U.S. Markets closed

Edited Transcript of ETRM earnings conference call or presentation 1-Apr-19 8:30pm GMT

Q4 2018 ReShape Lifesciences Inc Earnings Call

ST. PAUL Apr 8, 2019 (Thomson StreetEvents) -- Edited Transcript of ReShape Lifesciences Inc earnings conference call or presentation Monday, April 1, 2019 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Barton P. Bandy

ReShape Lifesciences Inc. - President & CEO

* Dan W. Gladney

ReShape Lifesciences Inc. - Chairman of the Board

* Scott P. Youngstrom

ReShape Lifesciences Inc. - CFO, Senior VP of Finance & Secretary

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, and thank you for joining us on today's call. (Operator Instructions) As a reminder, this conference call is being recorded today, April 1, 2019.

I would now like to turn the conference call over to Scott Youngstrom, CFO of ReShape Lifesciences. Please go ahead.

--------------------------------------------------------------------------------

Scott P. Youngstrom, ReShape Lifesciences Inc. - CFO, Senior VP of Finance & Secretary [2]

--------------------------------------------------------------------------------

Good afternoon, and thank you for joining us on today's call. I am pleased to be joined by Dan Gladney, our Chairman of the Board and outgoing CEO, who will provide an overview of the company's recent activities and business highlights. I will then review our financial results for the fourth quarter and full year of 2018, and then turn the call over to our new CEO, Bart Bandy, to introduce himself and 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 quarterly report on Form 10-K that was filed on November 14, 2018, and in our annual report on Form 10-K that will be filed at a later date.

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

I will now turn the call over to our Chairman, Dan Gladney. Dan?

--------------------------------------------------------------------------------

Dan W. Gladney, ReShape Lifesciences Inc. - Chairman of the Board [3]

--------------------------------------------------------------------------------

Thanks, Scott. Good afternoon, everyone, and thank you for joining us.

It's been a very busy last few months for us at ReShape Lifesciences as we continue to hone in and optimize our strategy to become a leading provider of solutions for obesity and metabolic diseases. And this last quarter was certainly one filled with hard work and change, culminating in the acquisition of Apollo's LAP-BAND product line in exchange for the sale of our ReShape Balloon business to Apollo Endosurgery. Although we did discuss in detail the transaction of Apollo when that deal was announced, I would like to take some time today to reiterate the rationale and then give you some additional information regarding integration and our strategic plan as we move forward.

As many of you know, LAP-BAND is a very well-known minimally invasive weight loss technology with over 20 years of commercial success and proven clinical efficacy. We were thrilled when we were made aware of the opportunity to bring this asset into ReShape Lifesciences. LAP-BAND is both FDA approved and reimbursed by most private payers in the United States. And in fact, the LAP-BAND is the only weight loss implant technology that is currently reimbursed in the U.S. The acquisition of LAP-BAND has given us an approved, reimbursed, well-known product to offer now for patients in a body mass index of 30 and above and also provides us a distribution system outside the U.S. that is already in place. This will not only allow us to hit the ground running with LAP-BAND internationally but will also save us both time and money once our next-generation ReShape Vest is approved. We really believe that the product is a perfect addition to our portfolio.

LAP-BAND has a track record that has brought immediate, significant revenue and gross margin to ReShape Lifesciences with very little required investment. As you are aware, much of last year was challenging for ReShape as our cash needs outweighed our ability to finance the company, putting us in a difficult operational position. The addition of the revenue and margin from LAP-BAND could not have come at a better time. With the bariatric surgeon customer base that is synergistic to the core call point for ReShape since our inception, we are confident in our ability to successfully sell the LAP-BAND and, in fact, have already seen immediate results since the acquisition of the product late last year.

Touching quickly on our decision to divest the ReShape Balloon. Unfortunately, the growth of the ReShape Balloon was not what it was projected to be at the time we acquired the business in October of 2017. This unanticipated underperformance of the balloon business was primarily due to an FDA letter related to the risk of intragastric balloons, which hit the business harder than expected. In addition, the cash required to run the ReShape Balloon product line was significantly higher than projected at the time of acquisition. Together, these factors hindered both our ability to generate significant revenue and, as a result, our ability to further capitalize the company and grow in a way that was consistent with our corporate vision. We, therefore, made the decision to divest the ReShape Balloon and to cut our losses, allowing us to refocus our financial and operational resources on the future and on the ReShape Vest, which we believe is the next big step for bariatric surgery.

