Greetings, and welcome to Apollo Endosurgery's Second Quarter 2020 Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. I'd like to remind you that this conference is being recorded. It is now my pleasure to introduce Matt Kreps, Managing Director at Darrow Associates Investor Relations. Mr. Kreps, you may begin.

Thank you, Taren, and thanks, everyone, for participating in today's call to discuss Apollo's second quarter 2020 financial and operating results. Joining me on the call today 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 and Apollo's plans and timing for product development and sales. In addition, there is uncertainty about the spread of the COVID-19 virus, and the ultimate impact it may have on our operations, the demand for our products, global supply chains and economic activity in general. These forward-looking statements involve material risks and uncertainties and 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 for the year ending December 31, 2019, as well as our most recent Form 10-Q filed today with the Securities and Exchange Commission. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 4, 2020. Except as required by law, Apollo undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call. During this call, we will interchangeably use the term ESS for OverStitch and the term IGB for Orbera and vice versa. And with that, I'd now like to turn the call over to Todd.

Thank you, Matt. Good afternoon, everyone, and thank you for joining today's call to discuss our second quarter 2020 results. I hope all of you joining us today and your families are remaining safe and healthy. On July 20, we preannounced our second quarter revenue and highlights. And in just a moment, Stefanie Cavanaugh, our CFO, will take you through the details of the second quarter. Before she does, I will open with four key points that best describe for investors, the state of the company here at the midway point of 2020. One, the immediate liquidity preservation actions we took at the start of the COVID disruption were successful. These decisions were hard to make and hard to implement because of the impact on our team. But we knew that the actions were necessary to preserve the interest of our shareholders, and the Board of Directors fully supported management's plans. Two, we have made sacrifices to reduce spend, but we have continued to pursue shareholder value creation by investing in our most important development programs such as the X-Tack program. This took tremendous teamwork and adaptation due to stay-at-home directives and travel restrictions, but our team persevered. And as announced on July 7, the X-Tack 510k application was submitted to the FDA and now in the regulatory review process. Three, our business is coming back. The COVID pandemic had an immediate and significant impact on all health care procedures, and, of course, it impacted our sales in the second quarter. But since March and April initial shutdown of elective procedures, we have been on a positive recovery path. In June, U.S. product sales were close to 90% of June sales in 2019. Our recovery trends outside the United States are also encouraging, but tracking slower in June than the U.S. pace. Four, our liquidity has been shored up. While COVID-related market risk continues to cloud the immediate future with uncertainty, our recently completed equity financing and simultaneous credit amendment provides us the capital to accelerate our business recovery from this period of COVID market disruption and fund through the X-Tack launch. I will pause with that and turn the call over to Stephanie now to cover the second quarter financial results in greater detail. Stef?

Thank you, Todd, and good afternoon, everyone. As addressed in our press release from earlier today and the 10-Q filing, the dominant theme in the second quarter has been the COVID-19 disruption to health care resources and elective or deferrable procedure volumes worldwide, including procedures that use our products. As a result, our revenue decreased 60% in the second quarter of 2020 from the second quarter of 2019. By geography. U.S. endoscopy sales declined 40%, while OUS endoscopy sales declined close to 68%. The difference in geographic decline is that the U.S. procedure volumes and health care activity appears to be recovering at a quicker rate, and the OUS decline includes our distributor channel, which was down by 76% compared to the second quarter of 2019. Both ESS and IGB worldwide sales were affected by COVID-19. As a result, total endoscopy product sales were $5.4 million, which is a 56% reduction. Foreign currency movements in the quarter did not materially affect revenue trends. The proportion of the ESS product sales to total endoscopy product sales were 67% in the second quarter of 2020, which is roughly equivalent to its share of sales back in the second quarter of 2019. Total revenues in the second quarter of last year also included $1.9 million in transition service revenues related to our former surgical product line that we sold in December of 2018, while transition services were only $200,000 in the second quarter of this year. We expect to be completely free of any remaining service obligations by the end of 2020. Gross margin for the second quarter was 43% compared with 50% for the second quarter of 2019. The liquidity preservation program we implemented at the early stages of the COVID-19 pandemic resulted in a series of postponements and cancellations of inventory…

