Good afternoon, ladies and gentlemen, and welcome to the Apollo Endosurgery Fourth Quarter and Full-year 2021 Results Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Matt Kreps. Sir, the floor is yours.

Thank you, John. And thanks everyone for participating in today's call to discuss Apollo 's fourth quarter and full-year 2021 financial and operating results. Joining me on the call today are Charles McKhann, Chief Executive Officer and Jeff Black, our Chief Financial Officer. Today's call will include slides to accompany the audio presentation. For those joining us by telephone, you can download a copy of the slides at our investor relations site, ir.apolloendo.com and choosing Events and Presentations. 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 continued spread of COVID-19 virus and the ongoing 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 Apollo 's actual results may differ materially. For a discussion of risk factors, I encourage you to review the company's most recent annual report on Form 10-K and our most recent Form 10-Q. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 22, 2022. As required, 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. Additionally, today's discussion will include certain non-GAAP financial measures, which we believe provide an additional tool for evaluating the company's core performance. Management uses these metrics in its own evaluation of continuing operating performance, and a baseline for assessing the future earnings potential of the company. Included in our press release issued today our financial results and corresponding 8-K filing, our supplemental tables reconciling non-GAAP figures to their closest GAAP comparable. And now I'd like to turn the call over to Charles.

Thanks, Matt. And thank everyone, good afternoon. Thank you for joining us. Next week will mark one year since I joined Apollo Endosurgery. And I am truly grateful for having the honor of leading this team and this company with such unique products that impact patients' lives. Last year, I laid out a three-phase strategy as described on page 3. The first phase was to energize the business by building momentum across all three of our product lines while executing on foundational initiatives that can set us up for growth in the years ahead. The second phase is to accelerate the business by developing new indications in markets. And the third phase is to lead in the fields of advanced defect closure and as endoscopic treatments for weight loss. As we implement this strategy, we have bolstered the Apollo leadership team by bringing in new talent into the organization to join an already strong Apollo team. And in addition, we are focusing our efforts on developing large market opportunities. I'm pleased to report today that in the past 12 months and in Q4 that we've made tremendous progress, which strengthened the team at Apollo at all levels. At the leadership team earlier in the year, we brought on new commercial leaders here in the U.S., we brought in Jeff Black as our new CFO who's with me today. And then just in January, we announced the addition of Keely Scamperle to lead our reimbursement and market access efforts. Keely is an experienced professional and is already working at building her team that will lead our reimbursement efforts in facilitating patient access for our products. We've nearly doubled our sales team in the U.S. and we've added to our OUS team. We're building our marketing and trading capabilities and becoming a…

Thank you, Charles, and good afternoon, everybody. Thank you all for joining us today. I'll spend a few minutes to recap our financial results and then to hand it back to Charles to discuss our 2022 outlook and strategy. Starting with revenue on Slide 7. In Q4, we continued to see strong year-over-year growth across the product portfolio, and our fourth consecutive quarter of double-digit growth. And that was against the backdrop of pandemic-related pressure. As we all know, this has been a changing dynamic throughout 2021, and we did see pressure on Q4 volumes. Outside the U.S., we saw pressure earlier in the quarter in concentrated markets, particularly Western Europe. And inside the U.S., we began to see slowdowns later in the quarter, particularly December, predominantly in academic hospitals and larger community hospitals where access was more limited. Even with this pressure on procedure volumes, we still maintained a healthy monthly revenue cadence in December, consistent with the rest of the quarter where we didn't see was the ramp that we expected in the last half of December. And that was really difference between hitting the low end of our annual revenue guidance and the high end or better. Growth in the fourth quarter was balanced between U.S., where we saw 25% growth, and international, which grew 27%. Globally, our endoscopic suturing business was up over 37% in the fourth quarter and that's just highlights continued demand for our OverStitch and X-Tack products across a broad range of indications. Globally, ORBERA revenue was up 20% and that was below our blended growth rate, really due to volume pressure in the U.S., where growth was about 6%. But we believe this down tick is transitory and that it was mostly attributed to inpatient in hospital settings in the U.S. where…

