Earnings call transcript: ReShape Lifesciences Q1 2024 sees cost cuts amid revenue drop

ReShape Lifesciences Inc. (RSLS) reported a significant decrease in revenue and gross profit for the fiscal year 2024, while implementing substantial cost reductions. The company's stock showed notable volatility, with a sharp rise during the regular session followed by a decline in aftermarket trading. According to InvestingPro data, the company's market capitalization stands at just $1.88 million, with a concerning financial health score of 1.38, rated as WEAK. The company remains focused on strategic cost management and expanding its product portfolio through partnerships.

Key Takeaways

• Revenue decreased by 8% from the previous year.
• Gross profit fell by 9%, with a gross profit margin of 63.2%.
• Operating costs were reduced by 42%, with significant cuts in sales, marketing, and R&D expenses.
• The stock price surged by 65.58% during the trading session but fell by 2.93% in aftermarket trading.

Company Performance

ReShape Lifesciences experienced a challenging fiscal year 2024, with total revenue declining to $8 million, an 8% drop from 2023. InvestingPro analysis reveals concerning metrics, including a negative return on assets of -92.26% and an Altman Z-Score of -190.62, indicating significant financial distress. The company attributed this decrease to competitive pressures from GLP-1 pharmaceuticals. Despite the revenue decline, ReShape implemented a disciplined cost reduction strategy, achieving a 42% reduction in operating costs. This strategy included scaling down marketing efforts and workforce reductions. For deeper insights into RSLS's financial health and growth prospects, investors can access the comprehensive Pro Research Report, available exclusively on InvestingPro.

Financial Highlights

• Total Revenue: $8 million, an 8% decrease from 2023.
• Gross Profit: $5.1 million, a 9% decrease from 2023.
• Gross Profit Margin: 63.2%.
• Sales & Marketing Expenses: Reduced by 60% to $3 million.
• General & Administrative Expenses: Reduced by 33% to $6.9 million.
• R&D Expenses: Reduced by 22% to $1.8 million.
• Cash and Cash Equivalents: $700,000.

Market Reaction

ReShape Lifesciences' stock price demonstrated significant volatility. During the regular trading session, the stock surged by 65.58%, closing at $0.55. However, in aftermarket trading, the stock experienced a decline of 2.93%, reflecting investor caution despite the earlier gains. InvestingPro data shows the stock has fallen significantly, with a -96.46% one-year total return and is currently trading at just 1.1% above its 52-week low of $0.3. InvestingPro subscribers have access to 11 additional ProTips that provide crucial insights into RSLS's valuation and market position.

Outlook & Guidance

Looking ahead, ReShape Lifesciences is focused on expanding its product portfolio and international distribution. The company has signed an exclusive agreement with Motion Informatics to distribute neuromuscular rehabilitation devices and is continuing the development of its diabetes Neuromodulation System. Additionally, ReShape is pending a merger with Viome Therapeutics and plans a concurrent asset sale to BI RADS.

Executive Commentary

CEO Paul Hickey emphasized the company's commitment to strategic resource management, stating, "We remain committed to a disciplined approach, strategically levering resources to execute our 2024 cost reduction plan." CFO Tom Stankovich highlighted the success of cost-cutting measures, noting, "We have achieved a 42% reduction in overall operating costs for 2024."

Risks and Challenges

• Competitive pressure from GLP-1 pharmaceuticals impacting revenue.
• Limited cash reserves, with $700,000 in cash and equivalents.
• Dependence on successful integration of new product lines and partnerships.
• Economic uncertainties that could affect consumer spending in health sectors.

ReShape Lifesciences is navigating a complex landscape with strategic cost reductions and product expansion efforts. The company's future performance will depend on its ability to effectively manage these challenges while capitalizing on growth opportunities.

Full transcript - ReShape Lifesciences Inc (RSLS) Q4 2024:

Conference Moderator: Good afternoon, and thank you for joining the Lifesciences Earnings Highlights and Strategic Update Conference Call. I would now like to turn the call over to Michael Miller from Rx Communications.

Michael Miller, Rx Communications Representative, Rx Communications: Good afternoon, and thank you for joining the ReShape Lifesciences Earnings Highlights and Strategic Update Call. I'm pleased to be joined today by Paul Hickey, President and Chief Executive Officer and Tom Stankovich, Chief Financial Officer. During the call, Paul will provide an overview and update on the company's activities, and Tom will provide highlights of the financial results for the year end 2024. As a reminder, this conference call as well as ReShape Lifesciences' SEC filings and Web 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 ks. As an additional reminder, ReShape's stock is listed on NASDAQ, trading under the symbol RSLS. I'll now turn the call over to Paul Hickey, President and CEO of ReShape Lifesciences. Paul?

