ReShape Lifesciences' (RSLS) CEO Dan Gladney on Q4 2017 Results - Earnings Call Transcript

ReShape Lifesciences Inc. (NASDAQ:RSLS) Q4 2017 Earnings Conference Call April 2, 2018 4:30 PM ET

Executives

Dan Gladney - Chairman & CEO

Scott Youngstrom - CFO

Analysts

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the ReShape Lifesciences Fourth Quarter and 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following managements prepared remarks, we will host a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded for reply purposes.

It is now pleasure to hand the conference over to Mr. Scott Youngstrom, Chief Financial Officer. Sir, you may begin.

Scott Youngstrom

Thank you. Good afternoon and thank you for joining us on today's call. I am pleased to be joined by Dan Gladney, our President, CEO and Chairman of the Board; 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 2017. After that, Dan will wrap up and following our remarks, we will be available for questions during the Q&A session.

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 Exchange Commission, including those factors identified as Risk Factors in our annual report on Form 10-K filed earlier this afternoon.

As an additional reminder, our stock is still listed on NASDAQ trading under the Ticker, RSLS.

I will now turn the call over to Dan Gladney.

Dan Gladney

Thanks, Scott and good afternoon, everyone, thank you for joining us. We have a lot of great news to share with you today but I want to start off with addressing the financing we announced this morning.

While we raised a bit less capital at more difficult terms than we set out for, the financing markets have been particularly difficult for early stage micro-cap companies such as ReShape and we are pleased to have gotten a deal done with a strong investor as our partner. While the market will now likely take some time to digest the terms, we and our Board believe this was the best deal for the Company and we are pleased to have a cash infusion as we continue to grow ReShape Lifesciences.

In terms of the specifics, this morning we announced that we entered into a securities purchase agreement with an institutional investors providing for the purchase and sale in a registered direct offering of shares of Series D convertible preferred stock and a warrant to purchase shares of common stock for the purchase price of $6 million. We expect to receive net proceeds of approximately $5.25 million after deducting placement agent fees and other offering expenses. We intend to use the net proceeds from the offering to continue to commercialize our efforts for clinical, product development activities and for other working capital and general corporate purposes.

I will now share with you all that we accomplished at ReShape Lifesciences in 2017. During this past year our team proved our ability to not only deliver a solid strategy but more importantly to follow through and execute on that strategy. During 2017, we transformed EnteroMedics, a single product company into ReShape Lifesciences, an obese company with a comprehensive offering of technologies to address the obesity continuum of care.

In May we announced the acquisition of BarioSurg which added to our toolbox of innovative and proprietary gastric vest recently rebranded the ReShape Vest. The vest which will be starting trial soon in Europe is a revolutionary minimally invasive not anatomy altering laparoscopic device to enable weight loss with stomach preservation. Under heels of our acquisition of BarioSurg in October we announced the acquisition of ReShape Medical and subsequently the change of our Company name from EnteroMedics to ReShape Lifesciences. The second acquisition represented not only the culmination of our state of strategic goal to become a full scale obesity company but it also shows the strength of our team to execute and deliver on our vision. I will talk in more detail about each of these products as well as vBloc as we move through today's call.

As we enter 2018, we turned our focus from building our product suite to commercialization and building clinical support. In conjunction with this shift and as we finalized the integration of our two acquisitions, we conducted a strategic review of our business operations and finances. It was through this review that we identified some areas where we could better align our expenses with our revenues which resulted in a plan to reduce operating expenses. Unfortunately, as part of this reduction, we had to make some cuts to our workforce including in our sales force which was a very hard decision. I would like to thank and acknowledge those affected by this decision, all of whose hardwork has been instrumental in bringing our life changing technologies to market. We do believe these changes will better align our organization and will strengthen our financial position as we look to grow.

On today's call, I will talk in more detail about each of our products. I will provide an update on the integration and will also go into some detail around our sales strategy. Scott will then provide detail on our fourth quarter and year-end results. Finally, I will wrap up and then we will look forward to taking your questions.

