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Edited Transcript of ETRM earnings conference call or presentation 14-Aug-19 8:30pm GMT

Q2 2019 ReShape Lifesciences Inc Earnings Call

ST. PAUL Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of ReShape Lifesciences Inc earnings conference call or presentation Wednesday, August 14, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barton P. Bandy

ReShape Lifesciences Inc. - President, CEO & Director

* 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, August 14, 2019. 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'm pleased to be joined by Bart Bandy, our Chief Executive Officer; who will provide an overview of the company's recent activities and business highlights. I will then review our financial results for the second quarter of 2019, and then turn the call back over to Bart to wrap up the call.

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 that was filed May 16, 2019, and in our quarterly report on Form 10-Q that is anticipated to be filed no later than August 19, 2019.

As an additional reminder, our stock is listed under OTCQB, trading under the ticker RSLS.

I will now turn the call over to our CEO, Bart Bandy.

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Barton P. Bandy, ReShape Lifesciences Inc. - President, CEO & Director [3]

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Thanks, Scott. Good afternoon, everyone, and thank you for dialing into our call today. I'm pleased to be hosting a ReShape Lifesciences' Second Quarter Earnings Call. On today's call, I will share with you the exciting progress we've made in the past few months of ReShape: operationally; financially; and technically as well as the strategy we have put into place over the past few months and how this supports our vision as we move forward. Scott will then provide an overview of our financial results, and then I will wrap things up.

Let's start with our top line, which we are incredibly proud of. Total revenues in the second quarter were $4.4 million, representing a 42% increase over our revenues of $3.1 million in the first quarter of this year. You might remember that when we acquired LAP-BAND, our goal was to reduce the decline that the project have been experiencing in the years prior to the acquisition. Only 2 quarters of owning the product, we have not only achieved that goal in the U.S., but our U.S. sales of LAP-BAND actually grew compared to the second quarter of 2018 under previous leadership and ownership.

Our revenues in second quarter of 2019 compared to $653,000 revenue in the year ago quarter, all of which was derived from gastric balloon sales, which has since been discontinued. And while we were a very different company in the second quarter of 2018 with different products, the significant revenue increase in 1 year speaks volumes to the fact that we are on the right track with the right product, the right strategy and the right team. To talk a bit more about the strategy, we mentioned on our last call that I spent significant time in my first month at ReShape, researching and reconnecting with the global obesity therapy market.

In the last quarter, I continued my travels and connected with more customers and industry participants, immersing myself in the market dynamics in order to help the ReShape team build our corporate strategy and best serve our customers by understanding and responding to these identified aspects of the current market and what is working and not working, our practices and patients, we can optimize awareness and its access for the growing population who can benefit from this personalized, minimally invasive and effective product, which remains the only approved implantable weight loss device that is currently reimbursed in the United States.

These past few months have also helped to formulate our commercial strategy, which I'm very confident will feel the future of ReShape Lifesciences. Our sales and marketing efforts are now being led by Kevin Condrin, who joined the company back in May, and who is a highly experienced, well-known and market-knowledgeable commercial leader. We're fortunate to have him as part of the ReShape team.

Now that we have fully transitioned from Apollo in the U.S. with an internal team and infrastructure that is controlling all operational logistics from receiving and processing orders to providing customer service, to billing and shipping product out the door, we're prepared to hit the ground running and to own our entire sales process.

Our VP of Operations, Vipul Shah, has performed exceptionally in leading this transition as well as their international integration, which includes the recently completed rollout of our ERP system, enabling better report metrics and planning.

Our sales model continues to focus on top tier sites through a model of high-touch customer focus with LAP-BAND doctors, who have built reputations as clinical leaders for both surgery and patient aftercare. These are the surgeons who really understand the product, its value proposition and its clinical viability. They are the surgeons who have made LAP-BAND the mainstay in their practice for the appropriate patients. With this strategy and top customer call points in place, our market review also uncovered the importance of improving awareness and providing online support for prospective and existing patients. As a result, we've recently established several important professional relationships, including social media experts, a lead management partner and an interactive aftercare service provider. While increasing our qualified LAP-BAND provider base as a primary objective, we believe that the main driver of product demand is the education of potential patients and existing patients to facilitate optimal personal weight loss results with the LAP-BAND.