Paul Hickey, President and Chief Executive Officer, ReShape Lifesciences: Thank you, Mike, and thanks to all of you for joining us this afternoon. As Mike noted, I will provide a strategic update on ReShape's activities and have Tom review the financial performance. Let's start with an overview of our activities over the past year. We remain committed to a disciplined approach, strategically levering resources to execute our 2024 cost reduction plan while executing our growth initiatives. As Tom will detail, we reduced operating expenses by almost 42%, excluding M and A related costs compared to the previous year.

And to help strengthen our financial position, we successfully closed a $6,000,000 public offering in February, positioning us for continued growth. Most excitingly, on April 9, just yesterday, we signed an exclusive agreement with Israel based Motion Informatics to import and distribute their next generation neuromuscular rehabilitation devices. This marks a significant milestone for ReShape as we expand and diversify our product portfolio. In fact, this partnership presents a unique opportunity to bring cutting edge AI driven neurorehabilitation solutions to The US market in alliance with our growth pillars and commitment to expand our portfolio with differentiated products and therapies. This is not my first introduction into the complex rehabilitation market.

And point of fact, prior to joining ReShape, I was President and CEO of Ultimate Medical Inc, where we worked extensively both with physical and occupational therapists to help those with complex rehabilitation needs. It is a fascinating market and offers tremendous opportunity for ReShape Medical and the differentiated technology that motion informatics offers. Now we recently introduced the motion informatics technology at the American Occupational Therapy Association's twenty twenty five Annual Conference and Expo held in Philadelphia. The feedback I received at this meeting, as well as other engagements with occupational therapists, have made us very excited to distribute the FDA cleared Stimul three system. Motion informatics, innovative devices align well with our commitment to improving the quality of life of patients our products and therapies serve.

Our relationship with Motion Informatics will leverage our competencies and complement our existing commercial activity, including the LAP BAND two point zero Flex designed to improve patients' quality of life while driving meaningful clinical and commercial results. Now let me tell you a bit more about the Stimul three system and motion informatics' other exciting products. The Stimul III is a breakthrough system that integrates functional electrical stimulation, or FES, neuromuscular electrical stimulation, MMES, and real time EMG biofeedback into responsive platform, redefining rehabilitation for patients recovering from stroke, injury, or surgery. In addition, with motion informatics development and future release of their flagship Spatial Stimul MD or SSMD, they are advancing precision neurorehabilitation by harnessing real time electrophysiological data, biofeedback driven neuromodulation and AR powered intervention protocols to optimize neuroplasticity and accelerate recovery for patients with complex neurological conditions. Now by integrating biomechanics, predictive analysis, and remote care, they are creating a scalable, intelligent rehabilitation ecosystem, and we are excited to partner with them and bring these important devices to The US market.

Clearly, we have reasons to be enthusiastic about this relationship with Motion Informatics as it will provide an opportunity to drive growth while we continue to execute with a disciplined approach. Our strategy remains consistent with our growth pillar to expand our product portfolio with either organically developed products or with products from strategic partnerships. Operationally, we will continue to identify cost reduction opportunities and invest in our key growth drivers, including the commercial launch of the next generation physician led LAP BAND two point zero Flex. Initial feedback from surgeons during our market release of the LAP BAND two point zero Flex in The US has been overwhelmingly positive. As a reminder, the new Flex technology features a relief valve that helps alleviate discomfort from swallowing large pieces of food.

This innovation eliminates the need for in office band adjustments as the band temporarily relaxes before returning to its resting diameter. In February, we entered into a distribution agreement with Liaison Medical to distribute the Lepantopenil Flex in Canada. As one of the largest surgical device distributors in the country, Liaison Medical has strong, well established relationships with hospitals and surgeons. This partnership follows the receipt of Health Canada's approval in November 2024 and marks a significant step toward expanding access outside The United States to effective minimally invasive weight loss solutions for patients seeking alternatives to traditional bariatric surgery. Now, regarding our intellectual property estate, the March 2024 notice of allowance received from the US Patent and Trademark Office, along with the issuance of key international patents from the State of Israel Patent Office, underscores our leadership in pioneering innovative treatments for type two diabetes.

Specifically, these patents ensure long term protection for our diabetes Neuromodulation System, which utilizes our proprietary V block technology platform in vagus nerve stimulation to tackle one of the most urgent global health challenges, diabetes and its strong link to obesity. In November of twenty twenty four, we received a supplementary grant of approximately $241,000 from the NIH in collaboration with the University of Southern California Center for Autonomic Nerve Recording and Stimulation System. This non dilutive one year grant is supporting studies evaluating the safety and efficacy of next generation electrodes for ReShape's retiree diabetes neuromodulation system. These advanced electrodes have the potential to double the nerve contact area, enhancing the delivery of the neuromodulation signals while reducing the power consumption. Our fourth NIH grant, this award brings our total funding to 1,150,000.00 reinforcing the strength of our non dilutive funding strategy and highlighting the NIH strong and continued interest in our groundbreaking diabetes neuromodulation technology and its potential impact on the global diabetes market.