Thank you, Stefanie. The first half of this year has been an unprecedented, unpredictable and difficult period for everyone. But Apollo Endosurgery has tremendous opportunities in front of us, and these opportunities are the management team's focus. The equity raise that we just completed, which was entirely funded by existing shareholders, is a testament to the support and belief of our current shareholder base in these opportunities. And I'll highlight three of these opportunities today. First, core GI use has been an important part of our OverStitch growth story, particularly in the United States. We've spoken for a while now of the goal to bring the benefits of flexible endoscopic suturing to core GI needs in the lower GI track, especially the colon. And this is what X-Tack is designed for. During our development labs, doctor feedback has been very positive. The feature that stands out is it's through the scope delivery designed to work with any 2.8 millimeter or larger working channel, which includes any of the leading gastroscopes or colonoscopes on the market. Advanced endoscopists, like those who use OverStitch today will find it distinctive with broad case application. Every endoscopist should find it easier to pick up and use and economical. It is specifically designed to easily and effectively close larger or irregularly shaped defects, which would otherwise be very challenging for the endoscopist to address with the existing closure devices in the market. X-Tack should also be a very good fit with our sales organization. Our top 100 OverStitch accounts in the United States where we generated 80% of our U.S. OverStitch sales last year, and we think there will be strong core GI demand for X-Tack at more than 75% of these same top 100 accounts. The range of use for X-Tack runs from being…

Thank you. Ladies and gentlemen the floor is now open for questions. [Operator Instructions] We'll take our first question from Matt Hewitt with Craig-Hallum Capital Group. Please go ahead, sir.

Good afternoon and thanks for the update and for taking the questions.

Good afternoon Matt.

Maybe on the first one regarding the rebound that you've seen May to June, and now it sounds like through July, how much of that is just kind of getting back -- or getting through the backlog that was created in late March and April versus new pipeline opportunities for your GI customers? And maybe what does that pipeline look like today if you have any thoughts there?

Yes. It's a good question, Matt. It's one of the uncertainties, I think, I would say, right now, as we look at our business is knowing to what degree have we been dealing with backlog, especially in June and July, versus to what degree we are really back to more of a normal health care utilization pattern. Undoubtedly, we have concerns, as do others, that higher unemployment rates and loss of insurance potentially can impact beyond the current backlog that we see right now, could impact recovery rates in the latter half of this year. So it's a good question, very difficult to answer. It's one of the reasons why we still are anticipating that even though July has been really a very satisfactory month, we still anticipate that the third quarter will likely be below the third quarter of last year. And it'll be a little bit longer before we see a return to pre-COVID procedure levels. We hope that we're being too conservative.

That's helpful. Thank you and then one of the risk -- the key risk categories for coronavirus patients is obesity. There's been a number of tweets from some of your customers talking about seeing an incremental demand once the lockdown orders were lifted for ESG and for other bariatric procedures. I'm just curious, is that something that you think could become a little bit of a tailwind here? I realize it's a tough environment, but given that risk factor, is that -- does that create opportunities for you?

Matt, it's a good question again. I think our opportunities were always exceedingly large in the bariatric marketplace. As we mentioned in the prepared remarks, this is a market of 200,000 procedures per year in the United States, and we haven't even tapped it in any meaningful way. This is, of course, the whole investment thesis behind the MERIT study. And our goal is reimbursement. And if the market grows as a result of the higher COVID risk factors associated with obese patients, that is something we aspire to help address. But we just see that the bariatric market pre-COVID was already a very attractive market for us and one worth pursuing and one that, once we are able to tap into it and compete on a reimbursed basis, I think we're going to see tremendous growth potential arise.

Okay. Great. And then one last one, I'll hop back into queue. The in-person training that you spoke about in your prepared remarks, was that in a customer facility? Or was that using your mobile lab? And I would think that you'd be able to control that mobile lab environment maybe a little bit better than even one of your customers' facilities. Is that something that you're looking to exploit, I guess, at least over the near term when there's still coronavirus circulating?

Well, what I mentioned that was conducted on Friday. That was actually done at a lab in Chicago at the ASGE. They have a fantastic facility. And I think this was actually their first training course that they hosted at that facility since the beginning of COVID as well as ours. So we've enjoyed always a really good relationship with physician societies, such as the ASGE, and we've always had very good success with their facility, which is just a top-notch facility. We have yet to turn back on, so to speak, the mobile lab, and we're going to be continuing to evaluate that here in the second half of the year.

Got it. Thank you.

We'll take our next question from Adam Maeder with Piper Sandler. Please go ahead, sir.

Hi guys this is Drew on for Adam. Thank you for taking the questions and congrats on a nice quarter. I was wondering if you could speak a little bit to either quantitatively or qualitatively, some of the mindset of your customers, given that you guys have a sizable cash pay exposure. You mentioned a couple of things on the previous question that feel a little more cautious as far as insurance or the financial health of some of your customers. But just to be clear, is that something you're hearing at all so far? And then just any patient concerns as far as coming in due to COVID?