Okay. Now as we look ahead to the year of 2022, let me talk about our overall strategy and our outlook for the year ahead. Page 13 gives you a summary of our three product lines and the two main businesses in which we operate: an advanced GI and endoscopic weight loss. And we are excited that we have very attractive growth opportunities across both sides of our business. As I mentioned previously, we also are focused on going after large market opportunities in advanced GI, in weight loss, and then over time in NASH as well. So for the year ahead, our outlook from a revenue standpoint is $73 million to $75 million, which translates to 16% to 19% growth compared to 202. And let me also share a few words as it relates to the COVID impact. In Q4 and early Q1 of this year, we have seen an impact in markets globally. As others have reported lower procedure volumes, staffing issues, reduced hospital access, have all presented challenges, especially in larger academic medical centers and community hospital. That said, more recently, the omicron case counts are coming down, the situation appears to be improving. And so we are optimistic that the impact of this wave is beginning to abate. And so as we look ahead for 2022, we see four key catalysts to drive our growth in the year ahead. X-Tack expansion and ORBERA resurgence, preparing for the Apollo ESG and Apollo Revise launches, and continuing to advance our organization. The first with X-Tack, and I'm on Slide 16. The X-Tack has been a very important product for us as it adds to our portfolio in the advanced GI side of our business, and it offers a truly differentiated product in defect closure. And with X-Tack, we're…

Thank you. Ladies and gentlemen, the floor is open for questions. [Operator Instructions]. The first question is coming from Josh Jennings from Cowen. Your line is live.

Hi, this is Eric on for Josh. Thanks for taking the questions. I appreciate all the great commentary around the early experience with X-Tack. Just curious, as you get closer to European approval here, could you help us understand what would be included in your CE mark submission. And then is any of your U.S. regulatory work leverageable for attaining that CE mark. Thank you.

Yeah, no. Thanks, Eric. Yes, under the new NDR requirements, there's obviously additional need for clinical data. So we have been able to leverage some of the data that was included in our initial clinical study that's been published, as well as a lot of the work that went into the U.S. application. As I'm sure, you know, in the past, having an FDA approval, it'd be almost a slam dunk, right? To quickly follow on in U.S. first. It really, right now, is just a timing element of as our notified body works through a backlog of applications from a lot of companies, but we think we've got the right materials that they need to get the approval.

Understood. That's great. Thank you. And then thinking about guidance for 2022, could you help us understand what COVID assumptions you're baking into the range here. Jeff, your comments around trends in December, especially in the U.S. How should we be thinking about Q1 revenues relative to the results that you've just delivered here in the fourth quarter? Just any commentary on the cadence of revenue through the year would be really helpful. Thank you.

Sure, Eric. And again, we haven't given quarterly guidance as you know, but I think it's consistent with what -- I think what you're hearing broadly in the industry is certainly early in the quarter, we saw pressured volumes, much like we saw in the fourth quarter. We're starting to see some of that abate. We're seeing nice momentum. But what we can say about the quarter is that we're certainly comfortable with where the street has us in terms of consensus for Q1. That in case, we start to think about the acceleration of the ramp to that 20% growth. That really happens once we get beyond the COVID impact and we start to see acceleration in some of these endobariatric practices.

That's great. Thank you guys.

Okay. The next question is coming from Matthew Blackman from Stifel. Your line is live.

All right. Good afternoon, everybody. Thanks for taking my questions. Just got a couple. Maybe Charles, just to start with you, I was hoping to get the priorities in 2022 for the U.S. commercial team, whether it's figuring out the sales force size, whether it's focusing on existing accounts or expanding the customer base. I just want to understand what the focus is in '22. And if you could layer on top of that the folks that you've onboarded over the course of 2021, how they are ramping, how productivity for the whole sales force looks like. And then just a couple of quick follow-ups.

Sure. Matt, as I think, you know, we have our core reps and the vast majority of our sales team in the U.S. carry the full bag of all three products, and then we've now layered on regional endobariatric managers that are focused on the opportunity in that area. And so for the first group, their priorities, if you look across product lines, we think we still have excellent opportunities to continue to identify and train new users in OverStitch, and they're doing that. But also driving additional usage in our existing base. That's a very important focus. For X-Tack, it's -- the strategy we laid out last year of continuing to be quite focused on a targeted set of accounts, and really driving the model of increasing adoption remains a priority for us. And as I just alluded to the importance of being able to do that across multiple users in both upper and lower GI is a real focus for that group. And then another focus, I'd say is to sell the whole bag. We've got some of our reps who are very good at selling ORBERA, and some who've got less experience in it. And I think given what we're seeing already in the marketplace of a nice bounce for that product, we've got a lot of share learnings on it that I think is going to help our sales organization expand the product across some regions that have had a lot of success, and make that more consistent. So we're pretty excited about the opportunities across each of those. And then for the -- these already [Indiscernible] roles I mentioned, we have a group of early adopters internally, we refer to as Wave 1 that's reference on one of the slides you saw. And to really learning from them, right? It's a mix of both academic and private practices. It's a mix of GIs and surgeons. So we got different models that are already having a lot of success across a range of endobariatric. So the balloon is big part of that, but then also some of the other procedures. So we're learning a lot about everything it takes to build and grow those kinds of practices, and then having a focus on what the next waves are going to look like. And we're just striking the right balance given the fact that we don't have any indication for the suture inside of it. But we absolutely to do a lot with the balloon, including those co-margin programs I mentioned.

