ReShape Lifesciences Inc. (NASDAQ:RSLS) Q3 2024 Earnings Call Transcript

ReShape Lifesciences Inc. (NASDAQ:RSLS) Q3 2024 Earnings Call Transcript November 14, 2024

Operator: Good afternoon, and thank you for joining the ReShape Lifesciences Third Quarter 2024 Conference Call. I would like to turn the call over to Michael Miller from Rx Communications.

Michael Miller: Good afternoon, everyone, and thank you for joining the third quarter 2024 ReShape Lifesciences’ earnings call. I’m pleased to be joined today by Paul Hickey, President and Chief Executive Officer; and Tom Stankovich, Chief Financial Officer. Management will also be joined by Krishna Gupta, a current Director of Vyome Therapeutics who will be appointed Chairman of the combined company upon the completion of the previously announced merger agreement between the two companies. As we do each quarter, Paul will provide an overview and update on the company’s activities, and Tom will review the financial results for the period, after which, Paul will introduce Krishna for his remarks. As a reminder, this conference call as well as ReShape Lifesciences’ SEC filings and website including the Investor information section of the website, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those discussed due to known and unknown risks, uncertainties and other factors. These and additional risks and uncertainties are described more fully in the company’s filings with the Securities and Exchange Commission, including those factors identified as Risk Factors in the company’s most recent Annual Report on Form 10-K. As an additional reminder, ReShape’s stock is listed on NASDAQ trading under the ticker symbol RSLS. I’ll now turn the call over to Paul Hickey, President and CEO of ReShape Lifesciences. Paul?

Paul Hickey: Thank you, Mike, and thanks to all of you for joining us this afternoon. As Mike noted, after I provide an overview and update on ReShape’s activities and Tom reviews our financial performance Krishna Gupta will take a few moments to share some background on the exciting vision of Vyome Holdings. Let’s begin with an overview of our activities during the third quarter and subsequent period. During the quarter, our revenue continues to rebound, increasing 16.6% in the third quarter over the second quarter, the third sequential quarter of revenue growth, and 6.4% over the third quarter of last year. While we remain highly focused on maintaining our disciplined approach to continually leveraging resources in order to execute on our 2024 cost reduction plan which has led to over 40% lower operating expenses for the first nine months of the year compared to last year.

As a result, our gross profit margin increased to 62.8% for the quarter and 60.3% for the first nine months. Tom will detail these cost reductions later in this call. In addition to the cost reductions, we continue to fine-tune our lead generation activities and invest in our growth drivers, including the commercial launch of our physician-led redesigned Lap-Band 2.0 FLEX. We completed our early launch phase and our analyzing data and metrics that will be used to support our widespread commercial launch. Additionally, as announced this week, we received approval for the Lap-Band 2.0 FLEX from Health Canada, which represents yet another important growth catalyst for the Lap-Band franchise as we look to gain regulatory approvals worldwide. Also announced this week, we were awarded approximately $241,000 supplementary grant from NIH with the University of Southern California’s Center for Autonomic Nerve Recording and Stimulation Systems.

Q&A Session

This nondilutive supplemental grant awarded over the course of one year, will fund studies to test the safety and efficacy of the next-generation electrodes for ReShape for proprietary Diabetes Bloc-Stim Neuromodulation or DBSN device, which can potentially double the nerve contact area, reduce power consumption and increase the effectiveness of delivering DBSN signals. This fourth grant from the NIH brings our total received awards to $1.15 million, demonstrating the viability of our nondilutive funding strategy, and the NIH keen interest in our novel DBSN technology and potential in the global diabetes market. Most notably, in July, we coordinated both the merger agreement with Vyome Therapeutics and the concurrent asset purchase agreement with Biorad and we successfully negotiated with our Series C shareholders to substantially lower the liquidation preference.

All things considered, we feel strongly these concurrent deals will maximize stockholder value and earnings potential. Krishna Gupta will detail the merger with Vyome, a little later in this call, which will shed some light on why we are very bullish on these transactions. Before I do that, I’d like to touch on the obesity market. Obesity is a complex lifelong disease that requires individualized treatment strategies to achieve sustainable weight loss. As most of you are aware, the promotion of GLP-1 receptor agonist has lessened the stigma around obesity and has started to normalize medical intervention and treatment. GLP-1 receptor agonists have provided considerable advantages for individuals with type 2 diabetes and has also benefited individuals dealing with obesity.

We continue to believe that the number of people seeking the help of medical professionals especially bariatric surgeons over time will increase. Further, with the health economic cost burden related to widespread adoption of the GLP-1s as well as our low real-world long-term tolerability we believe that the market opportunity for our minimally invasive Lap-Band increase, especially with the newly launched Lap-Band 2.0 FLEX. In the interim, our cost reductions have allowed us to focus and optimize the commercialization of the Lap-Band 2.0 FLEX, which was created to improve the patient experience. As I touched on earlier, we successfully completed the limited market release of the Lap-Band FLEX, and it went exceptionally well. I’m pleased to report that initial surgeon feedback has been very positive.