Yes. Let me take the first part of your question, and you may have to repeat the second part of your question, I'm not sure I heard it, Drew. But the prominent, let's call it, message from customers throughout the second quarter, lesser so now, but throughout the second quarter was that they just wanted to get back to work. And it really had more to do with them than it had to do with anything related to us or our procedures. It was just a desire to get back to work. But there was a large need to address things such as patient intake procedures and how to keep the hospital or ambulatory surgical environment secure from this highly contagious situation. And so we've had for some time a communication from our customers that they were ready to go and get started. And so I think what is interesting right now is that while Q3 tends to be a seasonal period that is somewhat lower than Q2, because of that period of disruption, I think we're hearing more from accounts that they plan to continue working through the third quarter at rates that perhaps in the past, would not have been typical. In the past, maybe they would have taken more vacation in August because that's seasonally what is done. But right now, I think our -- the things we're hearing in the marketplace suggests that procedures may continue to move forward, although probably because of these intake type of safeguards that have been put in place at a lot of places, capacity may be slightly reduced.

Okay. That make sense.

And what was the second part of your question, Drew, I missed it?

Yes. So the second part of the question was just more on the patient side. Are you hearing at all from your customers that some of their patients are concerned about coming in due to COVID? I mean, I think, based on your answer to your previous question, I think the answer is no, but anything on the patient side would be helpful, too.

Yes. I think I'll just go with your answer, Drew, no. That's a good answer.

That's what we're experiencing.

Okay. That's very helpful. And then congrats on the submission for X-Tack. It sounds like it could be pretty complementary to some of your products. Forgive me if I missed this, but assuming you get approval in a couple of months down the road, what can we expect as far as a full or a limited launch probably late this year or early next? And then from a sales model perspective, is there a bundling opportunity into some of those large accounts you spoke about?

So I'll start with our launch plans at this point. We believe if everything progresses with -- at the normal rate of the 510k submission that we will have approval by the end of this year, late this year. And so at that point, we will begin a limited launch that we would expect to carry forward with a small group of people for a couple of months. And then when we have our national sales meeting in the middle-ish of the first quarter, we would then begin a full launch and roll out our lessons learned from that limited launch experience through to our full sales force. As far as a bundling opportunity, I'm not aware of any discussion along those lines.

No, I don't -- yes. I think on bundling. We have two products that are very innovative. And so there would seem to be less need. Let me reuse that word, less need for us to consider bundling in order to improve access. So I don't anticipate that right now, but we'll be looking at pricing strategies as we continue to get closer to this point in time when we can introduce the product to the market.

Okay. That makes complete sense. Just one more quick one from me here. Just on the expense side, obviously, you took some chunks out of the business, due to COVID particularly on the sales and marketing portion, how quickly should we think about some of that investment return to the business as a recovery happens here? And then, I guess, with the recent capital raise, do you feel like you're in a good place to go on the offensive right away? Or do you kind of stay in cash preservation mode until there's a little bit more clarity with COVID. Thank you for taking the questions.

Thank you, Adam. Appreciate the question. How quickly our expenses come back will be entirely gated by how quickly our revenue comes back. So we will be very judicious in returning our expenses across the board for furloughed employees, salary reductions as well as sales and marketing activities to match that to what our revenue return looks like. So that would be how I would counsel you there in your thought process. And we're watching it daily -- weekly in order to make the right decisions for that effect. From our liquidity perspective, we are very pleased with the equity we just raised, and we see that giving us a nice runway through this disruption, the end of this year and helping us fund our X-Tack launch and getting us through the MERIT readout sometime in 2021. So our risk has been significantly decreased.

Thank you Adam.

[Technical Difficulty] My apologies. Ladies and gentlemen, that will conclude our question-and-answer session for today. I'll now turn the floor back over to Mr. Newton. Sir, the floor is yours.

Well, thank you, Taren. And thank you, everyone, for joining us today on the call. And should you have any questions or would like to arrange a call to have questions asked, please contact Matt Kreps at Darrow Associates. We also plan to participate in several investor conferences during the third quarter, all virtual for the moment. And these include the LD Micro event in early September on September 1 through September 4 and the H.C. Wainwright Conference in September on the 14th and through the 16th and potentially others. So we would welcome a chance to visit with one of you as part of those events. And so please contact Matt again if you would like to request a meeting. Stay safe, everyone, and thank you again.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.