ReShape Lifesciences, Inc.

Good afternoon, and thank you for joining the Reshape Life Sciences second quarter 2022 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 Life Sciences second quarter 2022 earnings call. I'm pleased to be joined by Paul Hickey, the newly appointed President and Chief Executive Officer of Reshape Life Sciences, and Tom Stankovic, Chief Financial Officer. Paul will open the call, after which Tom will provide an overview and update on the company's activities and review the financial results for the quarter. He will then turn the call back over to Paul for some closing remarks, after which we will open up the call to a question and answer session. 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 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, reshaped stock is listed on NASDAQ, trading under the symbol RSLS. I will now turn the call over to Paul Hickey, President and CEO of Reshape Life Sciences. Paul?

Thanks, Michael. Good afternoon, everyone, and thank you for joining us today. I am very excited to be joining Reshape Life Sciences, and I look forward to leading the company during such an exciting juncture. We are working towards our goal of becoming the global leader in physician-led weight loss and metabolic health solutions with a comprehensive, integrated slate of products and services, including our flagship lap band program. I'm enthusiastic about the demand generated by a multi-tier direct-to-consumer marketing campaign thus far, which continues to be successful in driving patient engagement and filling surgeons' pipelines for lap band procedures, evidenced by the 19% increase in sequential revenues achieved in the second quarter. In the second half of the year, we expect a positive trend in sales as bariatric surgeons regain the ability to proceed with lap band procedures, which were severely restricted in the early year due to the continued COVID-19 pandemic, and as patients and providers continue to navigate the typical six-month mandatory waiting period required by insurers for bariatric or weight loss procedures, including the anatomy-sparing lap band. Our confidence in this growth is strengthened by the success of our multi-tiered direct-to-consumer marketing campaign in helping practices work through patient backlogs, thereby allowing more new patients to pursue this process and further increasing the sales of the LapBand and our suite of weight loss and metabolic health solutions. The prospects for Reshape are a significant reason that I chose to join the company. In addition, my experience as senior vice president of marketing and reimbursement at Enteromedics, the predecessor company to Reshape, gave me invaluable insights into the company's potential to help alleviate the obesity epidemic. I am thrilled about the enormous market opportunity ahead of us. The well-documented obesity epidemic rages on with 2.5 billion people or more than 30% of the global population considered overweight or obese. This number is expected to grow to 50% by the year 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 the 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. The anatomy sparing lap band 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 insurance plans, including Medicare. In addition to our FDA approved lap band program, we have a robust pipeline of weight loss products and services, which we'll discuss in detail during this call. I look forward to working closely with the entire Reshape team to take advantage of this opportunity to expand the company's growth as we execute on our strategy to become the premier physician-led weight loss and metabolic health solutions company. I would now like to turn the call over to Tom Stankovich to review the recent highlights and provide a recap of our financial performance. Tom?

