Good morning, my name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Apollo Endosurgery Fourth Quarter and Full- Year 2018 Results Conference Call. [Operator Instructions] Thank you. Mr. John Gillings, you may begin your conference.

Thanks, operator, and thanks, everyone, for participating in today’s call. Joining me on the call are Todd Newton, Chief Executive Officer, and Stefanie Cavanaugh, Chief Financial Officer. Before we begin, I would like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of federal securities laws, including Apollo’s financial outlook, Apollo’s plans and timing for product development and sales. These forward-looking statements involve material risks and uncertainties and Apollo’s actual results may differ materially. For a discussion of risk factors, I encourage you to review the company’s Annual Report on Form 10-K filed today, March 18, 2019, with the Securities and Exchange Commission. The content of this conference call contains time-sensitive information that is only accurate as of the date of the live broadcast, March 18, 2019. Except as required by law, Apollo undertakes no obligation to revise or update any statement to reflect events or circumstances after the date of this call. During this call, we will interchangeably use the terms ESS for OverStitch and the terms IGB for Orbera and vice versa. In this call, we will also refer to the term continuing product revenue, which excludes the revenue associated with our surgical products, which we divested on December 17, 2018. Continuing products revenue will defer from our GAAP revenue as we will still report historical and transitional surgical product sales as part of our GAAP revenues. Now, I’d like to turn the call over to Todd.

Thank you, John, and good morning, everyone, and thank you for joining today’s call to discuss our fourth quarter and full-year 2018 results. The fourth quarter was a very productive quarter as we materially recast and restructured our business for better long-term shareholder success. In December, we shared our declining and underperforming surgical product line. Our goals with this transaction were to create a more focused company, monetized and non-strategic asset and remove a barrier to our top line growth profile. The final deal structure was somewhat complex, but we estimate the combined proceeds from the various agreements in the transaction will provide us an equivalent amount of cash flow over the next three years as the surgical product line would have contributed had we continued to own and operate it. Both before and after, the surgical product line divestiture OverStitch is our top selling product. In the fourth quarter, OverStitch was 64% of our continuing product sales and grew 46% over the fourth quarter of last year. And since the beginning of February, we have been in the full launch of the new single channel compatible OverStitch what we call OverStitch Sx in the United States and our European direct markets. We remain bullish as well on the Intragastric Balloon’s market prospects. The U.S. market development effort has been rocking up to now, to say the least, but in the fourth quarter we put in place a number of programs with some of our most capable customers to support the current weight loss season that kicked off in January with the New Year. We also see progress from our efforts to position the non-surgical weight loss from Orbera as a high value treatment option for various medical needs such as fatty liver disease as was shown last year during Digestive Disease Week, and I’ll talk more about this shortly. And lastly, we are very pleased to share with you on this call the refinancing of our long-term debt. Our new facility was solar capital is more tailored to our restructured business and its needs. I’ll turn the call over now to Stephanie and then I’ll come back with some more comments on various initiatives that we have underway. Stefanie?

Thank you, Todd, and good morning everyone. ESS sales increased to 46% to $6.9 million in the fourth quarter of 2018 versus $4.8 million in the fourth quarter of 2017. Sales in the United States increased 47% to $3.4 million; and outside the U.S., ESS sales increased 44% to $3.6 million. For the year, ESS product sales were 23.4 million, an increase of 42%. ESS growth have been achieved from both expanded proceedings within existing accounts and the existing new customers. Intragastric Balloon or IGB sales were $3.9 million in the fourth quarter versus $5 million in the fourth quarter of last year. Sales in international markets were roughly three quarters of our total IGB revenue in the fourth quarter and amounted to $2.9 million. This was a decline of 24%, compared to the fourth quarter of 2017, and was primarily due to lower sales to distributors. In direct market, ongoing market share gains in Europe, where we have available in the Orbera365 product were offset by declines in Brazil. In the United States, IGB sales declined approximately [$240,000] versus the fourth quarter of last year, or roughly 120 fewer balloons sold. This reduction is primarily due to continuing weakening market conditions that have persisted since the June 2018 FDA letter to healthcare professionals. In total, continuing product revenues for the fourth quarter of 2018 increased 10%, compared to the fourth quarter of 2017 with $10.8 million. Our GAAP fourth quarter revenue of $15.2 million included $4.1 million of surgical product sales, which we divested as announced on December 18. For the full-year, continuing product sales of $41.1 million increased 15%, while GAAP sales, which includes divested surgical product revenues declined 5% to $60.9 million. Gross margin for the fourth quarter 2018 was 46.6%, compared to 57.7% in the prior…

