Bart Bandy - Chief Executive Officer Tom Stankovich - Chief Financial Officer Michael Miller - Rx Communications, Investor Relations

Ladies and gentlemen, thank you for standing by, and welcome to the ReShape Lifesciences Fourth Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to turn the conference over to your speaker for today, Michael Miller, Rx Communications. You may begin.

Good afternoon, and thank you for joining the year-end 2021 ReShape Lifesciences earnings conference call. I'm pleased to be joined by Bart Bandy, Chief Executive Officer of ReShape Lifesciences Inc., who will provide an overview of the company's activity during 2021 and milestones to-date. Tom Stankovich, Chief Financial Officer of ReShape, will then review the financial results for the year, after which we will open up the call to a question-and-answer session. 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 stock is listed on the NASDAQ trading under the symbol RSLS. I will now turn the call over to our Bart Bandy, President and CEO of ReShape Lifesciences. Bart.

Thanks Michael. Good afternoon everyone, and thank you for joining us today. 2021 was a year for the significant accomplishments to ReShape beginning with our merger with Obalon, our listing on NASDAQ and our subsequent $46 million financing, all of which positions us to capitalize on the existing FDA approval and broad insurance reimbursement of the Lap-Band and to re-induce this proven product and other weight loss initiative directly to the consumer or patient market. With that in mind, in October we launched a multi-platform, direct-to-consumer advertising campaign utilizing national television, print, social media and public relations to market our Lap-Band program, with available after care supported through the ReShape Care, our reimbursable virtual health coaching platform that can also support weight loss objectives for people who are not surgery candidates. The goal was to create consumer awareness and increase patient demand for Lap-Band and as we recently reported, the early metrics have been extremely promising, recognizing that the four to six month mandatory waiting period for insurers represent the lag between early engagement and procedures. In 2021 we nevertheless witnessed a robust 20% increase in revenues year-over-year to $13.6 million. Before I go into more detail on our progress, I would like to once again recap the incredible market opportunity before us. Studies shows 73% of American adult are overweight or obese, with about 50% of that population seeking to lose weight every year. A Harris Poll research study conducted in late February of 2021 reported that 61% of American adults experience undesired weight changes during the pandemic, with 42% claiming they gained more weight than they intended, an average of 29 pounds, with 10% reporting they gained more than 50 pounds; and remember, this was one year ago. The epidemic of obesity is something we need to address…

Thanks Bart, and once again thank you all for joining our webcast this afternoon. Before turning to our detailed metrics, I'd like to provide some color on our non-cash stock compensation expenses, impairment charges and costs related to the merger with Obalon that drove substantial increases in our non-cash operating expenses for the following areas; sales and marketing, general administrative and R&D. As a company, we placed employees at the heart of our business. Understanding that, stock based compensation is a proven and effective tool to retain existing staff, attract seasoned professionals and enhance incentive programs. Subsequent to the merger with Obalon listing on NASDAQ and our fundraising, we issued for the first time since 2017 restricted stock units and stock option throughout the organization. Considering the height of this expense during the quarter, we believe it is appropriate to call out these metrics. For the year ended December 31, 2021 we recorded $12.8 million in total stock compensation expense. Of note, a majority of this expense includes a one-time charge for a look back provision for vesting to begin at the one year anniversary date of employment. We also recorded a loss on impairment of intangible assets and goodwill of $28.8 million. This is primarily due to significant drop in our market capitalization at December 31, 2021, coupled with the delay in the clinical trials for the ReShape Vest due to the COVID 19 pandemic. It is important to note that both the stock compensation expense and loss on impairment are non-cash expenses. Between the relatively high normal non-cash stock based compensation expense, loss on impairment and the 6 million acquisition related outlay of funds, and given these expenses are specific in nature and uniquely attributed to events this past year, the company expects this expenditure to revert to…

Thanks Tom. Operator, please open the lines for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Anthony Vendetti with Maxim Group. Your line is open.

Thank you. Good afternoon!

Hi Anthony!