Added to this, our patient-centric website is receiving meaningful traffic, while our co-op marketing programs has proven effective and scalable with key Lap-Band centers nationwide. Now let’s talk about the future of ReShape shareholders with Vyome. As most of you know last year, we conducted a high-priority search for synergistic merger and acquisition opportunities. engaging the Maxim Group exclusively to assist in this process. After extensively evaluating multiple strategic options and engaging in discussions with other potential merger and acquisition candidates, our Board of Directors unanimously recommended the merger with Vyome, along with the concurrent asset sale to Biorad. We believe this merger presents a significant opportunity for our shareholders to capitalize on the potential of owning a meaningful portion of Vyome’s go-forward business, which encompasses tangible assets and a big vision captured in a newly combined company.

As previously reported, Biorad has been granted an exclusive license for our Obalon Gastric Balloon System in the Indian subcontinent. We believe Biorad is the most synergistic partner to purchase our assets, including the Lap-Band system and the Obalon Gastric Balloon System for $5.16 million in cash, this asset purchase agreement will allow us to pay down the costs associated with the Vyome transaction and deliver maximum value to our shareholders. It is also worth noting that in October, we regained compliance with NASDAQ after effecting a 1-for-58 reverse stock split in September, which was a critical component for the merger with Vyome. I remain very excited about the shareholder value and growth potential resulting from these transactions.

And I’d now like to turn the call over to Tom Stankovich to provide a recap of our financial performance. Tom?

Thomas Stankovich: Thanks, Paul. And once again, thank you all for joining our webcast this afternoon. As Paul mentioned earlier, during the third quarter, our revenues continue to stabilize and grow and has increased for the third quarter — third sequential quarter this year. Additionally, and in response to the short-term impact and adoption of GLP-1s, we have reorganized the company and maintained our disciplined approach to executing our cost reduction plan for 2024. With various cost reductions, we have achieved a 41% reduction in overall operating costs for the first nine months of 2024 compared to the same period last year. All expense items within our operating expenses are the same or lower than the comparable period in the prior year.

And as a result, we also saw increases in our gross profit margin. A full discussion of our actual financials is in our press release and 10-Q. So I will just take a moment to review key financial metrics for the third quarter and nine months ended September 30, 2024. Our revenue totaled $2.3 million for the three months ended September 30, 2024, an increase of 6% or $100,000 compared to the same period in 2023. This primarily resulted from an increase in sales volume, offset by continued pressure primarily due to GLP-1 pharmaceutical weight loss alternatives. Quarterly revenue was 17% higher or $300,000 compared to the second quarter of 2024. Revenue totaled $6.2 million for the nine months ended September 30, 2024, a contraction of 7% or $500,000 compared to the same period in 2023.

This primarily resulted from a decrease in sales volume, primarily due to GLP-1 pharmaceutical weight loss alternatives. Gross profit for the three months ended September 30, 2024, was $1.4 million, which was slightly above $1.3 million for the same period in 2023. Gross profit as a percentage of total revenue for the three months ended September 30, 2024, was 63% compared to 60% for the same period in 2023. Gross profit for the nine months ended September 30, 2024 and 2023 was unchanged at $3.7 million. Gross profit as a total — as a percentage of total revenue for the nine months ended September 30, 2024, was 60% compared to 55% for the same period in 2023. The increase in gross profit margin is due to the reduction of overhead-related costs, primarily in payroll as the company has had a reduction of employees late in 2023.

Sales and marketing expenses for the three months ended September 30, 2024, decreased by $1.1 million or 60% to $700,000 compared to $1.8 million for the same period in 2023. Sales and marketing expenses for the nine months ended September 30, 2024, decreased by $3.7 million or 61% to $2.4 million compared to $6.2 million for the same period in 2023, the decrease is primarily due to a decrease in advertising and marketing expenses, including consulting and professional marketing services as the company has reevaluated its marketing approach and has moved to a targeted digital marketing campaign, resulting in a reduction of costs. Additionally, there was a decrease in payroll-related expenditures including commissions, stock-based compensation expense and travel.

General administrative expenses for the three months ended September 30, 2024, increased slightly by $45,000 or 1% to approximately $2.1 million compared to the same amount $2.1 million for the same period in 2023. The nominal increase is primarily due to an increase in professional services, primarily related to the merger and asset purchase transaction that was entered into in July 2024, offset by reductions in employee-related expenses and bad debt expense. General and administrative expenses for the nine months ended September 30, 2024, and decreased approximately $2.7 million or 30% to $6.1 million compared to $8.7 million for the same period in 2023. The decrease is primarily due to a reduction in professional services such as audit and legal fees of $1.1 million, primarily due to the company incurring onetime adjustments for professional services related to our February 2023 public offering.