Thanks, Paul. And once again, thank you all for joining our webcast this afternoon. We have achieved a multitude of important milestones during the second quarter and current period, strengthening our position as a market leader with our integrated portfolio of proven products and services that manage and treat obesity and associated metabolic diseases. Our recently announced FDA 510K clearance for the disposable gastrointestinal balloon indicator calibration tube is a significant milestone for the company. We expect this line extension of calibration tubes to be rapidly adopted by surgeons given their ability to help better visualize the anatomy, making it easier to identify potential defects during a broad range of bariatric procedures such as laparoscopic sleeve gastrectomy, gastric bypass, and adjustable gastric banding. We look forward to formally introducing this new important product at the International Federation for Surgery of Obesity and Metabolic Disorders World Congress in Miami later this month, and expect the commercial sales to begin in September. Our partnership with OpenLoop, an expert in full-stack virtual care delivery services, provides a nationwide physician-led telehealth solution for reshaped care, which should vastly extend the reach of our proprietary digital therapeutic weight loss and wellness programs. It is important to note reshape care is a doctor prescribed and may be covered by insurance for up to 26 visits per reimbursement year, making it an effective and convenient virtual health coaching program. In partnership with physicians, the program is differentiated by the current virtual weight loss market through live video-based counseling with doctors and board-certified health coaches to ensure the most comprehensive and customized care possible, including implementing behavioral change to improve sleep, nutrition, exercise, and stress levels. Reshape care is appropriate for all weight loss patients, including medical weight loss and pre- and post-surgical bariatric patients. As a result, we are able to tap into the virtual healthcare delivery space, a market that is expected to reach 95 billion by 2026. Specifically, The rollout of Reshape Care and its extension, Reshape Marketplace, which includes advanced line of premium supplements, allows Reshape to distinguish itself as an incredibly valuable e-commerce platform of healthcare provider recommended competitively priced weight loss and wellness products for bariatric surgery and medical weight loss patients that support nutrition, exercise, sleep, and stress. We remain encouraged by the continued pace of inbound requests from bariatric surgeons for refresher courses on the lap band program. In fact, this year, dozens of bariatric surgeons have approached us for recertification, which is an acknowledgement of the growing patient demand and established safety and efficacy of the anatomy-sparing lap band procedure. Keep in mind that this is additive to our existing accounts, and we are receiving a steady flow of requests for refresher courses every week. As we previously noted, we would again like to congratulate Vern Vincent, our Global Director for Clinical Training, the ASMBS's 2022 Distinguished Industry Partner Award, who is leading the retraining effort and facilitating the training of the next generation of bariatric surgeons, including, for the first time, bariatric fellows on the benefits of the lap band during the session at the ASMBS annual conference this past June. As a result of this renewed interest, the lap band from industry groups such as ASMBS, our focus has been on both re-engagement of accounts that have historically used the lap band and bringing in new accounts, especially within the underserved major markets. Doctors are realizing that lap band can be additive to their practices, and that is, not taking away any business from more aggressive stapling and gastric bypass procedures. We are creating a whole new market for people who don't want those procedures and may be giving up on diets. We are enthusiastic about this trend and expect a steady stream of practices to request training going forward, buoyed by our multi-platform DTC advertising campaign, which continues to drive patient engagement. The anatomy sparing lap band is unrivaled in the market, and it is adjustable, reversible, and well-proven, with over 1 million bands having been placed in patients globally in the last 20 years, demonstrating an incomparable safety profile compared to highly aggressive stomach stapling procedures and diets. Adjustability, reversibility, and having personal control are all highly desirable aspects for potential patients when making bariatric surgery decisions. Additionally, the reduced risks of adverse events and nutritional deficiencies associated with anatomy altering procedures have also been identified as being of great significance in this decision-making process. The fact that most of the patients return home the same day as their lap band procedure, which is available in outpatient surgery centers, is also a key determining factor in the weight loss procedure decision. As a reminder, our multi-tiered DTC marketing campaign has utilized strategic in place national television print and now to a greater extent targeted digital media in order to market our lap band program with available aftercare supported through reshape care. From the outset of the campaign, we have leveraged the highest view television channel and print publication with the goal of effectively communicating the benefits and differentiated advantages of the Lap Band, which have been featured in over 15 major magazine publications, including People, Good Housekeeping, Better Homes and Gardens, and over 28 national stations, including Bravo, Lifetime, USA, and A&E and Hallmark, all of which focus on our target audience. We continue to improve on these marketing efforts through diligent metric analysis and adaptation while also incorporating co-op marketing partnerships local digital media, and national social media influencer campaign. We've been successful in creating and building customer engagement, which has led to increased patient demand for the LAT-BAM program, which has then led to the filling of bariatric surgeons' pipelines. Today, we can track customer engagement, leads, and warm transfers of qualified patients to practices with a high level of confidence. Based on tracking these metrics, we have been able to adapt our DTC marketing campaign to be more effective and more efficient. This will all lead to increased lap band procedures and thus potentially a significant increase in revenues for reshape life sciences over time. The results of this campaign have been overwhelmingly positive so far, indicating that our message is clearly resonating with the consumer and professional markets. In fact, doctors who are working hard to catch up from the demand backlog that the marketing campaign created while surgery centers were shut down. The typical six-month mandatory waiting period imposed by insurers creates a lag between early engagement and actual procedures. This means that after we transfer a warm lead to a doctor from our DTC campaign, insurers will require a patient to go through several steps, which may include behavioral analysis, physical analysis, or perhaps trying a medically managed weight loss program one more time to make sure they can't lose weight that way and need surgery. This represents a lag between the preliminary investment towards our marketing efforts, initial patient engagement, and scheduled procedures. As these scheduled procedures are starting to flow, we are really excited what the next few quarters could look like based on the metrics we are tracking from the DTC campaign. We are now just starting to reap the benefits of this strategic outreach And we are optimistic that revenue will continue to increase through the remainder of 22 and beyond. Turning to a review of our financial performance, a full discussion of our financials is available in our press release and 10Q. So, we'll just take a moment to review key financials for the second quarter end of June 30th, 2022. Our revenue totaled 2.9 million for the three months end of June 30th, 2022. which represents a contraction of 18.1% versus the same period in 2021. As I explained earlier, the primary reason for this decline is the COVID-19 Omicron variant, which caused a significant number of bariatric centers to close in January, February, and into March 2022. As the spread of the Omicron variant began to subside, we were pleased to have experienced a 19% increase in sequential revenues compared to the first quarter. As I noted in my prior remarks, we expect sales to continue to increase through the remainder of 2022 as we have witnessed continued growth in patient engagement and doctor consultation attributable to our DTC marketing campaign. We reported gross profit of $1.9 million compared to $2.2 million for the three months ended June 30th, 2021. Gross profit as a percentage of total revenue for the three months ended June 30th, 2022 was 65.1%. a solid improvement compared to 61% for the same period in 2021. The gross profit margin increased during the three-month end of June 30, 2022, primarily due to the company had a higher percentage of domestic sales than in the same period of 2021, which has a higher gross profit margin than international sales. Sales and marketing expenses for the three months ended June 30th, 2022 increased to 4.7 million compared to 1.4 million for the same period in 2021. The increase is primarily due to an increase in advertising and marketing costs of 1.8 million after having launched the TPC marketing campaign during the fourth quarter of 2021 and expanding this campaign during the first half of 2022. There were also increases related to strengthening the commercial organization and increase in consulting and professional fees related to the launching of the digital media platform, as well as other smaller increases, such as travel-related expenses, as markets began to open up again. General administrative expenses for the three-month end of June 30, 2022, increased to $5.4 million, compared to $4.3 million for the same period in 2021. The increase is primarily due to $2 million of legal expenses and increases in stock-based compensation of $1.2 million. and an increase in payroll expense as we continue to make strategic organization changes. This was offset by a decline of $2.3 million in consulting and other professional fees, as the company had significant related costs during the second quarter of 2021 due to the merger with Ovalon. Research and development expenses were $800,000 for the three months ended June 30, 2022, compared to $100,000 for the same period in 2021. The increase is due to increase related to consulting fees and an increase in payroll expenses, including stock-based compensation. On a non-GAAP adjusted EBITDA basis, the loss was 7.8 million for the three-month end of June 30, 2022, compared to a loss of 1.2 million for the same period last year. It is important to note that revenues were delayed due to the mandatory wait period of approximately six months for insurance verification purposes, which we previously discussed. The increased loss is primarily due to the previously mentioned increase in advertising and marketing costs from the DTC marketing campaign, a related increase in payroll expenses due to the expansion of the commercial team, an increase in stock-based compensation, and an increase in legal expenses. Lastly, during the quarter, we continued to strengthen our balance sheet, grossing $2.5 million in proceeds for a warrant exercise after having eliminated all debt previously from our balance sheet at the end of last year. We ended the quarter with $11.5 million in cash and cash equivalents, which combined with an increase in revenues for the second half of 2022 and beyond should extend our cash runway well into 2023. With that, I will now turn the call back over to Paul.