Our lead management providers are set up to do this and to institutionalize the process of increasing awareness, facility and the pre-approval of qualified candidates and helping to direct patients to establish LAP-BAND practices. After the surgical procedures are done, our aftercare service partners will be able to work in conjunction with these practices and their patients to provide resources that will power the best possible outcomes with the LAP-BAND. We believe that providing these foundational services is essential and could help open the floodgates to LAP-BAND to again become a preferred option for obesity treatment. Additionally, on the direct-to-consumer front, ReShape has made great progress with our social media presence, search engine optimization and co-op marketing programs to increase patient awareness and educate patients on the safety and effectiveness profile of the LAP-BAND.

Turning to our business outside of United States. As of April, we now have all distribution rights for LAP-BAND in Australia. Australia, which you might remember is one of the largest worldwide markets for LAP-BAND outside of U.S. and was one of the early adopters in the technology, producing some of the strongest long term, publish peer review data on actual results. We have partnered with Satori Healthcare, a distribution partner, that has a long successful history of LAP-BAND in that country. As a result of this transition, ReShape has recognized all the revenue from the Australian market since April 1. We continue to move forward with our transition of the LAP-BAND business in Europe. We have set up logistics, customer service and fulfillment in EU, including distributors who also have long and successful experience with our products.

Due to the summer shutdown in Europe, working through the final distributor contracts has taken a little bit longer than anticipated, causing modest delays in our transition timing. But we now expect to be fully transitioned by the end of this third quarter. We were also excited to participate in several conferences this past quarter, highlighting our LAP-BAND and gastric calibration tubes to generate a new flow of awareness and surgeon interest.

LAP-BAND was the subject of 2 presentations at ASMBS summer meeting in June. The first, entitled "Dispelling LAP-BAND Myths," was presented by Dr. Fred Tiesenga, Director of the Westlake Bariatrics in Elmwood, Illinois; and the second presentation entitled "Building your LAP-BAND Practice Through Marketing," was presented by Dr. Vafa Shayani, Director of the Bariatric Institute of Greater Chicago.

Presenting these programs demonstrated strong evidence that the LAP-BAND is supported by a committed team and that we're back to stay. Attendees were enthusiastic to see familiar faces in the company and excited to see what we have planned. Not a bad start for the conference season. We remain very confident in our product pipeline that includes ReShape Vest and believe that this product will be the next big technology for bariatric surgeons once it completes its clinical study and it's commercially available. We work purposely to prioritize our corporate investments towards commercial drivers for LAP-BAND sales and profits with strategic investments to support this ongoing ENDURE II trial for the ReShape Vest in the European Union.

As a reminder, the trial included total of up to 95 subjects at multiple investigational sites located throughout Europe. One-year data for enrolled subjects will be used to support the CE Marking application for the web, and we will continue to follow patient outcomes for 2 years.

We are strongly encouraged by our results in the second quarter of 2019, having achieved record sales combined with great operational strategic progress through our leadership and team members.

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

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

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Thanks, Bart, and good afternoon, everybody. For purposes of this quarterly financial update, we will be comparing our June 30, 2019 results to our March 31, 2019 results for both revenue and gross margins, as any comparison to prior year is not comparable due to the acquisition of the LAP-BAND product line and the discontinuance of the intragastric balloon product line in December of 2018.

For the 3 months ended June 30, 2019, we reported sales of $4.4 million as compared to revenues of $3.1 million in the 3 months ended March 31, 2019, which represents a 42% increase. Our revenue numbers reflect $2.8 million in U.S. shipments and $1.5 million from shipments outside the U.S., which include shipments to Apollo Europe as a part of our transition services agreement.

As a reminder, our OUS revenue now consists of direct sales to our Australian customers, combined with sales in Europe, which will continue to go through Apollo at a transfer price until we finalize our commercial infrastructure in Europe. We continue to work to bring this opportunity in-house with the target date of late quarter 3, so that we can begin to recognize these global revenues.