Got it. I appreciate that and I'll just ask one more. I'm curious, you've called out the top ten accounts, something like greater than 600,000 in revenue. Are those accounts using multiple products within the APEN portfolio? Or is it largely driven by one product? I'm obviously trying to get at to what opportunity there may be to cross-sell. And obviously, as you've mentioned before, how you could turn that into a playbook for the rest of your accounts.

I think you see there's a mix of accounts in there. Some of that are pretty broad-based, some of the larger academic settings that truly are using a whole range of the products, and really incorporating X-Tack into that as well. So you've got all three products that are involved. And then you've got some that are more endobariatric accounts that absolutely will use both the Balloon and OverStitch, probably not likely to use a lot of X-Tack, because the applications are more limited in that setting.

Got it. Thank you. Appreciate it.

Okay. The next question is coming from Adam Maeder from Piper Sandler. Your line is live.

Hey, Charles, hey, Jeff. Thanks for taking the questions here and congrats on a nice year. Wanted to start with the guidance and see if we can just deconstruct that a little bit further particularly by segment. Just curious to get some additional color on how you think about the ESS franchise versus the balloon business in 2022. And if you're willing to kind of put any color around contribution from X-Tack, maybe we can start there and then I had a follow-up or two. Thanks.

Yeah, I know. Thanks, Adam. You know what? As we look across, we see each product can continue to contribute to growth. Thinking in order a little bit, I think the -- on the balloon side, I think we're still learning frankly in terms of sustainable elements of growth and what it can deliver, but we're encouraged. Obviously, we had a very good year last year. I'm not -- we're not planning for another year of 50% growth, but I'd be nice. But we do think it can be a sustainable contributor, which given the history for the product line would be a really good outcome. And so we're looking at that, and as we implement more of these programs and get more one-way with it, we'll have more to build on to say sort of the level of sustainable growth. And then we see, I think, a good balanced contribution then across the other two products. Good opportunities with X-Tack here in the U.S., and then layering on depending on the timing of approvals outside the U.S., and so that can absolutely be out there both this year and beyond. And then a lot of excitement, obviously around OverStitch, both the core GI applications we continue to add new users there. And the opportunities as the year progresses on the weight loss side. And again, that I mentioned before, we really are trying to be appropriate and have the right level of where we're not the folks promoting the aspects around the weight loss side for OverStitch until we have the right indication.

Yes, Adam. Just to add to that, as you think about it, as we think about our long-term growth play, and we talked about this 20-plus percent long-term CAGR, I think you need to think about it as, yes, as OverStitch and X-Tack being the outsized growers relative to that 20% and ORBERA likely being behind that, but that's really how you get to the blended growth of 20 plus percent. If that's helpful.

Yes, that's helpful color guys. And maybe just a quick follow-up on that, and then if I could squeeze in a third, I'll try my luck. But for the follow-up, wondering if you guys can put a finer point on ESG in revision, FDA approval timing. Any finer point or specific quarter where we should expect those to come on label? And then is there anything in terms of the guidance that you've had -- that you have issued $73 million to $75 million that currently contemplates revenue directly associated to those indications? Thanks.

Yes. So when we submitted the application for the De Novo 510(k), I think even in the press release, Adam, we mentioned that, we had one of our outside law firms do an analysis that says on average, the De novo 5 10(K) takes 12 months. And each one is unique because there is no predicate. And we're working through the process, but we've mentally prepared ourselves for that kind of a timeline, which would put you in the second half of the year from a timing standpoint. But there's uncertainty around that, and we're going to do everything we can to move it along and support the process, hopefully to a successful conclusion. From that vantage point, given that kind of timeline, we haven't put a hockey stick kind of ramp into the sort of back half of our year, although we do know that even just general awareness in the community is having somewhat of a lift effect. So again, we're playing our role appropriately, but we do see a broader awareness about weight loss and endoscopic procedures, and people are coming to us interested about it. So -- and we can appropriately do things like training on the suturing techniques. But again, we're trying to be careful here.

