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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2021
 
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to              
 
Commission file number: 001-35706
APOLLO ENDOSURGERY, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
16-1630142
(I.R.S. Employer
Identification No.)
 
1120 S. Capital of Texas Highway, Building 1, Suite #300, Austin, Texas
(Address of principal executive offices)
78746
(Zip Code)
Registrant’s telephone number, including area code (512) 279-5100

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.001 per shareAPENThe Nasdaq Stock Market LLC
 
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer  o
Non-accelerated filer x
Smaller reporting company 
Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No x

As of July 30, 2021, there were 28,702,968 shares of the issuer’s $0.001 par value common stock issued and outstanding.





APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
FOR THE QUARTER ENDED JUNE 30, 2021
TABLE OF CONTENTS
 
Page
Item 1. 
Item 2. 
Item 4. 
Controls and Procedures
Item 1. 

i


PART I - FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except for share data)
June 30, 2021December 31, 2020
(unaudited)
Assets
Current assets:
Cash and cash equivalents$30,541 $36,235 
Accounts receivable, net of allowance for doubtful accounts of $649 and $634, respectively
11,250 8,218 
Inventory10,844 10,306 
Prepaid expenses and other current assets4,397 3,771 
Total current assets57,032 58,530 
Restricted cash701 965 
Property, equipment and right-of-use assets, net5,824 6,221 
Goodwill5,290 5,290 
Intangible assets, net of accumulated amortization of $14,190 and $13,231, respectively
5,198 6,017 
Other assets374 414 
Total assets$74,419 $77,437 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable$5,914 $3,675 
Accrued expenses8,534 7,357 
Current portion of long-term debt 636 
Total current liabilities14,448 11,668 
Long-term debt35,516 37,192 
Convertible debt19,413 19,387 
Long-term liabilities2,328 2,439 
Total liabilities71,705 70,686 
Commitments and contingencies
Stockholders' equity:
Common stock; $0.001 par value; 100,000,000 shares authorized; 28,624,979 and 25,819,329 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively
29 26 
Additional paid-in capital281,551 276,569 
Accumulated other comprehensive income1,527 2,929 
Accumulated deficit(280,393)(272,773)
Total stockholders' equity2,714 6,751 
Total liabilities and stockholders' equity$74,419 $77,437 

See accompanying notes to the condensed consolidated financial statements.
1


APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except for share data)
(unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Revenues$16,610 $5,644 $30,467 $16,362 
Cost of sales7,487 3,215 13,837 8,296 
Gross margin9,123 2,429 16,630 8,066 
Operating expenses:
Sales and marketing6,005 2,265 10,795 8,595 
General and administrative5,338 2,157 9,407 5,496 
Research and development2,550 1,815 4,478 3,962 
Amortization of intangible assets471 490 945 986 
Total operating expenses14,364 6,727 25,625 19,039 
Loss from operations(5,241)(4,298)(8,995)(10,973)
Other (income) expenses:
Interest expense, net1,334 1,316 2,686 2,560 
Gain on forgiveness of PPP loan(2,852) (2,852) 
Other (income) expense, net(775)633 (1,339)2,927 
Net loss before income taxes(2,948)(6,247)(7,490)(16,460)
Income tax expense71 6 130 49 
Net loss$(3,019)$(6,253)$(7,620)$(16,509)
Other comprehensive (loss)/income:
Foreign currency translation(517)591 (1,402)2,403 
Comprehensive loss$(3,536)$(5,662)$(9,022)$(14,106)
Net loss per share, basic and diluted$(0.11)$(0.30)$(0.28)$(0.78)
Shares used in computing net loss per share, basic and diluted27,269,838 21,152,937 26,790,801 21,135,032 
 