Turning to the integration of LAP-BAND. We have really hit the ground running in the United States. As you remember, when we acquired the LAP-BAND, the sales trend was on a decline as Apollo was allocating virtually no resources to the product. And we shared that our goal initially would be to reduce the sales decline. We have increased the number of reps selling the LAP-BAND from 2 professionals that were selling with Apollo to 5 full-time sales reps in United States as well as a full-time sales trainer. And we already incredibly -- and we're already incredibly excited and proud of the efforts from our sales team. In fact, we've already seen a reduction in the sales decline thus far in quarter 1. Our strategy and approach in addition to reaching new accounts is to stratify the top customers who represent a significant part of the business and to increase the number of LAP-BAND procedures for these accounts. We want to spend more time in the field with existing customers who only do a few procedures a year and help them understand the benefits of doing more procedures. Our reps are really focusing on education and patient follow-up to reinforce the efficacy and success of LAP-BAND procedure. We are also working in partnership with some existing accounts and utilizing co-op spending program to help drive business.

Now outside the United States, we are working hard to build an infrastructure, which until now has not existed for ReShape Lifesciences. OUS markets account for approximately 40% of existing LAP-BAND sales with Australia being the #1 international market for us. As part of the transaction and the transition, Apollo has continued to sell the LAP-BAND outside the U.S. in order to give us time to set up our infrastructure. Our plan internationally is to focus first on Australia, where our goal is to hire 2 sales professionals; and then on to Europe, where we're planning to add a third and fourth -- excuse me, a 3- to 5-person team, all of whom will be supported by distributors in key markets. We are on target to have our infrastructure set up in Australia by the end of April and by the end of the second quarter in Europe, at which point we will be in position to realize revenue in those geographies.

We are thrilled that this acquisition of LAP-BAND also provides us with the technology that is a perfect precursor to our ReShape Vest. Both products wrap around the stomach, they are sold to the same call point, the bariatric surgeon, and are both incredibly exciting technologies that we believe are best-in-class for weight loss. We also believe the ReShape Vest is the next big step for the bariatric surgeon, following on the heels of LAP-BAND. Additionally, divesting the ReShape Balloon and acquiring the LAP-BAND provides us with the financial flexibility to further develop the Vest.

Turning now to the ReShape Vest. We have made great progress in the past few months. In February, we held a live surgery training course and investigator meeting in Prague for bariatric surgeons and key opinion leaders who are serving as investigators in the company's ENDURE II trial in the European Union. This training generated continued excitement about the ReShape Vest. As a reminder, the ReShape Lifesciences ENDURE II trial is an investigative, prospective, non-randomized multicenter study to assess the safety and effectiveness of the ReShape Vest for treatment of obese patients. The trial will include up to 95 subjects at 8 to 10 investigational sites located in Spain, the Czech Republic, Germany, Belgium and the Netherlands. Our most exciting news in the Vest is that Dr. Jordi Pujol, our principal investigator in Barcelona, Spain, successfully implanted the first patient in our ENDURE II trial last week. The patient was discharged from the hospital at the expected time and continues to do well. 1-year data from enrolled subjects will be used to support the CE Marking application for the Vest, and we will be continue to follow patient outcomes for up to 2 years. We estimate receiving CE approval in quarter 4 of 2021.

Turning to our financial performance. While we ended the third quarter with a healthy amount of cash in the balance sheet, we did spend significantly in the last fourth quarter on the LAP-BAND acquisition and its subsequent integration, which has included building the OUS infrastructure and adding an entirely new ERP system. Those investment dollars are already showing their benefits in the form of LAP-BAND revenues and margin. We truly believe in this product and its value to reshape our customers and our investors.

In order to bridge our balance sheet as we wait for a positive financial impact of LAP-BAND sales, we will continue to do some small financings. Last Friday, March 29, we announced that the company had entered into a definitive agreement with certain institutional investors for a $2 million convertible note financing, the details of which Scott will share with you later. Ultimately, once the company has shored up its cash position and has a bit more experience in traction with LAP-BAND, the plan will be to have discussions to relist ReShape Lifesciences' stock back on NASDAQ.

