Q2 2020 Apollo Endosurgery Inc Earnings Call

Greetings and welcome to Apollo Endo surgeries second quarter 2020 results call. At this time all participants are in <unk> said 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 MACRA managing director at Darrow Associates Investor Relations Mr., Craig you may begin.

Thank you Terry 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, our Todd <unk>, Chief Executive Officer, and stop the cabin Chief Financial Officer.

Before we begin I'd like to caution listeners the 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 oppose plans in timing for product development sales. In addition, there was uncertainty about the spread because that 19 virus the ultimate impact it may have on our operation.

The demand for our products global supply chains and economic activity in general.

These forward looking statements involve material risks uncertainties and all the actual results may differ materially.

Where discussion of risks factors I encourage you to review the company's annual report on form 10-K for the year ending December 31, 2019 as all her most recent form 10-Q filed today with Securities Exchange Commission.

The content of this conference call contains time sensitive information is accurate only as of the date of the live broadcast August four 2020.

Except as required by law Apollo undertakes no obligation to revise or update any statement tricks like events or circumstances. After the date of this call.

During this call will air changeable use the term, yes asked for Overstretched term eyes, you before a bear a vice versa.

I'd now like turn the call over time.

Thank you Matt Good afternoon, everyone and thank you for joining todays call to discuss our second quarter 2020 results.

I will tell you joining us today and your families are remaining safe and healthy.

On July 20, yes, we pre announced or second quarter revenue and highlights and then just a moment Stephanie cabinet our CFO.

I'll take you through the details of the second quarter before she does I will open with four key points. The best described for investors.

State of the company here at the Midway point of 2020.

One.

The immediate liquidity preservation actions, we took that the started the cobot disruption we're successful.

These decisions, we are hard to make and hard to implemented because of the impact on her team.

We knew that the actions we are 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 the we have continued to pursue shareholder value creation.

Are you investing in our most important development.

Brands, such as the ex TAC program. This to a tremendous team working adaptational due to stay at home directives and travel restrictions, but our team persevered and as announced on July the seventh the ex TAC five 10-K application was submitted to the FDA and now and the regulatory review process.

Three.

Our business is coming back.

The Kobin pandemic had an immediate and significant impact on all health care procedures and of course impacted ourselves in the second quarter, but since the March and April initial shut down of elective procedures, we have been on a positive recovery path.

In June U.S. products sales were close to 90% of June sales and 2019.

Our recovery trends outside the United States are also encouraging the tracking.

No. We're in June then the U.S. pace.

For our liquidity has been shored up.

Well coded 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 cobot market disruption and fund through the ex Tac.

Lunch.

I will tell us with that in turn call over just Stephanie now to cover the second quarter financial results in greater detail.

Yes.

Thank you Todd good afternoon, everyone.

As a draft in our press release from earlier today, and the 10-Q filing the dominant theme in the second quarter has been a carbon 19 disruption to health care resources, and elected 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 2019.

By geography, U.S. Endoscopy sales declined 40% well are you at the endoscopy sales decline close to 68%.

The difference and geographic decline is that the U.S. procedure volumes and health care activity appears to be recovering at a quicker rate.

And the Oh U.S. decline includes our distributor channel, which was down by 76% compared to the second quarter of 2019.

Oh, yes, that's an IDE you'd be worldwide sales were affected by covered 19.

As a result total endoscopy products sales were 5.4 million, which is a 56% reduction.

Foreign currency movements in the quarter did not materially affect revenue trend.

But the portion that yes, that's product sales to totaling dark meat products 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 and transition service revenues related to our former surgical product line that we sold in December 2018.

Well transition services were only 200000 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 with 43% compared with 50% for the second quarter 2019.

The liquidity preservation program, we implemented at the early stages at the coated 19 pandemic resulted in a series of postponements and cancellations of inventory purchases.

And we also reduced our production plan to align our inventory with the expected decline in product demand.

These efforts idle dark production facilities for a large portion of the second quarter and resulted in a direct charge.

Your point 5 million to cost of sales in the period.

Without this charge for Unabsorbed overhead in the second quarter, our gross margin would have been comparable to the second quarter of last year and more consistent with our pre covered gross margin percentage expectation.

Total operating expenses were $6.7 million are more than 50% reduced compared to the second quarter 2019 due to cost savings initiatives. The management team implemented in response to the cut at 19 pandemic.

As we have discussed we undertook a number of aggressive actions at the beginning of the pandemic to preserve cash.

Our goal was to complete the second quarter with the same that cash use we expected before the crisis.

And we met this call.

We will continue to closely manage cash during the remainder of the cobot 19 disruption to maintain a balance between our cash commitment and business improvement.