A reduction in payroll-related expenses, including stock-based compensation expense due to a decline in staffing levels, a reduction in rent expense as the company moved its headquarters at the end of the second quarter of 2023 to a smaller facility to reduce costs and a reduction in bad debt expense. Research and development expenses for the three months ended September 30, 2024, decreased by $100,000 or 26% to $400,000 compared to $500,000 for the same period in the prior year. Research and development expenses for the nine months ended September 30, 2024, decreased by $300,000 or 19% to $1.3 million to approximately $1.6 million for the same period in the prior year. The primary reason for the reduction — a decrease in the reduction is payroll, consulting and clinical trials.

Non-GAAP adjusted EBITDA was $1.6 million for the three months ended September 30, 2024, compared to a loss of $2.9 million in the same period last year, an improvement of $1.2 million, for the nine months ended September 30, 2024, the adjusted EBITDA loss was $5.6 million as compared to $12 million for the same period last year, an improvement of $6.4 million. Both reductions are primarily due to our continued efforts to reduce overall operating costs. We ended the quarter with net working capital of $1.3 million, including cash and cash equivalents and restricted cash of $800,000. And now with that, I’ll turn the call back over to Paul.

Paul Hickey: Thanks, Tom. While I’m happy to be joined once again by Krishna Gupta, who will be the Chairman of the combined company post-merger to further outline Vyome strategy and vision for the future. Now over the last year, I’ve had the pleasure of working with Krishna, and I am truthfully very excited about the opportunity for our ReShape shareholders and new shareholders alike to become part of Vyome that stands apart from any other investment opportunity. Krishna?

Krishna Gupta: Thanks, Paul and Tom. I’d like to take this opportunity to kick off a more meaningful dialogue with ReShape’s shareholders. I’m looking forward to having you along on the Vyome journey, which also revolves around innovation in healthcare, much as ReShape has done. We’ll be putting out a deck on the Vyome vision shortly, but in the interim, I encourage you all to read through the S-4, which is publicly filed and available. We note in the S-4 that both sides have valued the go-forward entity at about $130 million for the purposes of allocating the ownership of the combined company between ReShape and Vyome current shareholders, underpinned by our existing assets. We view this transaction as a massively positive one for ReShape shareholders and believe there is significant upside beyond this valuation as well if the Vyome team executes well in 2025.

So what does Vyome do? As a reminder, Cambridge, Massachusetts-based Vyome is an innovation-driven healthcare platform centered around the U.S. India corridor and the increasingly special relationship between the two countries. In particular, we are building a healthcare platform that we anticipate having three core pillars underpinning the bridge between U.S. and India. Number one, biopharma, where we already have developed valuable assets; number two, medical devices; and number three, AI. The latter 2, we are in the process of building the foundations for. We intend to be very active deal makers as a core competency in order to potentially further our platform and shareholder value. As an example of this, we have struck multiple deals with Sun Pharma, the fourth largest global specialty generic pharma company to commercialize some of Vyome technology in India.

We’ll be sharing more information and upcoming milestones about our core assets and how we think about value in our investor presentation shortly. These core assets have been developed over nearly a decade with millions of dollars invested significant IP filed around the world and a large value creation opportunity centered on the large immuno-inflammation space, which has seen several lucrative deals. We’ve been very tactical about designing assets for rare unmet needs, accelerating development and hopefully one day monetization. I encourage you to understand our assets in some detail. I also want to shed some light on our Board and my colleagues who are one of the world’s best group of individuals to be stewarding this vision. Every person on our Board is educated at the world’s top institutions is equally comfortable in the U.S. and in India and has developed or invested in innovation on both sides of this bridge.

Whether it is Co-founder, Shiladitya Sengupta, who was Gold Medalist of India’s top Medical University and now is a researcher at MIT and Harvard or Ambassador Frank Wisner, who was U.S. Ambassador to India, New York to New Delhi is a route we know extremely well. By putting our stake in the ground and capitalizing on the number one public market in the world for innovation-driven companies, the NASDAQ, we are excited about taking this journey with all of you. We believe the election results to be a strong tailwind for Vyome vision, which is synergistic with our M&A strategy. We expect both the capital markets, including the Indian American hedge fund managers on Wall Street and retail shareholders alike to recognize a significant opportunity that exists by engaging with India as its influence on healthcare is beginning to resemble the trajectory shown in technology.

In closing, we are confident in our ability to potentially build significant value with our pipeline of novel local agent drugs for significant unmet needs, supported by a robust patent portfolio effective drug development strategies, a balance sheet with no debt and prudent capital deployment toward a really big vision that is propelled by macro tailwinds and near-term catalysts. Our Board and in Vyome are 100% focused on creating shareholder value for you and Vyome investors. If you’re excited about healthcare innovation about the exchange of talent, ideas and capital between the U.S. and India, and about the value creation opportunity that this transaction may offer you, please join us. With that, I’d like to turn the call back to Paul.