ReShape Lifesciences is an obesity company offering two FDA approved products and a third exciting product about to enter CE and IDE studies. Our products can serve patients across the spectrum. From our ReShape balloons for patients with a BMI between 30 and 40, to vBloc therapy for patients with a BMI between 35 and 45, and finally, and finally, our ReShape Vest which is intended for morbidly obese patients with BMI of 40 and above. First, our ReShape balloon which we acquired in October is differentiated from other inter-gastric balloons by the dual balloon configuration. This design allows for more potential fill volume and takes us more space in the stomach compared to other products in the market thus aiding in patients weight loss. Earlier this month we shared that we had signed an exclusive agreement for distribution of the ReShape balloon by academy medical to over 400 Department of Defense, DoD medical facilities in the United States.

Academy Medicals are certified service disabled veteran owned small business specializing in the distribution of medical products to VA and DoD hospitals and community based outpatient clinics. This agreement establishes the ReShape balloon as the exclusive inter-gastric balloon that our distributor will sell to DoD facilities validating our technology as their balloon of choice. Through this most recent agreement, both the ReShape balloon and ReShape vBloc are both now contracted products to be distributed by Academy Medical into DoD medical facilities and for use by the bariatric surgeons and GI doctors who work at these facilities. You may also remember that in December we announced that we are granted employee coverage of the ReShape balloon at a multi-national telecommunications corporation through a supplemental coverage policy called Care Plus.

This policy covers the lives of 254,000 employees of telecommunications company and gives them access to the ReShape balloon. We are optimistic that this policy decision will help pave the path for additional private coverage of this product. With focus in recent years by large companies on corporate wellness, we hope to see more corporate coverage policies such as this one in the future. Together the Academy Medical contract and Care Plus coverage decisions provide a springboard for the sales strategy of our ReShape balloon. Our team's primary focus is on opening new accounts and of course, increasing sales which are both driven by educating the potential physician customers and patients who can benefit from our product.

Our team has implemented targeted awareness campaigns to educate both, the DoD and the telecomm corporate employees that the ReShape balloon is a covered benefit for them in addition to promoting the clinical results and the unique benefits of our products to all potential physician and patient customers. Internationally, the ReShape balloon is approved and we have established distribution in Kuwait, Qatar, United Arab Emirates, the UAE, and most recently, in Saudi Arabia where we just received approval by the Kingdom of Saudi Arabia, Saudi Food & Drug Authority. We sell our balloons employing 3 distributors through which approximately 8 representatives have been trained. Congruent with our Saudi Arabian approval, we have just recently received an initial stocking order for one of the largest surgical distributors, from one of the largest surgical distributors in Middle East, [indiscernible] Medical. You might recall that this same distributor also placed a significant order in December to support increased demand for the ReShape balloon from a leading hospital customer in Dubai.

Obesity in the Middle East region has been estimated to be twice the worldwide rate of 30% and is projected to continue to grow. In the UAE alone, over 5,000 weight loss surgeries were performed in 2015. We are pleased that our balloon has been a technology of choice to help reduce obesity in this region. On the clinical front, through the ReShape balloon, we recently announced the results of two studies that support our product as a safe and effective option for weight loss. First, in November, results of a multi-center study were presented at the Obesity Week Conference 2017. Mean weight loss for 240 patients in the study with 120 days or more of treatment was 24.3 pounds, representing 10.5% of initial body weight. The study concluded that our balloon is safe and effective for weight loss in appropriate patients and that gastric ulceration, deflations, pancreatitis and early retrievals for intolerance occur infrequently.