Thank you, Stefanie. As I mentioned in my opening remarks, we kicked off the full launch of the OverStitch Sx in early February in the US and European markets. We have high expectations for Sx, as it allows us to take flexible Endoscopic Suturing from a niche application that required its physician to have access to a niche endoscope to a mainstream readily available solution for any physician who is performing flexible endoscopy. The primary focus in the early stages of our Sx launch is to expand our user base, especially with physicians who have core GI application needs. Like the established OverStitch device, Sx will deliver the same full-thickness suturing and give clinicians the ability to customize their suture pattern for the broad range of treatment needs that the therapeutic endoscopist encounters today. The most obvious feature of the Sx is that it does not require investment in a dual-channel endoscope in order to gain access to the benefits of suturing. The Sx is compatible with over 20 single-channel flexible endoscopes, representing the most prevalent endoscopes in the market today across four different manufacturer platforms. Today, our U.S. OverStitch business consists of approximately 400 accounts representing about 900 users. We estimate that closer to 4,000 of the roughly 15,000 gastroenterologists in the United States have a therapeutic practice and therefore could benefit from the improved access to suturing that Sx offers. In the fourth quarter, we were conducting what we call the limited launch of Sx and we learned a lot about the nuances of attaching Sx to the various different scope platforms, using it in different tissue types and for different therapeutic needs. We will of course give you an update on how the full-launch is going at the end of our first quarter. The Sx is a…

[Operator Instructions] And your first question comes from Matt Hewitt with Craig Hallum. Your line is open.

Good morning Todd and Stefanie. Thank you for taking the questions.

Hi Matt, good morning.

Hi Matt.

Good morning. Maybe first on gross margins, you mentioned that you obviously started to make some changes last year to help facilitate higher gross margins of future, how should we be thinking about those in FY19 and where do you see those going maybe over the next 3 years to 5 years as some of those changes start to take effect and you see the rapid growth in the bariatric piece? Thanks.

So, thanks for the question Matt. We had announced on the surgical call, when we talk about the divestiture of the surgical business that we expect our margins in 2019 to be in the low to [mid-30%] range. That’s depending upon the timing of, of course, the divestiture, the transition that occurs; depending upon our sales mix and also depending upon the timing of our gross margin improvement projects kicking in, but we have shared that with everyone and we have no exchange to that process. Over the next 3 years to 5 years, it is our intention that these gross margin projects that Todd referred to that will complete around 2020 should add another improvement in the 3 million to 3.5 million range, and that should get us into the mid-60% gross margin profile that we are now working to progress towards.

Okay. Thank you. And then you mentioned the study out of Saudi Arabia that was published in mid-February, a thousand procedure sounds like a pretty significant practice, maybe help us understand why that’s such a big deal? And more importantly, how many other doctors do you have either domestically or internationally that are running that number, that size of a practice?

It is significant in a couple of respects and it’s not necessarily – these are not necessarily data points you will put out the study, but one thing that makes it significant is that the bariatric practice at King Saud hospital is a very active practice. It’s bariatric surgeon driven and the interesting thing about that study from my perspective was that as we were talking to the physician who published the results, he did not see that he or she was replacing really any of his bariatric surgical procedures, his more traditional bariatric surgical procedures. What he noted was that ESG was attractive to many of his patients who otherwise would have opted not to receive one of the other traditional bariatric surgery. So, in that regard, what made him so excited, I think, was that he saw not a replacement of one procedure for the other, but he was observing and has continued to observe that his practice overall is just growing. In other words, the pie is growing, not just the ESG sliver of the pie.