See accompanying notes to the condensed consolidated financial statements.
2


APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except for share data)
(unaudited) 
Three Months Ended June 30, 2021 and 2020
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive IncomeAccumulated
Deficit
Total
SharesAmount
Balances at March 31, 202021,128,101 $21 $251,502 $3,442 $(260,418)$(5,453)
Exercise of common stock options1,150 — 2 — — 2 
Issuance of restricted stock units67,136 — — — — — 
Stock-based compensation— — 534 — — 534 
Foreign currency translation— — — 591 — 591 
Net loss— — — — (6,253)(6,253)
Balances at June 30, 202021,196,387 $21 $252,038 $4,033 $(266,671)$(10,579)
Balances at March 31, 202127,035,842 $27 $277,994 $2,044 $(277,374)$2,691 
Exercise of common stock options 291,512 — 988 — — 988 
Exchange of common stock for warrants1,043,956 2 — — — 2 
Issuance of restricted stock units 241,601 — — — — — 
Issuance of common stock for convertible debt interest12,068 — 43 — — 43 
Stock-based compensation — — 2,526 — — 2,526 
Foreign currency translation — — — (517)— (517)
Net loss— — — — (3,019)(3,019)
Balances at June 30, 202128,624,979 $29 $281,551 $1,527 $(280,393)$2,714 

 See accompanying notes to the condensed consolidated financial statements.
3


APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except for share data)
(unaudited) 
Six Months Ended June 30, 2021 and 2020
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive IncomeAccumulated
Deficit
Total
SharesAmount
Balances at December 31, 201920,951,963 $21 $250,634 $1,630 $(250,162)$2,123 
Exercise of common stock options1,150 — 2 — — 2 
Issuance of restricted stock units78,477 — — — — — 
Issuance of common stock for convertible debt interest164,797 — 467 — — 467 
Stock-based compensation— — 935 — — 935 
Foreign currency translation— — — 2,403 — 2,403 
Net loss— — — — (16,509)(16,509)
Balances at June 30, 202021,196,387 $21 $252,038 $4,033 $(266,671)$(10,579)
Balances at December 31, 202025,819,329 $26 $276,569 $2,929 $(272,773)$6,751 
Exercise of common stock options313,005 — 1,048 — — 1,048 
Exercise of common stock warrants2,043,811 3 (1)— — 2 
Issuance of restricted stock units252,938 — — — — — 
Issuance of common stock for convertible debt interest173,252 — 615 — — 615 
Conversion of convertible debt22,644 — 74 — — 74 
Stock-based compensation— — 3,246 — — 3,246 
Foreign currency translation— — — (1,402)— (1,402)
Net loss— — — — (7,620)(7,620)
Balances at June 30, 202128,624,979 $29 $281,551 $1,527 $(280,393)$2,714 

 See accompanying notes to the condensed consolidated financial statements.
4


APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
Six Months Ended June 30,
20212020
Cash flows from operating activities:
Net loss$(7,620)$(16,509)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization1,732 1,899 
Gain on forgiveness of PPP loan(2,852) 
Amortization of deferred financing costs256 320 
Non-cash interest 875 728 
Provision for doubtful accounts receivable10 78 
Inventory impairment30  
Stock-based compensation3,246 935 
Unrealized foreign exchange on intercompany payables(1,357)2,824 
Changes in operating assets and liabilities:
Accounts receivable(3,059)3,300 
Inventory(563)(2,263)
Prepaid expenses and other assets(441)28 
Accounts payable and accrued expenses3,334 (4,612)
Net cash used in operating activities(6,409)(13,272)
Cash flows from investing activities:
Purchases of property and equipment(551)(388)
Purchases of intangibles and other assets(127)(70)
Net cash used in investing activities(678)(458)
Cash flows from financing activities:
Proceeds from exercise of stock options1,048 2 
Proceeds from exercise of warrants2  
Proceeds from long-term debt 2,824 
Payments of deferred financing costs (241)
Net cash provided by financing activities1,050 2,585 
Effect of exchange rate changes on cash79 (67)
Net change in cash, cash equivalents and restricted cash(5,958)(11,212)
Cash, cash equivalents and restricted cash at beginning of year37,200 30,921 
Cash, cash equivalents and restricted cash at end of period$31,242 $19,709 
Supplemental disclosure of cash flow information:
Cash paid for interest$1,567 $1,606 
Cash paid for income taxes25 13 
Right-of-use assets recognized in exchange for lease obligations (non-cash)(577)(46)
Gain on forgiveness of PPP loan (non-cash)2,852  