Additionally, earlier this month we are pleased to announce results of a real world safety and efficacy study that was published in the journal of clinical gastroenterology and hepatology. This physician sponsored study collected data on 202 adults at two academic centers and 5 private practices in which all patients paid for the ReShape balloon procedure and follow-up visits out of pocket. All patients had the ReShape balloon inserted for weight loss therapy and the balloon was removed from each patient after six months. Patients also received counseling on lifestyle modifications focused on diet and exercise. Mean percent total body weight loss for patients in this study was 11.4% and 14.7% at 6 and 12 months respectively.

Practioners were looking more and more real world results to drive technology decisions and the results of both of these studies are very compelling. We believe that these results support ReShape as the best inter-gastric balloon in the market.

Turning to vBloc, I'm pleased to report that the backorder supplier issue that we discussed on the third quarter call is fully resolved and vBloc manufacturing is back on-track. As such, we have made good progress in our previously announced vBloc Now program; our company subsidized program that we believe will provide us with real world published data on vBloc to help support reimbursement. We now have 120 patients implanted with 5 more scheduled over the next few weeks at which point the vBloc Now Program will be completely enrolled. We then expect early data on these patients to be available during the second half of 2018 and our plan is then to present this data to payers to support future reimbursement of vBloc therapy.

As discussed earlier, we are excited to expand our agreement with Academy Medical for vBloc adding over 400 contracted DoD facilities. Academy will now distribute vBloc to both VA and DoD facilities. With these agreements in place, our sales strategy for vBloc is to focus primarily on marketing and selling to patients within the VA and DoD where the devices are under contract and can be paid-for for qualified patients. On the clinical front of vBloc in November early, results of 35 vBloc therapy patients in a real world setting were the subject of a poster presentation at Obesity Week 2017. Of the 28 patients who had reached 9 month follow-up at the time of the presentation, average BMI dropped from 41 to 36, mean initial body weight loss was 12%, and there were no serious complications. The presentation concluded that the short-term use of vBloc therapy can achieve significant meaningful weight loss with minimal complications in severely obese people in a real world setting.

Our third product is our laparoscopic non-anatomy altering implantable device that is designed to enable weight loss in stomach preservation. The reshaped vest restricts stomach volume without cutting, stapling or removing the stomach. In a pilot study of 16 patients, early clinical results showed durable weight loss in excess of 85% excess weight loss in one year. These favorable results were presented at the ASMBS Obesity Week Conference at the end of 2017, as well as last month at the Minimally Invasive Surgery Symposium of MISS Conference is Las Vegas, and most recently, at the World Consensus Conference in India. We recently received approval from the CE authority to initiate a company sponsored trial that is designed to evaluate the safety and efficacy of the ReShape Vest for CE mark approval.

The gastric vest trial is a single-ARM perspective multi-center trial that will seek to enroll upto 85 subjects who will be followed for 2 years. Our primary endpoint which is percent total body weight loss will be assessed at 12 months with results used to support our application for CE marking. We have selected Medpace full service clinical research organization with strong presence in Europe and extensive experience managing obesity clinical trials to oversee the management of the vest trail. Site identification and qualification has started and we expect enrollment to begin this summer. We anticipate CE mark approval of the vest within 2 years. We plan to meet with the FDA in the next few months to gain additional insight regarding our proposed pivotal trial to support U.S. approval of the ReShape Vest. We anticipate submitting our IDE for the vest in the second half of 2018 to support enrollment initiation in the U.S. trial.

After reviewing the integration of our two acquisitions from 2017, and as part of our previously announced cost reduction program, we made the decision to concentrate our sales and marketing efforts on areas that are expected to directly support the sales in eventual [ph] reimbursement of our products. We spent much of the fourth quarter of 2017 focused on cross training of our sales reps, so if they are well positioned to sell both, the ReShape balloon and ReShape vBloc to bariatric surgeons and GI doctors. Our current salesforce of 8 reps who are complemented by two field clinical representatives are now responsible for covering their 8 territories with both vBloc and balloon products. The reps reside in the large population areas and are focused on going after the high volume accounts. We believe that our sales force is the right size to support our current level of sales and we will continue to assess and align this organization as we grow.