Descriptions of these cost savings initiatives, we are detailed in our past shareholder periodic reports on form 10-K for 2019 10-Q for the first quarter 2020, and the form 8-K dated April Twentyth.

Our operating loss in the second quarter 2020 decreased 40% to 4.3 million from 7.2 million in the second quarter 2019.

Similarly, our net loss for the second quarter 2020 improved to $6.3 million compared to 8.8 $9 for the second quarter 2019 and improvement of 29%.

Cash at the end of the second quarter was $19.7 million and we were in compliance with our credit agreement.

Subsequent to quarter end on July 21st we completed the transaction to sell common stock and pre funded warrants for total gross proceeds of $25 million.

Concurrently we modified our existing on agreement to waive any minimum revenue covenant requirement for the remainder of 2020.

And decreased our minimum liquidity requirement that we set to increase to 20 million this quarter down to $12.5 million.

The combination of these two transactions increased our liquidity by $32.5 million and greatly reduces our coated 19 near term market risk.

The length of the runway from these transactions someone's depends on the pace at which I've been has continued to improve from cut at 19.

But in any of that we expect to other today that our liquidity will be sufficient to get us past this years 22020 disruption.

Turning to read out of the Merit trial in 2021 and fund the XTRAC launch in 2021 as well.

I'll now turn it back to Todd.

Thank you Stephanie.

The first half of.

This year has been an unprecedented unpredictable in difficult period for everyone.

At Apollo into surgery has tremendous opportunities in front of us and these opportunities are the management teams focus the equity raise the we just completed which was entirely funded by existing shareholders is a testament to the support and belief of our current shareholder base.

And these opportunities and I'll highlight three of these opportunities today.

First quarter G. I use has been an important part of our overstates growth story, particularly in the United States.

We've spoken for while now that's the goal to bring the benefits of flexible and discussing suturing too poor G.I. needs.

The lower G. I track, especially the colon and this is what ex Tac is designed for.

During our development labs Dr. 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 gastroscope circling the scope so in the market.

Advanced in does could this like those who use over stitch today, we'll find it distinctive with broad case application.

Every industry this should find it easier to pick up in use and economical.

It is specifically designed to easily and effectively close larger or irregularly shapes defects, which would otherwise be very challenging for the industry. This to address with the existing closure devices in the market.

EXTEX should also be a very good fit with our sales organization.

Our top 100 overstated share counts in the United States.

We're where we generated 80% of our U.S. oversteer sales last year.

And we think there will be strong fourg demand for ex Tac at more than 75% of these same top 100 accounts.

The range of use for ex Tac runs from being a rescue tool for acute perforations a one into the spectrum.

To the prophylactic closure following a mid to large size polyp removal for patients at high risk of delayed bleeding because of either call upsize location.

The need to use anti thrombotic medications being at the other into the spectrum and many uses in between.

Ex Tac will materially expand our addressable market in core G.

With more than 20 million, calling us piece performed each year in the United States.

Ex Tac news this into a large an important market, where our existing customers have an existing unmet need that ex Tac will address.

The typical five 10-K processing time as a guide we believe that ex Tac couldn't be cleared by the end of this year.

Second we have substantial very actor growth potential still ahead, the very ettrick procedure market is a roughly 200000 procedure per year market in the United States alone and the endoscopic sleep gastric plastique for U.S.G. procedure that is enabled by the full.

In a suturing capabilities of overstretch has a very attractive value proposition for patients.

And the health care system at large due to its effectiveness low adverse event rate and ease to revise when a revision is needed.

Well bariatrics have been an important part of our overstretch pass growth as has core guy we have yet to tap the potential of U.S.G.D.S.G. procedure continues to build momentum worldwide and we estimate that there will probably somewhere around 5000, yes, Ci procedures performed worldwide.

Last year.

Agendas data generation is required to break into a bigger shares the bariatrics market or to grow the market and the Marriott trial, which we've spoken about many times before is intended to provide this data as a reminder, merit is a randomized prospective multi center trial being conducted at various sites in the United States. So.

So did the effectiveness in safety of the U.S.G. procedure and is a key piece of our reimbursement strategy for the U.S.G. procedure and label expansion for overseas.

We remain very confident that the merits study will achieve its goals and the reason for optimism is simple.

Yes G.

Has already been studied in reported a multiple times by multiple centers with highly consistent results across the globe.

In 2019, there were three Mehta analysis published that pulled the results of over 1700 patient experiences.

Some of the merits site activities experienced some covert 19 related delays, but as of last week less than 10 crossover procedures <unk> remained to be performed.

The T.I.s anticipate the primary Mary data readout by the middle of 2021.

And with reimbursement, we believe the U.S.G. procedure will be disruptive to today's very accurate marketplace.