It is with mixed emotions that I made the decision to retire from being a public company CEO and announced my retirement as the CEO of ReShape Lifesciences. It has been a wonderful experience with the business and (inaudible) that I was so fortunate to work with. I truly believe in the mission and the vision of ReShape. I've worked closely with the Board that handpicked Bart as my replacement, and I believe he is the perfect fit. I thank everyone for the opportunity to be CEO and lead such a wonderful team. And I'm thrilled to be able to stay involved as the Chairman of the Board.

I am now turning the call back over to Scott Youngstrom, our CFO, who'll walk you through our financial results. Scott?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Dan. Let me highlight a few activities that occurred over the last quarter of 2018. During the fourth quarter of 2018, the company's Board of Directors and stockholders approved a 1-for-140 reverse split of the company's outstanding common stock that became effective after the close of market on November 7, 2018. (inaudible) and per share amounts have been retroactively adjusted to reflect the reverse stock splits for all periods presented.

On November 25, 2018, the company raised $10 million through a registered direct offering, which supplemented the $16 million that was raised through the company's at-the-market stock offering programs throughout October and November of 2018. These capital raises enabled the company to move forward with a significant and strategic business acquisition.

On December 17, 2018, the company acquired Apollo Endosurgery -- acquired from Apollo Endosurgery substantially all of the assets exclusively related to Apollo's LAP-BAND product line, and Apollo acquired from ReShape substantially all of the assets exclusively related to our ReShape Balloon product line. As part of the agreement, we were also required to pay Apollo a cash consideration of $17 million, of which $10 million was paid at the closing of the transaction, $2 million is payable on each of the first and second anniversaries of the transaction, and $3 million is payable on the third anniversary of the closing date. Additionally, as a part of the transition services agreement, Apollo will manufacture the LAP-BAND on our behalf for up to 2 years, serve as our distributor of the LAP-BAND product outside of the U.S. for up to 1 year, and provide other specified services.

As Dan mentioned earlier, last week, on March 29, we announced that we entered into a definitive agreement with certain institutional investors for a $2 million convertible note financing, which will be in the form of a private placement. In connection with the financing, we will also amend the exercised price of warrants to purchase up to 8 million shares of common stock held by the investors that were issued on November 25, 2018, from $1.50 per share to $0.01 per share.

Moving on to the financial results for 2018. When you review our financial statements and related footnotes in our 10-K, you will notice significant changes in our presentation due to the reporting requirements surrounding our acquisition of the LAP-BAND product line. You will notice a line called loss from discontinued operations net of tax that removes the effects of our Balloon business, which we sold as part of the Apollo transaction. Our 2018 and ongoing financial analysis will focus on our performance for our continuing operations.

For example, our revenue for the year ended 2018 totaled $2.8 million. However, we are reporting $607,000 as this is comprised of $450,000 of LAP-BAND revenue for the 14-day period from December 18 to December 31, plus $156,000 of revenue generated in 2018 by the vBloc product line. In comparison, we reported $1.3 million of total revenue in 2017. However, in our continuing operations, we will show -- only show $569,000 for the year ended 2017, which is comprised of $319,000 of vBloc revenue and $250,000 of service revenue. No activity associated with the Balloon product is reflected in our ongoing financial statements. However, details of our Balloon business can be found in the footnotes to our financial statements.

For the year ended December 31, 2018, we reported ongoing revenues of $607,000 and a gross profit totaling $442,000, a gross margin percentage of 73%. For the year ended December 31, 2017, ongoing revenues were $569,000 and gross profit totaled $236,000, a gross margin percentage of 41%. The significant increase in gross margin in 2018 was driven by the higher margin LAP-BAND product line as compared to the lower vBloc and service revenue margins generated in the comparable prior period. The company anticipates gross margins will remain in the 70% to 75% range throughout 2019. This is a significant improvement over the 25%, 3% and 13% gross margins reported by the company, our previous 3 quarters of 2018, respectively, which primarily reflected the previously discussed low margins associated with the product Balloon line.

For the 3 months ended December 31, 2018, the company reported revenue from continuing operations for the LAP-BAND product of $450,000 and associated gross profit of $372,000. There were no corresponding revenues from continuing operations for the 3-month period ended December 31, 2017.