Most notably, in July, we coordinated both the merger agreement with Viome Therapeutics and the concurrent asset purchase agreement with BIRAB, and we successfully negotiated with our Series C shareholders substantially lower the liquidation preference. All things considered, we feel strongly these concurrent deals are intended to maximize stockholder value and earnings potential. The transactions have been progressing and both the ReShape and BIOM teams have been diligently working on all needed aspects of the transactions so that we can set the date for the shareholder meeting. Our board has unanimously recommended merging with BIOM and simultaneously selling assets to BI RAD as we believe this strategic decision will generate significant value and growth for our shareholders in the newly formed entity. I would now like to turn the call over to Tom Stankovich to provide highlights of our financial performance.

Tom?

Tom Stankovich, Chief Financial Officer, ReShape Lifesciences: Thanks, Paul. And once again, thank you all for joining our webcast this afternoon. As Paul mentioned earlier, during 2024, we implemented a disciplined approach to executing our cost reduction plan. With various cost reductions in all areas we've achieved a 42% reduction in overall operating costs for 2024 compared to the same period last year excluding transaction related costs for our pending merger and asset sale. A full discussion of our actual financials is available in our press release and 10 ks.

So I will just take a moment to review key financial metrics for the twelve months ended 12/31/2024. Revenue totaled $8,000,000 for the year ended 12/31/2024, which represents a contraction of 8% or $700,000 compared to the same period in 2023. The primary reason for this decrease is due to the introduction of GLP-one pharmaceuticals as well as a reduction in marketing spend at certain times in 2024. Gross profit for the year ended 12/31/2024 was $5,100,000 compared to $5,500,000 for the year ended 12/31/2023 a decrease of half a million dollars or 9%. Gross profit as a percentage of revenue for the year ended 12/31/2024 was 63.2% compared to 63.9% for the same period in 2023.

The slight reduction in gross profit margin is primarily due to the write off of certain inventories offset by the company's allocating resources to increase efficiencies and a slight increase in product pricing. Sales and marketing expenses for the year ended 12/31/2024 decreased by 4,600,000.0 or 60% to approximately $3,000,000 compared to 7,500,000.0 for the same period in 2023. The decrease is primarily due to a decrease of 2,200,000.0 in advertising and marketing expenses including consulting and professional marketing services as the company has continued to scale down its marketing efforts to a targeted digital marketing campaign. General and administrative expenses for the year ended 12/31/2024 decreased by approximately 3,400,000.0 or 33% to approximately 6,900,000.0 compared to 10,300,000.0 for the same period in 2023. This decrease was primarily driven by $1,800,000 reduction in general legal audit and other professional fees as the company reduced its reliance on consultants and professional services to conserve cash.

In addition payroll related expenses including stock based compensation decreased by 1,300,000 due to changes in personnel and workforce reductions during the year. Research and development expenses for the year ended 12/31/2024 decreased by half a million dollars or 22% to 1,800,000.0 compared to 2,300,000.0 for the same period in 2023. The decrease is primarily due to a decrease of 300,000 in consulting and clinical trials as the company halted clinical trials during 2023 and reduced the use of consultants while the LAP BAND was released in early twenty twenty four. Transaction costs for the year ended 12/31/2024 were slightly over $1,000,000. We have incurred transaction costs during 2024 related to our pending merger and asset sale and we felt it necessary to isolate these costs separately.

These expenses primarily consisted of 700,000 of legal fees and 200,000 of audit related fees incurred with our pending merger and asset sale. Cash and cash equivalents as of 12/31/2024 were 700,000. As Paul mentioned earlier we completed an upsized $6,000,000 public offering on 02/18/2025. The company had $800,000 in a convertible note payable to an institutional investor at 12/31/2024 which was repaid on 02/18/2025. With that, I will now turn the call back over to Paul.

Paul Hickey, President and Chief Executive Officer, ReShape Lifesciences: Thanks, Tom. To remind shareholders, the details of the merger with Viome are outlined in the S-four registration statement, which includes the proxy statement. When the SEC declares the S-four effective, we will plan and hold a shareholder meeting to approve the transactions. The upcoming merger with Viome and the concurrent asset sale to BI RADS should be a cause for optimism, and it is part of the reason our board unanimously recommended the transactions. In closing, I'd like to extend my heartfelt gratitude to our employees, board members, customers, consultant advisers, suppliers, and both our existing and new shareholders for your steadfast support of ReShape and for believing in our future as Viome.

Thank you all.

Conference Moderator: This conference has now concluded. Thank you for attending today's call. You may now disconnect.

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