Third.

Expanding physician access to our products remains a priority for us.

Good night team has disrupted travel in many of the plan didn't person physician meetings, we have historically leverage to address medical education demand. However, there remains a strong physician interest to learn more about overs ditch and we have found alternative ways to address this interest in the second quarter, we held to international Webinars and.

The benefits of into luminal suturing.

The first webinars focused on the benefits of ends luminal suturing as part of the core geometry basket of procedures and was attended by 300 persons.

The second discussed into luminal bariatrics suturing applications and that was attended by almost 500 participants.

At the end of July we also hosted to unite didactic training sessions here in the United States again, one for Bariatrics and went on Fourg Guy designed is precursors to hands on training activity, we had more than 80 registrations for each of these classes and subsequently conducted our first in person.

Lab training session since the beginning of October does this past Friday.

To test, how we might reopened the hands on aspects of our education programs.

As normal see returns the level of engagement, we have seen on our virtual platforms makes us feel confident the new user interest will be as high as we were experiencing pre coated.

Expanding physician interest to our products goes beyond medical education, though.

In 2019, we launched the Essex Overstates device as part of the strategy to avail or suturing technology to those decisions for account locations that did not have access to a dual channel endoscope since that launch about a third of all new overstretch accounts globally, our sx users.

And by the end of this year, we will be making minor modifications to further improve the user experience with Essex.

In addition, during the second quarter of this year and despite to hit our regulatory team succeeded in securing market approvals were clearances for one or more of our endoscopy products.

Seven countries. These new markets will be served by either new or existing third party distributors regulatory efforts are ongoing inside of Apollo to further expand the availability of our products to new markets.

Indeed, we have multiple growth drivers ahead for our business following Kobin 19 recovery.

I want to say a couple awards as well better gross margin improvement programs. These remain important but had to be put on hold as part of our liquidity preservation program of course, we kept ex Tac moving forward and ex Tac is probably our most important gross margin improvement project as we expect to ex Tac that its launch to be it.

Accretive to our overall gross margin.

We will resume other gross margin improvement projects as our business or recovery.

And organizational bandwidth dictates as reasonable.

Finally, a soft outlook for.

The third quarter ahead.

Our team has built a solid growing business.

This business is coming back as quickly as elective procedures are allowed to come back in the United States in the second quarter, we had very good recovery, India admitted Atlantic and southeast as well as the southwestern Western States still the North East area, the United States, where we have a sizable business.

Severely hit by covert 19 and slower to recover during the second quarter.

Outside the United States direct markets, such as Germany, Spain, and Italy showed good signs of recovery throughout the second quarter, while the United Kingdom in France.

Sales behind.

So far larger distributor markets, such as the middle East have yet to show signs of recovery.

But overall, we like what we're seeing so far in the third quarter based on July from both over Stitch annual Ribeira in July our direct marketing endoscopy product sales, both in the United States and outside the United States increased compared to July of 2019.

In fact, if we had June and July of 2020, together, our direct markets endoscopy product sales increased compared to those same two months in 2019.

The third quarter is traditionally a seasonally soft quarter, but all indications right now are that the third quarter sales will be sequentially up compared to the second quarter. However, much could risks remain.

And we are still planning for the third quarter to be below the third quarter of last year and by the end of the fourth quarter, perhaps we will see or returned to pre co the procedure levels.

With that we'll now open the lines up for questions.

Darren I'm. Please proceed.

Thank you ladies and gentlemen, the floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time, if you're using a speaker phone.

Posing your question you pick up your handset to provide the best sound quality again, ladies and gentlemen, if you do have a question or comment. Please press star one and your telephone keypad at this time.

Well take our first question from Matt Hewitt with Craig Hallum Capital Group. Please go ahead Sir.

Good afternoon, and things for the update then for taking the questions.

Good afternoon met.

Maybe in 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. There was created in late March and April versus a new pipeline opportunities for.

Your T.I. customers and maybe what does that pipeline looks like today, if you have any thoughts there.

Yeah. 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 heavily been dealing with backlog, especially in June and July versus to what degree.

We are really back to more of a normal healthcare utilization patterns.

Undoubtedly we have concerns as do others that higher unemployment rates.

And loss of insurance potentially can impact.

Beyond the current backlog.

We see right now could impact.

Every rates in the latter half of this year. So it's a good question very difficult to 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 you will be a little bit longer before we see a return to pre covert procedure levels, we hope that were being too conservative.

That's helpful. Thank you and then.

One of the risk the key risk categories for krona virus patients is obesity, there's been a number of.

It's from some of your customers talking about seeing an incremental demand once the locked on orders were lifted.