Interesting, okay. And then, maybe one last one for me and I’ll hop back in the queue. Regarding the MERIT study, you’re – it sounds like you’re approximately three quarters all the way through the 200 being randomized. Maybe an update on what we should anticipate from a completion timeline. And then, will – do you anticipate they will get maybe a read-out shortly thereafter? Or just help us understand the timeline. Thank you.

Yes, and I don't have a lot of information to share with you, Matt, in terms of all the specifics on the timeline. We are hopeful though that once they reach the one-year follow-up point, and of course, they have to finish randomization in enrollment before they can get to that even, but once they get to that one-year follow-up point that – the principal investigators will elect to publish their interim results. But that's really up to them, and we don't have much, you know, if any control over that decision.

Understood. Thank you.

Next question comes from JP McKim with Piper Jaffray. Your line is open.

Hi, good morning. Thanks for taking the question. I wanted to ask one on this early launch of Sx in the U.S. Maybe procedures that have been used in, is it sort of how you thought it would be? Or is there anything that’s kind of jumped out of the surprising that you didn't expected to see uptick that early there?

No, there’s really nothing to give you, JP, in terms of that kind of color. What we have found, and this is the reason why we wanted to do limited launch, we have vowed that the Sx seems to work really well in all those traditional users that the older OverStitch was being used for. And so, in that regard, we were trying to determine whether or not it had a limitation, if you will, before we went on with the launch and we’re very pleased into the limited launch that we didn’t see those kinds of limitations.

Okay, that’s helpful. And then, on the kind of growth outlook in that business being stronger in the second half versus the first half, I assume that comes down to the value, the VAC committees and so, what’s the – like how long does it traditionally taking you to get to the VAC? I know everyone is different, but is that the real gaining factor to your growth rate this year?

I don’t think it’s going to be a gaining factor other than it’s a timing issue here at the very front-end. You know, your right and that the VAC process isn’t usually something that takes months, it’s something that can take weeks. But it’s also – I think what’s influencing our 15% also is to do with the Intragastric Balloon business. You know, I would say that in – as we look at the first half here in 2019, we have five months of business basically that were pre or the before the FDA’s third letter, and those months represent – it was just a higher comp period versus the back half of the year. So, the IGB influences our estimates as well.

Okay. So IGB, I know you’ll give it, but flat, down, up. Can you just give directionality where you think IGB overall this year?

Well, I think, we don't give it in – broken down by a product. Certainly not this guidance, but we think that the 15% blended is probably somewhat instructive to you JP. If we see OverStitch growing at a rate that is consistent with its historical growth, then very usually presented the Intragastric Balloon expectation is going to be lower than the 15%.

Got you. Okay, thank you so much.

Next question comes from Suraj Kalia with Northland Securities. Your line is open.

Good morning, everyone. Can you hear me alright?

Yes.

Okay. So, Stefanie the new debt put in place, does this have specific covenants on the revenues and cash flows?

So, our agreement does have a revenue covenant. Its set at [indiscernible] our plan for 2019, and we do have a minimum liquidity covenant or requirement to maintain $10 million of cash.

Okay, got it. And Todd, specifically on Orbera, you were not marketing Orbera for NASH, correct? I just want to make sure this is your commentary. It was more implied as a side effect, I mean, you know, a positive side effect for obesity treatment, you're not specifically marketing in NASH.

No, we’re not claiming, if you will, if this is the question, we’re not claiming that Orbera is a solution for NASH where we’re – our product label is that Orbera is indicated for weight loss, and the hepatology society's own guidelines discuss weight loss as an important consideration for the treatment of NASH patients. So, if you think about that way, that’s how we’re positioning the product in the hepatology community.

Got it. And Todd, specifically for OverStitch, can you give us some color on the number of accounts OverStitch is being used? And you know just the sales and marketing landscape, it seems like the SG&A cost for OverStitch are high. Can you just kind of help us reconcile those two?