Hey Bart, Tom! How are you doing? So the DTC marketing campaign showed significant growth in terms of the number – I guess in terms of percentage for leads generated. I was wondering if you could tell us the number of leads generated or number of consultations you know as best you can tell directly related to the DTC marketing campaign?

Thanks. Yeah, that’s something we work out you know to do with the metrics funnel so to speak, it looks like. You know I think it’s really important to point out that the mandatory wait periods for most insurers is four to six months. So if somebody wants to go in and get a bariatric procedure today, Lap-Band, Bypass, whatever, it's going to take four to six months for them to get through that process; behavior analysis, physicals. Some people require that they go through medically managed weight loss to make sure they can do that just one more time. But you know as we get through it, the main thing is that we're seeing that – I mean we already launched in October. In November we launched harder because we got affiliate approvals from broadcast networks like ABC and then December was a little light because of the holidays we pulled back. But then in January, February and March we started to advertise quite a bit. So if you kind of look at that four to six months window, we're just starting to see those people get through the consultation and procedural volume list. But you know as we mentioned, we’ve had 250,000 people coming to our website that weren’t there with our baseline. We had a 480% increase in request for information on Lap-Band, a 400% increase in warm transfers to consultations, and we have a pretty good conversion ratio there. So I can tell you, that one’s starting to come. But a lot of the practices are just not getting their feedbacks out of them. Some practices haven't done any procedures since Christmas, is coming back in February and March, so just getting their stats back, they are just getting consultations scheduled, they are just getting everything…

So Bart, just following up on that. So did you say that that maybe this is partly due to Omicron, but were some of these procedures which were obviously elective, were they put-off’s in January and February to some extent because Omicron or even you know patients that maybe were interested, even though it takes four to six months, just the normal flow of patients; was that just stalled because of Omicron?

It was definitely impacted. I mean we actually saw it all the way back to December you know went Omicron started to hit, and you know hospitals and everybody have kind of gone through the process now, so they are a lot faster to start closing and reallocating staff and doing that. You know they've learned over the last couple of years what to do, so yeah, we saw that. You know staff was reallocated in different departments in hospitals. Some practices, there was practice class about COVID, so yeah, a lot of this was put off, but you know that's why we’re starting to push the numbers so hard so that we can try to make up for that and try and get more people into the outpatient surgery centers and just trying to get the doctors lines set up. The one thing we did check is that with the practices, they are building their procedural load so – and when they do get at this, they are not losing those patients, which is key for us also because that’s what tells us to keep the process. While we know the continuity builds the traction, it’s going to get us more procedures down the road, direct to consumer marketing. So we don't want to have any breaks in it, but we also have to make sure it’s the wise thing to do, and we're confident of that because we're actually engaging with all of our accounts and making sure that they are not losing patients. Those patients aren't going anywhere. They are not doing anything else. You know you may have a small percentage fall off, but we're going to capture them over the coming quarters.

Okay, that's great. And then, as you've been getting the word out there among not just potential patients, but physicians, how many physicians had that may be used to do the Lap-Band procedure but stopped, you know as there wasn't a lot of marketing and training behind it. How many of them have signed back up, and do you have that number or also the number of potentially new physicians, bariatric surgeons that have said, you know we want to be – we want to be a part of this process?