Okay. Really helpful, Chas. And just the last one if I may, just gross margin. Jeff, I think you gave some helpful puts and takes in the prepared remarks. But just want to kind of flush that out a little bit more. I think you have the mid 60s number in the slide deck over the next three to five years. Do we straight-line that from where we currently are to get there? Is it going to be a bit lumpy? Or I guess just trying to figure out exactly how we think about 2022 gross margin if you're willing to quantify to any extent. Thanks so much, guys. Appreciate it.

Sure. Yes, Adam. Thinking about '22, we haven't given specific guidance, but we will see expansion. I think it's more of an evolution of the margin and not a step change. I think that's the way you need to think about it. There's still a lot that we're working through in terms of the planning for the launch of new products, the configurations, pricing considerations, a lot to really think about in terms of what might drive longer-term margin. I think you think about '22 margin and even really '23 is more of a gradual evolution.

Okay, got it. That's helpful. Thanks, guys.

Okay. The next question is coming from Matt Hewitt from Craig - Hallum. Matt, your line is live.

Good afternoon. Thank you for taking the questions and congratulations on the progress in '21. Maybe first up, and I don't know if this is a metric that you can provide or if you're going to focus on other areas. But as far as X-Tack accounts, where did the year end up? And as you look at '22, is it more about driving utilization and focusing on the quality of the accounts or is it still about grabbing new greenfield opportunities within new accounts entirely?

Matt, I think the overall, it's still very much about the quality aspects. We do view this as a product that can be used quite widespread, but there are definitely learnings about the learning curve and nuances to even just, especially for people who aren't used to suturing. And it's much simpler than OverStitch, but it is for some of the alternative procedures are doing nothing. And so we want to make sure that people understand the product and how to use it well. And so we've got a heavy focus on a targeted set of accounts that are using the product -- sorry, that are doing these kinds of procedures at high volumes, and they are the primary focus for our sales organization. It doesn't mean we're not opening other additional accounts, but again, we really are trying to focus on that utilization metric because I think many people who have been involved with launches where you try to get out too quickly, get out to a lot of institutions or you're not getting the traction you want to get from a utilization standpoint, that continues to be a big focus with the team. We will continue then to build and grow over time by kind of the utilization first strategy in terms of how we do it.

That's helpful. And I guess along those lines and I really, as it might be a little bit early, but as the year progresses or as we maybe start looking at '23, will you start providing some utilization trends even if just high level to help us recognize the ramp that you're seeing within accounts.

Yeah. Matt, it's a fair question. I think the answer is possibly. It's a competitively sensitive product as well. So we're trying to be as guarded as we can around how much we actually offer. But to the extent that we can continue to share more of our key metrics without compromising some of that, we'll do that. I mean, we try to lay out as an example our sequential percentage growth, 40%, we saw 20% increase in number of ordering accounts. And clearly, you probably don't have a good view on the baseline, but we're trying to give you what we can without sort of compromising some of the competitive sensitivity.

Completely understand, thank you. And then maybe one last one. Is there any update on the status of the Nash trial as far as timing or plans, whether or not there would just be ORBERA or whether we would include OverStitch? Any color on that process will be helpful. Thank you.

Yeah. Now, Matt, it's a good question and one that we are working through, frankly. It's -- we've been with some experts in both the GI side of things and the hepatology side of things to really work through the learnings that have gone into recent trials in the NASH area. As I'm sure you're aware, there have been tens of trials, multiple trials on the drug side, many of which haven't been very successful. And so we're really trying to learn from those, while also taking a hard look at the data that we have for both Balloons and ESG, right? As we are collecting some additional data, you know MERIT has data on comorbidities, liver function was not one of them. But we've got some other studies in Europe that have reported some initial data that looks interesting. And then you wrap in that there is still a whole ongoing set of discussions with CMS about exactly what their coverage policies might be for new technologies. The previous MCIT doesn't look like it's going forward, but they're talking about new versions of what they might do. So for all those reasons, we're taking a pretty deliberate approach to whether it's one product or both products, it's a one trial or multiple trials. As a small company, we probably only get one chance to get this right, so we're measuring twice, cut once approach here intentionally because there's just a lot of moving parts.

I completely understand. All right. Thank you.