We reported gross profit of $2.9 million in the second quarter of 2019 at a the gross margin of 64% compared to $2.2 million in gross profit in the 3 months ended March 31, 2019, at a gross margin of 73%. The lower gross margin is primarily the result of an increase in our mix of sales in Europe, as our revenue from shipments to Europe carry a lower gross margin than our U.S. revenues due to our transfer pricing arrangement with Apollo.

The Q2 gross margin of 64% is right in line with our expectations and why we initially forecasted fully transitioning the European business in-house early Q3, our slight delay to the end of the third quarter will mean that Q3 margins will likely stay in the mid-60% range. Once we are up and fully operating worldwide, we anticipate gross margins will settle in the low 70% range. For purposes of our operating expense discussion, we will be comparing our second quarter 2019 results to both the first quarter 2019 and the second quarter of 2018.

Selling, general and administrative expenses for the second quarter of 2019 were $6.8 million, as compared to $5.4 million for the first quarter of 2019. Included in SG&A expenses this quarter were $2.5 million of noncash items related to stock-based compensation, severance and amortization and depreciation.

Severance and legal settlement expenses accounted for the majority of the increase in SG&A over the first quarter of 2019. We anticipate that our SG&A spend will continue in the $5 million range per quarter as we bring on the U.S. sales process and incur the fees associated with this -- I'm sorry, OUS sales process and incur the fees associated with this.

Research and development expenses were $1 million for the 3 months ended June 30, 2019, compared with $1 million for the quarter ended March 31, 2019. For the 6-month period ended June 30, 2019, our R&D expense totaled $2 million, as compared to $4.6 million for the same 6-month period in 2018. This decrease is attributable to the limited R&D necessary on the LAP-BAND product in the current period and previous quarter. And our 2018 R&D expense included substantial development expense associated with both the Gastric Vest and the vBloc products. We anticipate our R&D expense will continue in the $1 million to $1.2 million per quarter range for the remainder of the year.

As a result of an impairment analysis performed during the second quarter of 2019, we recorded an impairment charge of $6.6 million on the indefinite-lived intangible assets recorded in connection with our acquisition of BarioSurg in May 2017. We also assess the recoverability of finite-lived intangible assets and did not find any impairment. In a similar exercise in 2018, we recorded an impairment loss of $14.2 million for the 3 and 6 months ended June 30, 2018.

Turning to the balance sheet. As of June 30, 2019, the company's cash and cash equivalents totaled $4.4 million. This includes the $7.2 million of net proceeds raised in a private placement offering completed June 18, 2019. $2.2 million of the proceeds were used to pay off the convertible subordinated debentures issued in March of 2019, which now are no longer carried on our balance sheet. We intend to use the remainder of the proceeds for working capital needs and for general corporate purposes, including strategic outlays for operational and commercial initiatives.

For the second quarter of 2019, after adjusting for the noncash charges included in our financial statements, our monthly cash burn increased slightly to just under $900,000 per month, due primarily to increased professional fees. We are targeting our net monthly burn for the remainder of 2019 to continue to be in the $800,000 to $900,000 per month range. Our financing strategy is to proceed with another capital raise, as we continue to invest in growing our LAP-BAND sales and the infrastructure to support our growing business. Our year-to-date revenue through June 30, 2019 of $7.5 million was very much in line with our expectations. That said, we feel that we still need a few more quarters of experience to understand trends and potential seasonality before we will be in a position to accurately provide future guidance.

As Bart and the leadership team complete our business review over the next couple of months, we plan to provide more specific guidance on our expectations for 2020.

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

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Barton P. Bandy, ReShape Lifesciences Inc. - President, CEO & Director [5]

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Thanks, Scott. Our team is working incredibly hard this past quarter to show the world that the LAP-BAND is back and that we have a solid strategy and a suite of products dedicated to this market. We've traveled the globe to meet the customers, both existing and new, and worked diligently to understand the market and how we can best service surgeons and patients.

We're now set up with a strategy and pathway for success, and we are optimistic for the road ahead. Thank you to our investors, Board, employees and customers, who step by our side and for listening to our call today.

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Operator [6]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may all disconnect. Everyone, have a wonderful day.