Thanks, Tom. Before we open up the call for Q&A, I'd like to take a moment to review the status of a few of additional products in our pipeline. As mentioned last quarter, we continue to evaluate the reshape best. We remain in contact with the clinicians and clinical sites regarding the EU clinical trial, which was paused due to the lack of access to patients and facilities caused by the COVID-19 pandemic. Additionally, we continue to explore the manufacturing viability and market opportunity which would be necessary for the reintroduction of the Obalon balloon system. The technology is the first and only swallowable, gas-filled, FDA-approved balloon system introduced into the U.S. weight loss marketplace as a non-surgical, minimally invasive product. We'll provide an update once our analysis is completed. Also of note, with the assistance of a grant from the NIH, we met the necessary endpoints in order to complete the preclinical development of the reshape diabetes block stem neuromodulation device, a novel investigational device using neuromodulation to adjust insulin production and potentially treat type 2 diabetes. We have submitted an application for a second grant with the NIH and hope to hear back in the near future. We remain committed to further evaluating the potential of this product, which is backed by a strong intellectual property portfolio through a non-dilutive funding strategy. Finally, we will continue to evaluate M&A opportunities that align with our commitment to the physician-led weight loss and metabolic solutions market, specifically those that can enhance our current product portfolio and be accretive to our value. We are pleased with our recent efforts and achievements and are optimistic that the upward trend in sales we are experiencing will continue through the balance of 2022 and beyond. Through our national direct-to-consumer marketing campaign and other visibility programs, we will continue to maintain focus on marketing the proven advantages of our FDA approved insurance reimbursed anatomy sparing lap band program, along with the rest of our portfolio physician led weight loss solutions. This concludes our prepared remarks. So now we'd like to open the call to your questions. Operator.

Thank you. And as a reminder, to ask a question, please press star 11 And again, that is star 1-1 to raise your hand. And again, everyone, as a reminder, if you'd like to ask a question, please press star 1-1. Thank you. And we'll take our first question from Anthony Vendetti from Maxim Group. Your line is open.

Thank you. Tom, maybe if you could talk a little bit, or Paul, if you want to, on the recent FDA approval for the line extension, how that, for those disposables, how is that going to impact, do you believe, the top line and eventually maybe give a little timeframe on when you're going to start to commercialize that and then have a follow-up call and reshape care.