Selling, general and administrative expenses for the year ended December 31, 2018, totaled $16.3 million as compared to $22.8 million in 2017. This decrease is primarily due to the reduction in headcount as compared to the prior year and lower overall expenditures as a part of our integration strategy. Included in SG&A expenses for the year ended December 31, 2018, were stock-based compensation and warrant expense of $2.9 million, inventory write-offs for obsolete product of $2 million, legal fees related to patent infringement defense and transactional fees of $2 million and severance of $569,000. Included in SG&A expenses for the year ended December 31, 2017, in addition to the expenses picked up with the BarioSurg acquisition, included a noncash charge of $8.7 million related to stock compensation and warrant expense. Prior year SG&A also included $1.2 million of expenses related to our acquisition, $1.1 million associated with severance and onetime charges and $720,000 of amortization expense, a total of $3 million.

Selling, general and administrative expenses for the quarter ended December 31, 2018, were $4.3 million as compared to $6.4 million for the third quarter of 2018. The company feels that the current quarterly run rate of approximately $4.5 million is indicative of the SG&A expenses to be incurred throughout 2019.

Research and development expenses for 2018 totaled $5.4 million as compared to a similar amount of $5.4 million for 2017. This is primarily due to the development of the gastric vest and the vBloc block and stim research throughout both 2018 and 2017. For 2019, our primary R&D investments will be on the ReShape Vest product line as minimal R&D will be required for the LAP-BAND product line.

We continue to review our organization, including our cost structure, in an effort to best align revenues and costs. As part of the integration in cost control efforts, we have reduced our overall employee count from a combined 97 ReShape Medical and EnteroMedics employees at the beginning of 2018 to a total of 36 ReShape Lifesciences employees at present.

As of December 31, 2018, the company's cash, cash equivalents and short-term investments totaled $5.5 million, and the company's debt was the $7 million asset purchase consideration payable to Apollo for the LAP-BAND product line. We are targeting our net monthly burn in 2019 to be no more than $800,000 per month.

Lastly, with the earlier discussed acquisition of LAP-BAND, expansion in our sales force and our reach into the OUS markets, and with the recently announced addition of our new CEO with previous LAP-BAND experience, we want to reiterate that our strategy is one of controlled expansion as we grow into our new markets while at the same time, preserving cash to support the clinical programs around our ReShape Vest. We feel that we will be better able to give revenue guidance after experiencing a few more quarters of activity. We have a goal to turn the U.S. revenue decline around and optimize the OUS markets by revitalizing previous customers.

With that, I will now turn the call over to Bart Bandy, our new President and CEO. Bart is a seasoned leader in the medical technology space with almost 3 decades of experience, 1/3 of which time was spent building the LAP-BAND market and awareness for both Inamed and Allergan. What a perfect fit for Bart to bring his experience and vast network within bariatrics as he helps us build the future of ReShape. We could not be more excited for Bart to join the team.

Bart, we welcome you to ReShape.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Scott. I could not be more pleased to be at ReShape Lifescience. As Scott mentioned, I spent over the last 25 years in various operational and commercial leadership roles with a significant portion of that time dedicated to this obesity space. Given my experience in building and growing organization's products and sales in health care and bariatric surgery specifically, this is a great fit for me. It was a tremendous pleasure to oversee the growth of the LAP-BAND technology during my years at Inamed and then Allergan, and I'm truly excited to be reunited with this technology and to bring my experiences to ReShape.

I see a unique opportunity in ReShape in that there still is a treatment gap that has not been filled for most obese patients. The technology is there but the market awareness and penetration has never been realized. ReShape has the solutions, both with the LAP-BAND and with the exciting ReShape Vest that is currently enrolling patients for the CE Mark study in Europe. Our product portfolio has an exceptional opportunity to drive sustained growth in a global market.

Turning to my vision for ReShape Lifesciences. The technologies at ReShape truly change people's lives, both physically and emotionally. That is what gets me excited. We will work with the KOLs and the physician community to build a robust technology road map that thinks ahead into the future, establishes deep awareness of the clinical evidence to support the benefits of our technologies from both an outcome and a cost perspective and builds a best-in-class team dedicated to enhance professional and patient education from surgical discernment and practice through post-procedural follow-up. Working together with the committed community of medical professionals, we can enhance patient outcomes and improve the lives of many people battling obesity and metabolic disease. I look forward to spending more time with all of our stakeholders over the coming months and providing updates on our strategies and progress.

Thank you for everyone to come out today.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program, and you may all disconnect. Everyone, have a great day.