Yeah, that's great. So you know as we said in the past, we're going a different model; we're not putting 10,000 reps out chasing 100,000 doctors. That’s expensive. It doesn't work anymore. You can't get access to them. They don't have the controls they used to at the hospital level, so driving the patient flow is what we can do, and we only needed about 150 accounts across the U.S. to really be effective and to you know see returns that makes sense on this consumer investment. And so the good news is, we had over 30 accounts come back since the program started. So in the last four months we had 30 accounts come back. We put them through refreshers, recertification, gone out and made sure that they were up-to-date on all the new collateral materials, how to process the leads, how to work with our tracking programs and our leading engagement company, so that’s the tremendous number and that’s just the first four months. Now a lot of these guys I mean, we'll have to sit down and have a coffee someday because there are some funny stories. But the guys you said they probably wouldn't come back until things really changed or until they had a lot of data. But the patient flow, I think a really good sign on the patient flow is that these guys are coming back now and that's important for us. We know we're doing the right thing. And I mentioned earlier on the fire-side chat I had today with Maxim is that, we are also tracking what the umbrella effect is on this. We’ve seen 1,300% increase in patients going directly to our website and going to the surgeon locator. So even if they are not coming through our system, we're still tracking them and we're seeing the doctors come back and do that. The other thing that’s really key, is because of the traction we're getting, in February we went to an ASMBS leadership meeting and for the first time in over a decade, they included us to present to their new fellows that are graduating, because they are starting to really believe that this, the Lap-Band should be something that's part of all practices and should be offered. So that's a huge sign, that you know when the society starts to see it and starts to recognize it, it needs to be taught to the new fellows and make sure that they are aware that we provide for them and that they see it as an important addition to patient treatment. So that’s strong across the board.

That's great. And then last question and I’ll hop back in the queue. Reshapecare, I know it's reimbursable, which is great. Have you rolled that out to primary care physicians yet? Is – where is that rolled out in terms of the plan?

Yeah, we started to test that this past quarter with some different primary care or family care and it was a very positive result. So we're working on the final aspects of the new model that we're going to, to roll that out. You know we are focused on the main thing and that’s the Lab-Band and the surgeons. But this is a great opportunity. We think that we can do it in a very non-dilutive matter and we think that we can really start to access that market, which as you can imagine is what, 350,000 general practitioners compared to maybe 3,000 bariatric surgeons. So this could really open a huge opportunity for us. You know with the pandemic, a year ago the Harris Poll results came out that the average weight gain for an American adult was 29 pounds. That's a lot of people getting into the, ‘I want some help zone’ and maybe they are not a bariatric patient yet, but some people needs something like this. So as the physician led weight loss solutions company is right down our alley and it actually helps to get more out of something we've already built and developed.

Right, and obesity is one of the comorbidities that can have a negative outcome for people that have – get COVID, right, obesity is one of the comorbidities, one of the…

Yeah, exactly! It magnifies the risk profile of COVID. You know 78% of all patients who are hospitalized or die from COVID were overweight or obese. So besides hypertension, diabetes and types of cancer, now the risk of COVID. People need to watch their weight and when they start getting pre-diabetic and they start getting 30, 50 pounds overweight, that's a huge concern and you know diabetes is no fun and it's dangerous and it's costly. So yeah, I mean there's a lot of people that needs help and I think for us to expand that offering without having to put a lot of investment into additional resources, really is something that's going to benefit our shareholders.

Okay, thanks. Bart, I appreciate it. I’ll hop back in the queue.

Thank you.

Thank you. Our next question comes from the line of Ben Haynor with Alliance Global Partners. Your line is open.

Good afternoon, gentlemen! Thanks for taking the question. You know first-off, I really appreciate all the metrics that you've been able to share on the marketing campaign. I think that’s really helpful. But I was just curious on the visibility that you've had historically in terms of, well particularly in the case of warm transfers. You know what proportion of U.S. sales kind of historically have come through leads that you guys generated initially. I mean is that something that you have some data on?

Yeah, none. Before the direct-to-consumer marketing, we only did a couple of test market in the U.S., because we didn’t want to spend a lot of money till we know what we are going to do. But one thing we can do is go back to our historical data team and we look at the historical numbers when the company started to do direct-to-consumer advertising on a national level back in 2006, 2007, 2008. That's when we had upwards to $70 million increases in year-over-year revenue, so we know that's what works. The test market shows that we can drive the website traffic, the lead volume and the warm transfers. So we have an idea what the conversion ratios look like, but I think for us to put a number on that right now would not be – I don't think it would be good data until we start to see what normalized markets look like, but it’s very positive. I know we’re going to – even if its low numbers, we know that we are going to have tremendous procedural volume increases. But we've been going through this pandemic. We just rolled out the program in October and November to tell you what the bottom line number is going to be from warm transfer to consultation to procedures. We're going to need a couple of quarters of normalized data to really start to talk about it.