Yes, she and for other bariatric procedures I'm just curious he is that something that you think could become a little bit of a tailwind here I realize it's it's a tough environment, but given that risk factors that does that create opportunities for you.

You know Matt its good question again.

I think our opportunities we're always exceedingly large in the very attard marketplaces, we mentioned in the prepared remarks. This is a market of 200000 procedures per year in the United States, we haven't even tapped it any meaningful way.

This is of course, the whole investment thesis behind the merits study.

And our goal is reimbursement and if and if the market grows as a result of the higher co. Good risk factors associated with obese patients that is something we we aspire to help address but we just see that the Barry aftermarket.

Pretty code that was already.

Very attractive market force in one worth pursuing and one that once we are able to tap into it and compete.

On a.

Reimbursed basis, I think received 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 labs, 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 coasters customers facilities is that something that you're looking to exploit I guess at least over the near term is there still krona virus circle circulating.

Well, what I mentioned that was conducted on Friday that was actually done at a lab in Chicago at the S.G. They have a fantastic facility and I think this was actually there.

Their first training course that they hosted at that facilities since the beginning of covert as well as ours. We've enjoyed always a really good relationship with.

Physician society, such as the A.S.G. and we've always had very good a.

Success with their facility, which is.

As 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.

Well take our next question from Adam.

Paper Sandler. Please go ahead Sir.

Hi, guys. This is that you're 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 too you know either quantitatively or qualitatively.

Some of the the mindset of your customers given that you guys have you know its IPO cash pay those here.

You mentioned a couple of things on the previous question that keep a little more cautious as far as answer answered the financials I mean, your cost sorry, but just to be clear that's something you're hearing it all so far.

And then just any patient concerns as far as coming and decoded.

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.

Promenade.

Let's call it message from customers.

The second quarter.

Lesser so now but throughout the second quarter was the they just wanted to get back to to work.

It really had more to do with with them than it had to do with anything related to US. There are 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 the keep the the hospital or ambulatory surgical environment secure.

From this highly contagious situation and so.

We've had for some time.

Good.

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 were hearing in the marketplace suggest that a.

Procedures and they continue to a two to move forward although.

Probably because of these intake.

Type of safeguards that had been put in place it a lot of places.

Paskey may be slightly reduced.

Okay that make and what we think the second part of your question.

And I missed.

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 covert I mean, I think based on your answer to your previous question I think dancers no, but you know anything on that the patient they would be helpful too.

Yeah, I think I'll just go with your answer drew no [laughter], it's good answer.

So we're experiencing.

Okay. That's very helpful. And then congrats on the mission for ex Tac.

It sounds like it could be pretty complementary to some of your products forgive me if I missed that but you know assuming you get approval and a couple of months down the road what can we expect as far as a full or a limited launch.

You know probably late this year early.

And then from a sales model perspective, you know there bundling opportunity into the into some of those large accounts you spoke about.

So I'll start with our launch plans at this point, we believe a if everything progressive with but at the normal rates have a five countries 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 is the first quarter. We would then begin a full launch and Rollouts are lessons learned from that limited launch experience.

Through to our full salesforce.

As far as a bundling opportunity I'm not aware of any any discussion along those lines.

Yes, I think there I think on bundling yeah, we have two products did or or.

Very.

Innovative and so there there would seem to be less and less need let me be use that word less need for us to consider.

Bundling in order to.

Improve access so I don't anticipate that right now there will 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 I'm just one more quick on for me here I'm just on the expense side. Obviously, you took some time side of the business due to cover particularly on the.

Sales and marketing portion.

You know how quickly should we think about some of that investment return to the business as you know recovery happens here.

And then I guess with the recent capital raise you know do you feel like you're in a good place to go on the fence that right away or do you kind of stay in cash preservation mode until there's a little bit more clarity with with <unk>. Thank you for taking the question.

Thank you Adam I 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 and returning our expenses across the board for furloughed employees salary reductions as well as thousand marketing activity to match that Q.

So what are our revenue return looks like.

So.

That would be how I would account for you there and your thought process and and were watching it daily weekly in order to make the right decisions for that that affect from our liquidity perspective, we were very pleased with the equity we.

Yes raised and we see that giving us a nice runway through this disruption. We ended this year and helping us to fund our ex Tac launch and getting us through the merit read out sometime in 2021 so.

Our risk has been significantly decreased.

<unk>.

Ladies and gentlemen, you add.

My apologies, ladies and gentlemen that will conclude our question and answer session for today, we'll now turn the floor back over to Mr. <unk>.

Floor is yours.

Well, thank you Terry 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 a please contact mad crabs 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 one through four Andy 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.

<unk> <unk>.

This does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time and have great day.

[music].