Okay. The next question is coming from Frank Takkinen from Lake Street Capital Markets. Your line is live.

Chas, Jeff, congrats on all progress. Thanks for taking the questions. I wanted to ask a couple more on the top 10 accounts. First, can you comment on how many of those top 10 are endobariatric -specific. And then 2, my assumption is there's been a little mix in the composition of those top 10 accounts. Can you comment on what's driving that, whether that's the OverStitch account and introduced X-Tack or endobariatric accounts that's growing quicker than the rest of the account base. Just any color around how the composition has changed and why would be great.

Yeah. Then I would say the majority do fall under that category of endobariatric or at least where endobariatric is a significant portion of what they do. And so that's an important element. Some of those will also be doing some of the core GI procedures, so they may, as I said in fact be using X-Tack as well. And so I think we do have some where it's kind of all in, and you've got both -- all three product lines contributing to that growth. But I would say a number of them, and probably the majority is primarily being driven by the balloon and OverStitch at that level, right. Really driving sort of those, as I mentioned, $600,000 volumes. Those are typically when you have institutions that really are embracing the role for endoscopic therapies on the weight loss side. Again, with the balloon often being a big part of that.

Got it. Okay. That's helpful. And then two in the operating expense region. First, how do we think about sales force growth for 2022? And then secondly, thinking about just broad business investments sounds like that's going to take up pretty aggressively now that you have the funds to do so. Where should we expect to see that most in the operating expense structure?

Yeah, Frank, good question. I think the first question on the sales force growth, we ramped up to about 30 by the end of the year. We've made some incremental hires throughout the course of the first quarter. I think where we are now is that we were really more focused on making sure that the existing sales force is trained up and that they begin to ramp up and we start to see the programs that are working, the ones that aren't, and adjust. And so I think you'll definitely see a bit of a ramp in hiring Q1, and we'll probably start to see another ramp later in the year. So I think as as you start to think about sales and marketing expenses ramping in the near term, it is some of the run rate from the larger commercial sales rep footprint. But then it's also the investment in the marketing type programs around endobariatric s that Charles walked you through. And then as you think about investments beyond sales and marketing, the reimbursement initiatives, bringing Keely on board and building out that team, some of the clinical initiatives in terms of a deeper dive on X-Tack publications and NASH strategy that we hope we'll get more clarity on by the end of the year, and then across the R&D product portfolio, COGS improvement, it really is in many cases just really making up for some level of under-investment historically.

Just one more thing on the salesforce. Just to give you an order of magnitude, Frank. Last year, we -- this is U.S. I'm talking about. We almost doubled the sales force to about 30. I'd say order of magnitude by the end of the year of 2022 will be in the range of call it 40 to 45. We're not looking to double again. Now, that could change. Things take off and we're going to evaluate that as we go. But just to give you a sense of our thinking, it's not doubling again. It's continuing to grow and split some of the larger territories continue to get depth in some of the markets where we know we can drive growth with our current footprint. While in parallel, we're going to evaluate the overall footprint. I mentioned these regional endobariatric managers. That's almost like a pilot, right? To see what that role, how it contributes, how it complements the existing roles, in advance of the newer indication. And so we'll see the exact structure and size as the year goes on.

Got it. That's helpful. I'll stop there. Thanks for taking my questions.

The next question is coming from Chris Cooley from Stephens. Your line is live.

Hi. This is Ben on for Chris. Thanks for taking the question just a quick one for us. Given the current inflationary environment and your prior comments around potentially passing on price, I was just wondering if you could provide some additional color around any potential timing on those price uptakes. And then really how we can think about volume growth moving forward, if you do implement those. Thank you.

Hi, Ben. So for OverStitch, we did take a price increase at beginning of the year. We have in the past taken a cost of living increase. It was modestly higher this year in light of the inflationary environment that we see, and so that was certainly part of our planning. And so we implemented that really at the start of the year. Jeff was alluding to also as we get the new indication and the new products, how exactly we price those in the marketplace is still something we're working through when that plays into things like some of our reimbursement strategies and other areas. So that determination will be more closely tied to the roll-out of the new products, and the systems as it were for ESG and revisions, which will certainly in the back half of the year or even beyond as we kind of think through that aspect of it.

Thank you. I'd now like to turn the floor back to management for any closing remarks.

Awesome. Thanks again, folks for joining us. We really appreciate it. Very gratified with the progress we made in 2021 and looking forward to an exciting year ahead and thank you for your interest and the follow-up.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.