Okay. And then just thinking about the impressions that patients are seeing over time. You are what, four or five months into this now. Are you seeing upticks in the number of enquires, the number of surgeon locator searches, that type of stuff as it would be patients to get more and more impressions of the adverting campaign, marketing campaign.

Oh absolutely! I mean we took our baseline from July after we got funded and after we got listed on NASDAQ. We created a baseline from July through September and then started to compare the data of the study – I’m sorry, the campaign for advertising. And yes, 250,000 people to our website, a 480% increase in requests for information or 400% increase in warm transfers to doctors, I mean all of these are tremendous. And then what we're tracking on the offset from that umbrella effect I talked about is 1,300% increase in visits to our surgeon locator page. So people that are going outside of the lead tracking process are going straight to the surgeon locator page on our website. So it’s very, very positive and that's why the doctors are starting to speak with us about coming back or participating with it, that's why we're starting to get picked up by more channels and more magazines, because they see that the liability and the ethical way that we're doing it, that is going to have an opportunity to help a lot of people.

Okay, that makes a lot of sense. And then just for clearly sake, you're comparing versus July to September. The metrics that you're given are those just for Q4 or do those include up until yesterday or last week or whatever. What time period are we looking at for the comparison?

Yeah, those metrics were through February. So we launched mid-October with the soft launches, just a couple of magazines. In November we got most of our affiliate approvals for television and we were semi dark in December because of the holidays. So that’s the time period that we are comparing it to, from the soft launch in October to the end of February and through the dark period for the holidays.

Got it. And then lastly from me, just on ReShape Care, you know what do you anticipate the contribution to revenue looking like this year? I mean is it meaningful on its own or does it fall into kind of more of a supporting role in helping to drive Lap-Band procedures.

I think it’s a good support, the resource for us with the Lap-Band and remember we're agnostic with ReShape Care. So it doesn’t matter what procedure you have, even if you had it 10 years ago, if your doctor enrolls you, we’ll support it. But I think that it'll start to generate more revenue towards the end of year. Practices come back, they start getting patients enrolled. They don't really want everybody in their office right, patients not only want to go into the doctor's office, so I think we'll see more and more. And then as we start looking at this opportunity with kind of the medical physician practice level, that general practitioner, I think that can create a big opportunity for us. We’ve done some studies and some metrics and worked with a couple of key partners to understand what the viability of that looks like, and I think that by the end of this year that ReShape Care are definitely showing up on our revenue line and start to carry some weight. But you know right now the two things doctors told us was, I want to do Lap-Band but patients don't ask for it. Send them to me, I'll do them. We are doing that. Second thing they said was, help me manage those patients afterwards so that I'm actually able to get to the OR and do more patients. I want to do surgery, but I want the patient to do well. So we have to have help on that too. We can't encumber their practices with a deluge of patient volume. There has to be – it has to be something that we do, so we're doing that. We're driving to consumers and we're providing a program that helps them with that after care and then takes away some of that encumbrance. I think it's a wonderful thing that we’ve done during the last couple of years, that through the pandemic to develop that strategy and now able to execute upon it.

Excellent! Well, that’s all I had gentlemen. Congrats on the progress and the marketing campaign and that’s it from me. Thank you.

Super! Thanks Ben!

Thank you. I am showing no further questions in the queue. I would now like to turn the call back over to Bart Bandy for closing remarks.

Thank you. I hope you can see that the steps we took in 2021 and over the most recent months have positioned ReShape for substantial growth going forward. We are very excited about what the future holds for ReShape and believe we're at the precipice of reaping significant benefits from our robust, multi-tiered, direct-to-consumer marketing campaign, creating and expanding awareness for a next generation Lap-Band program and suite of weight loss solutions for the millions of patients seeking to improve quality of life. Thank you to 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. We look forward to providing future updates too.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.