We also viewed our acquisition of ReShape Medical as an opportunity to expand our presence outside the United States and to drive expansion into international markets with a need for products to address obesity as high. As discussed earlier, we have established a presence in the Middle East and plan to continue to increase our footprint outside the U.S. in 2018.

We were very pleased with our results during the fourth quarter, particularly given that they were in the midst of transition, integration and training. We sold 308 balloons during the quarter and we also experienced strong interest in our vBloc Now program including 13 vBloc Now units during the fourth quarter bringing total vBloc Now implants to 68 in 2017. Combined with strong interest in the first quarter of 2018, total vBloc Now implants are at 120, again with an additional 5 implant scheduled in the next few weeks which will bring that program to completion.

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

Scott Youngstrom

Thanks, Dan. As Dan mentioned, this morning we entered into a securities purchase agreement with an institutional investor providing for the purchase and sale in a registered direct offering of shares of Series D convertible preferred stock in a warrant to purchase shares of common stock for a purchase price of $6 million. We expect to receive net proceeds of approximately $5.2 million after deducting placement agent fees and other offering expenses.

The shares of Series D convertible preferred stock will be convertible into an aggregate of 8 million shares of common stock at an initial conversion price of $0.75 per share and the warrants will have a 1 year term and be exercisable for an aggregate of 35 million shares of common stock at an initial exercise price of $0.75 per share. The closing of the offering is expected to take place on or about April 4, 2018 subject to the satisfaction of waiver of customary closing conditions. We intend to use the net proceeds from the offering to continue our commercialization efforts for clinical and product development activities and for other working capital in general corporate purposes.

Moving to our financial results for the fourth quarter and full year of 2017; for the 3 months ended December 31, 2017, we reported sales of $794,000 and gross profit totaling $156,000. This compares to revenues of $297,000 and gross profit of $150,000 for the 3 months ended December 31, 2016. I'm pleased to note that the 2016 numbers do not include revenue from the ReShape Medical acquisition. Our team placed 21 vBloc units in the fourth quarter of 2017 representing an increase of 91% compared to 11 units in the fourth quarter of 2016. 13 of the 21 vBloc units were part of the vBloc Now program. During 2017, a total of 68 vBloc Now units were implanted, and as Dan has mentioned previously, total enrollment of the vBloc Now program is currently 120 units implanted with the remaining 5 scheduled in the next few weeks.

Selling, general and administrative expenses for the quarter were $9.7 million, as compared to $3.4 million for the fourth quarter of 2016. Included in SG&A expenses this quarter were $3.3 million of non-cash expenses consisting of $1.6 million of severance, onetime accruals and acquisition related expenses; $803,000 in stock-based compensation primarily due to the inducement stock brands issued ReShape Medical employees and $675,000 of amortization of intangible expense.

Research and development expenses were $2.2 million for the three months ended December 31, 2017, compared with $1.3 million for the same quarter in 2016. This increase is primarily the result of the additional expense from our ReShape Vest product and the additional gastric balloon expense associated with the ReShape Medical acquisition.

For the full year ended December 31, 2017, we reported sales of $1.3 million, a 64% increase over the full year ended December 31, 2016. For the full year 2017, gross profit totaled $351,000 which was comparable to the amount for the same time period ended December 31, 2016. Please note that the 2017 full year results include the fourth quarter revenues from the ReShape Medical acquisition, all of which are included in our fourth quarter results for 2017. On a pro forma basis, as if the ReShape Medical acquisition had occurred on January 1, 2017, the total combined product revenues would have been $3.6 million for the 12 month period. Our team placed 101 vBloc units in 2017 as compared to 63 for the comparable 2016 year representing a 60% increase year-over-year.