Yes, I’m sorry Suraj if I get this a little bit wrong because there are – you were starting to break up. But the color on the customer base, first of all, I think we mentioned this in the script, we have about 400 accounts in the United States, and an account is not necessarily equal to a user, an account would be where we ship product. We think those 400 accounts in the United States will represent probably close to 900 users who are relatively active users today with OverStitch. Relatively active just meaning that when they have a suturing case come up, they will look into – opt to the suture versus some of the alternatives that they have. And as we were mentioning with the niche scope that OverStitch required in the past – that was – while it hadn’t changed our or effected our growth too much in those prior periods, it was going to at some point become of a limited patient to us. So, we think that the Sx is going to make the product and the technology just available to a wider number of accounts, and I mentioned 4,000 of the 15,000 gastroenterologists in the United States being potential suturing users. That's obviously not precise, but it’s fairly well researched on our part, and we feel like that’s a good indication of the potential user base. As far as sales and marketing for OverStitch is concerned, there’s a far or less amount of spend being put on things like direct-to-consumer advertising, it’s not that kind of a product. It does require a field sales support. So, the sales reps that we have, I would say, a lot of their time is spent on OverStitch, and the thing that OverStitch carries, as well as is a relatively expensive medical education component because it does take user training and that's something that is probably incrementally higher than what we see for Orbera or what we are seeing for the surgical products in the past.

Got it. And finally, Stefanie, my – forgive me, my phone was – my reception was a little bad. You mentioned – made some comments on inventory drawdown in Q4 and the impact, you know, on margins, can you repeat that again? Forgive me, I missed it. Thank you for taking my questions.

Sure Suraj, no problem. So, yes, our inventory declined this year in order – as planned. We had built up our inventory in anticipation of the transfer related to the gross margin improvement projects. So, in 2017, we ended at 10 million, which had some of that increase or most of that increase in it. Now that we've finished the Helix project, the Cinch project and the IGB project, you know, early in the fourth quarter, we were able to now bring down those inventory levels. So, when we were at about 10 million at the end of 2017, we’re at about 6 million at the end of 2018 and about $3 million of that decline all occurred in the fourth quarter. And so that’s a good – from that perspective that’s a good trend in terms of needing to invest in increased inventory levels. But the downside or the foot side of that is at least during the fourth quarter, we had an impact on the amount of [overhead] that was charged to cost of goods sold. It’s important to know that overhead spend didn’t go up, it's really just the rolling out of that inventory that had been sitting on the balance sheet in anticipation of any potential disruption associated with those projects.

[Operator Instructions] And we have a question from Matt Hewitt with Craig Hallum. Your line is open.

Yes, thank you. Just wanted to dig in a little bit more on the NASH opportunity. I guess a couple of different aspects of this. Number one, what is – how do you get this information into the hands of the physicians, the surgeons? What's the best way to attack this market, especially in light of some of the opportunities that you see out there? I mean if you look at some of the valuations of the drug companies, and these are drugs that are still in clinical development, may be years away if ever getting approved, yet you have both Balloon and ESG that have shown data that – that supports the treatment of NASH. So, you've got the data already. So, maybe just walk us through what is the way that you plan to attack that market? Thank you.

Matt, first of all, the most important thing we feel like we can do in the short-term is to continue to create clinician awareness, and this is why events like the ILC event that we mentioned coming up in April is important. It gives us an opportunity to be on the stage, if you will, to have some of the clinicians who have had great results with Orbera treatment for NASH patients talk about it, and create that awareness. That’s the most important thing we can do right now. There's still some work we need to do in terms of things like labeling, and of course, it's probably an area where you really can't have enough clinical evidence ever. There's going to always be a little bit of a demand for more clinical evidence, so we need to do some more work there. But in the short term, we think, especially in Europe where we have a relatively established and large Intragastric Balloon user base that we can create clinician awareness at the Hepatology societies, Hepatology departments and Gastroenterology departments are fairly well aligned within most hospital structures, and just like creating that greater clinical awareness, we can have an impact on our positioning of that the Balloon for that use.

Understood. Alright, thank you.

[Operator Instructions] And we do not have any telephone questions at this time. I will turn the call over to the presenters.

Great. Well, thank you operator. And in closing, we would like to thank all of you for your interest in Apollo Endosurgery today, and should you have any questions for follow-up please contact John Gillings, our Investor Relations Manager, and his contact information is listed on our press release today. Thank you very much.

This concludes today’s conference call. You may now disconnect.