Sure. Thanks, Anthony. It's Tom here. Thanks for the question. So yeah, the GB launch for us is very important, strategic. It's very, very good news for the company. As you may recall, we were selling, you know, a we were selling this in the wrong sizes. Now we've got 510K approval for the most popular sizes that the bariatric surgeons are using today. So that's just a benefit of what we have been doing and what we will be doing going forward. So I expect some nice revenue increases as far as this is concerned as it gets to be rolled out. We plan to have this go commercial in September. We're going to introduce it at the IFSO conference that's upcoming next week in Miami. And we expect it to gain some traction early on. Again, this is going to be in the in the more popular tube sizes that the surgeons are using. And we expect a nice bump in revenues, even starting this year and into next year.

Okay, great. So commercialization in September and start to contribute to revenues by the end of this year. And then on reshape care, do you have a number in terms of how many Patients have signed up for it. Any feedback so far? I know it's early stages. I know you had signed an agreement with a company that was going to incorporate reshape care, so I was wondering what kind of early feedback you have so far.

Early feedback that we've been getting is very good. We are about to really significantly launch reshape care. So, you know, the feedback that we've gotten, we've been working some of the kinks out in the system as far as, you know, how the whole process, as we're able to work through coaching some of the patients. So this is all also going to, you know, become very mainstream for us in the coming weeks and months. And Again, expect to have a revenue bounce from reshape care even before the end of this year. We're very excited with the whole reshape care program.

Okay, great. And in terms of the lot band itself, you know, you've been putting in, you know, towards the end of last year particularly, October, November, into December in significant dollars and into advertising and in magazines and print journals and so forth. Can you just talk about, you know, your level of comfort or, you know, if you feel like those dollars are giving you the ROI? what I believe is after the initial launch, you fine-tuned it a little bit more. Do you feel comfortable with it, with where you're at now, or do you think you need to continue to fine-tune it before spending more dollars there?

Well, you know, I think a great question, but I do think an easy answer to your question is we're, you know, we're 100% happy with the way things have gone as far as the whole DTC advertising campaign. The amount of website traffic that we've had, the amount of leads that we have had, those leads that turn into warm transfers, as we like to call them, and then ultimate consultations with doctors, we're extremely happy with that. And we had to do that on a larger scale initially to you know, effectively launch the whole lap band program. We've learned a lot from that. And, you know, some of the things we have learned as to the whole national DTC campaign was to, you know, where we can tune things up a little bit, where we can tune things down a little bit also. Right now, we're starting to to do a lot more in the way of digital marketing and social media, to do a lot more in the way of digital marketing and social media marketing. And to be honest with you, that's going to cost us significantly less also going forward. A lot of the expensive advertising that we did on a national basis, TV and national print, I don't need to go into a whole lot of detail explaining that. That's very expensive to do. But that laid the foundation, and I think we needed to do that to get the lap band back out there in the marketplace. Now we can target a little bit better, and we're going to do that through more digital marketing and social media.

Anthony, this is Paul Hecke. First off, I just want to publicly thank Tom for taking the role as interim CEO in the last few weeks. Yeah, much appreciated. Kept the machine operational and everything running smoothly with all the employees and the great team we have here at Reshape. Completely agree with the answer he just gave. Just want to emphasize too, I mean, our ongoing business plan and I guess the business model is to optimize the dollar spent to drive leads to our physicians. And part of that is, as Tom indicated, working with sort of a national splash, and then as time moves on, continue to optimize that into different media outlets, as well as watching the shifts from dollars we spend to also watching our centers dedicate funds to markets, their practices, and drive additional patients into their settings to ultimately treat them with lap bands. So committed to it. As far as return on investment, it just gets better over time because of us being very diligent about looking at the metrics and making sure that we understand where the dollars are spent and what leads are generated. And one additional tool that the company added prior to my arrival was Salesforce as their CRM tool. And it's probably the best in industry that I've experienced in my past. And I think that's truly going to track metrics by region, by state, by practice, Again, making sure that the media outlet, the media channel that we use, whether it's social or national or radio, whatever, will be tracked for how warm the leads are and whether or not the physician and their programs are able to convert to lap band.

Great. That's helpful color. Thanks, Paul. And I know today is your first day, so welcome aboard.

Thank you.

Thank you. This concludes our question and answer session. I would like to turn the call back over to Paul Hickey for any closing remarks. Please go ahead.

Great. Thank you. Well, I hope you all recognize our enthusiasm and share our excitement for the road ahead, given the substantial growth opportunities we have before us. You know, we believe wholeheartedly that the benefits offered by the FDA approved middle invasive safe and effective lap band and the suite of weight loss solutions will continue to attract interest and that we are just beginning to reap the benefits of our proactive direct-to-consumer marketing campaign. I want to thank our employees, board members, 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. I look forward to the opportunity I have at Reshape and to providing future updates. This conference is now Sorry. Conference call is now concluded. Thank you for attending today's call. You may now disconnect.

Thank you. Everyone, have a great day.