Paul Hickey: Thanks, Krishna. You just shared a very compelling and believable opportunity that shareholders can be a part of with their approval of the proposed merger and asset purchase agreement. To remind shareholders, the details shared by Krishna are outlined in the S-4 registration statement which includes the proxy statement. When the SEC declares the S-4 effective, we will plan and hold a shareholder meeting to approve the transactions. Krishna’s message should excite you, and it is part of the reason our Board unanimously recommended the merger with Vyome and the concurrent set sale to Biorad. Thank you again, Krishna. I’m grateful for you joining today’s call to discuss what future shareholders can anticipate with Vyome Therapeutics.

They’ll be in great hands. Additionally, I want to express my sincere appreciation to our employees, Board members, customers, consultant advisers, suppliers and existing and new shareholders for your unwavering support of ReShape and support for our future as Vyome Therapeutics. Thank you all.

Operator: Before we conclude, we have one question from Jason McCarthy from Maxim Group. Mr. McCarthy, your line is open.

Jason McCarthy: Hi guys. Hello. I’m sorry. Can you guys — as we start to think about Vyome, a bit more from a pharmaceutical biotech company. Can you just talk at a high level about the 1953 gel kind of what it does and your plans to target malignant fungating wounds, something I think a lot of people don’t really know too much about and it would be a good opportunity maybe to inform some of the investors here.

Paul Hickey: That is definitely in Krishna’s warehouse. Krishna?

Krishna Gupta: Yes. The malignant fungating wounds is an example of a rare unmet disease. I’m going to defer on talking about the science until we put out our investor deck. But what I can point you to is that, it’s an example of an immuno inflammation therapy. So if you look at the world today, it’s beset by many problems that are frankly niche untreated and often caused by an underlying immuno inflammation response. It’s a category that’s hot. And Vyome’s scientific journey has always been focused on identifying the root cause and treating them from the lens of how do we interact with the immune system of the body. So malignant fungating wounds is one of these examples where patients that suffer from this, have quite acute symptoms that are multisensory.

Obviously, it’s painful, but then there’s a very strong smell and it is a very, very disturbing site to look at as well. And that can cause significant damage to people’s quality of life. And we believe we are working on, the only sort of solution and sort of product that can treat this in a systemic way. And we believe that can create a lot of value for shareholders to come. And that’s just one example of where we can use this sort of development philosophy of, hey, how can we use existing molecules, target them towards rare unmet needs and do so in spaces where the underlying causes are immuno inflammatory. I’d love to share more, but I want to wait until we put out our investor presentation.

Jason McCarthy: Okay. Well, that presentation have, I guess, a high-level outline of the strategy in terms of what programs to take forward, whether it’s the 1953, or the 1908 and the uveitis indication, which a lot of the ophthalmology space has been very, very busy over the last 12 to 24 months. Is that a fair assessment of what we could expect?

Krishna Gupta: Yes. Yes, you will have — we will sort of share a bit about the three different molecules that we have, the catalysts that we are intending to pursue in the near term and the value unlocks would follow.

Jason McCarthy: Okay. And just a quick one back to the ReShape Group. You had mentioned that the GLP-1 agonist and dual agonists that are out there pressured your platform. Do you think that there’s going to be more gravitation just in general, over time towards Lap-Band, things like that as opposed to GLP-1s as people kind of break that stigma of obesity, as you mentioned, do you think there’s an opportunity after that market will expand or rebound, I guess, maybe be the right way to phrase it.

Paul Hickey: Yes. I do. It’s a great question. I was just at ASMBS weekend conference in Atlanta last weekend. and sort of talked about the market overall and adoption of GLP-1s and what the impact has been on bariatric surgeries done in the U.S. and clearly, there’s been an impact. And so again, our gains this quarter and through the year have sort of been — and to me signaling their sort of market gains, based on the fact that we’ve got more people that are getting into these obesity discussions kind of petering out or tapering on the weight loss they get with GLP-1s or other means and looking for the least invasive option. Now it’s interesting that the obesity market overall is clearly untapped. Even with GLP-1s, I think they showed data, whether it’s accurate or not to be — not more than roughly about 10% adoption of that 100% of the pie that is obese — clinically obese and needs to get medical attention.

So it’s still primarily an underserved market, and that’s where it’s going to take time for sort of societal influence as well as big pharma to help give people off the sidelines and then to physicians to start talking about improving their quality of life.

Jason McCarthy: Got it. Thanks guys for taking the questions.

Operator: Thank you. Ladies and gentlemen, this does conclude the conference. The conference has now concluded. Thank you for attending today’s call. You may now disconnect.