Operating expenses for the year ended December 31, 2017 totaled $31.6 million as compared to $23.2 million for the year ended 2016. SG&A expenses for the year ended December 31, 2017 totaled $25.8 million as compared to $18 million for 2016. Included in SG&A, in addition to the additional expenses picked up with the two acquisitions, included a non-cash charge of $8.7 million related to stock compensation and warrants expense representing a $6.9 million increase over the same period in 2016. SG&A also included $1.2 million of expense related to our acquisitions, $1.1 million associated with severance and onetime charges and $720,000 of amortization expense, a total of $3 million to which there were no comparable expense in 2016.

R&D expenses for 2017 totaled $5.8 million as compared to $5.2 million for 2016. This is primarily due to the continued development of the gastric vest and the addition of the balloon line.

As Dan mentioned, we recently completed a review of our organization including our cost structure in an effort to better align revenues and costs. As part of the integration and cost control efforts, we will have reduced our overall employee count from a combined 97 ReShape Medical and EnteroMedics employees at the close of the acquisition to a total of 58 ReShape Lifesciences employees when integration is complete. It should be noted that some of these employees were notified of their termination following the October acquisition of ReShape Medical, and were therefore already in transition as they complete their integration responsibilities. We feel this resizing will best position the company going forward to focus on our three product lines in the most efficient and effective manner possible.

We expect to substantially complete the restructuring by the third quarter of 2018 we estimate that we will incur approximately $500,000 of cash expenditures in connection with the restructuring substantially all of which relates to severance cost.

As of December 31, 2017, the Company's cash, cash equivalents and short-term investments totaled $10.2 million and the Company remains without any debt on it's balance sheet. This does not account for the $6 million financing announced earlier today. With previously stated, that we will reduce our monthly burn to $2.5 million a month after taking into consideration integration related costs; our Q4 2017 and Q1 2018 operating expenses will not be at the $2.5 million a month due to integration related costs. Starting with Q2 2018, we are targeting our monthly burn to be no more than $1.8 million per month.

Lastly, with the earlier discussed reductions in our sales force, we want to reiterate that our strategy is one of controlled expansion as we grow into our market, while at the same time preserving cash to support the clinical programs around our suite of products including the ReShape Vest. As such, we anticipate top line growth of 10% to 20% during 2018 supporting a $4 million to $4.3 million revenue target.

With that, I return the call back over to Dan.

Dan Gladney

Thank you, Scott. As we enter 2018, we're pleased about the significant progress we have made over the last year. We have broadened our platform significantly with acquisitions and have transformed our business from a one-product company to a full-scale rollup of technologies to address the obesity continuum of care. We have published real world clinical evidence that supports the efficacy and safety of our products as solutions for weight loss. We have established relationships and contracts that put into place distribution of and payment for our products. We have conducted a thorough review of our business as we complete integration better aligning our spend to support revenues and to position us well financially as we grow.

We are energized about the year ahead as we focus on educating the market about our products, increasing awareness of the clinical benefits and driving topline growth. As you may know, 1 in 3 adults in our country are considered obese, yet currently only approximately 200,000 surgeries a year are done to address obesity in the United States. Clearly, there is a market need that is not being met. ReShape Lifesciences can help fill that gap, we can now offer to bariatric surgeons and GI specialists a toolbox of patient friendly, safe, transformative alternatives through traditional bariatric surgery with healthy outcomes and the ability to reduce cost in the healthcare system.

We have a great market with significant opportunities and novel products that are backed by solid clinical evidence. Our goal is to now drive physicians and patients to our products, filling the market need for acceptable, surgical obesity solutions, expanding market penetration and fueling the growth through ReShape Lifesciences. We greatly appreciate the hardwork of all of our employees at ReShape Lifesciences and the continued interest and support of our investors. We are excited for the future of ReShape and how we can impact the lives of our customers and patients.

With that, we are now open for questions. Operator?

Question-and-Answer Session

Operator

Dan Gladney

Thank you everyone for joining us today and have a great evening. Thanks again.

Operator

Ladies and gentlemen, thank you for participation in today's conference. This does conclude the program. And you may all disconnect. Everybody have a wonderful day.