See accompanying notes to the condensed consolidated financial statements.
5

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(In thousands, except for share data)

(1) Organization and Business Description
Apollo Endosurgery, Inc. is a Delaware corporation with both domestic and foreign wholly-owned subsidiaries. Throughout these Notes, "Apollo" and the "Company" refer to Apollo Endosurgery, Inc. and its consolidated subsidiaries.
Apollo is a medical technology company primarily focused on the development of next-generation, less invasive medical devices to advance gastrointestinal therapeutic endoscopy. The Company develops and distributes devices that are used by surgeons and gastroenterologists for a variety of procedures related to gastrointestinal conditions including closure of gastrointestinal defects, managing gastrointestinal complications and the treatment of obesity.
The Company's core products include the OverStitch™ Endoscopic Suturing System, the OverStitch Sx™ Endoscopic Suturing System, X-TackTM Endoscopic HeliX Tacking System (collectively "ESS") and the ORBERA® Intragastric Balloon ("IGB").
The Company has offices in the United Kingdom and Italy that oversee commercial activities outside the U.S. and a products manufacturing facility in Costa Rica. All other activities are managed and operated from facilities in Austin, Texas.

(2) Significant Accounting Policies
(a) Basis of Presentation
The Company prepared its interim condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"). They do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements include the Company's accounts and the accounts of its wholly-owned subsidiaries. The Company has eliminated all intercompany balances and transactions.
The Company has made estimates and judgments affecting the amounts reported in its condensed consolidated financial statements and the accompanying notes. The actual results that the Company experiences may differ materially from the Company's estimates. The accounting estimates that require the Company's most significant, difficult and subjective judgments include revenue recognition and inventory valuation.
(b) Unaudited Interim Results
In management's opinion, the unaudited financial information for the interim periods presented includes all adjustments necessary for a fair presentation of the results of operations, financial position, and cash flows. All adjustments are of a normal recurring nature unless otherwise disclosed. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. This interim information should be read in conjunction with the audited consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
(c) Recent Accounting Pronouncements
In March 2020, ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, was issued to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients for contracts that reference LIBOR, if certain criteria are met, that can be applied through December 31, 2022. As reference rate reform is still an ongoing process, the Company will continue to evaluate the timing and potential impact of adoption for optional expedients when deemed necessary.

(3) Concentrations
Consolidated financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents and accounts receivable. At June 30, 2021, the Company's cash, cash equivalents and restricted cash are held in deposit accounts at five different banks totaling $31,242. The Company has not experienced any losses in such accounts, and management does not believe the Company is exposed to any significant credit risk. Management further believes that credit risk in the Company's accounts receivable is substantially mitigated by the Company's evaluation process, relatively short collection terms, and the high level of creditworthiness of its customers. The Company continually monitors the compliance of its customers with the Company's payment terms, but generally requires no collateral.
6

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Notes to Unaudited Interim Condensed Consolidated Financial Statements (continued)
(In thousands, except for share data)
The Company had no concentrations greater than 10% of the Company's net accounts receivable as of June 30, 2021. The Company had no single customer that comprised more than 10% of the Company's total revenues for the three and six months ended June 30, 2021 and 2020.

(4) Inventory
Inventory consists of the following as of:
June 30, 2021December 31, 2020
(unaudited)
Raw materials$2,998 $2,344 
Work in progress765 558 
Finished goods7,081 7,404 
Total inventory$10,844 $10,306 
Finished goods included $115 of consigned inventory at June 30, 2021.

(5) Prepaid Expenses and Other Current Assets
Included in prepaid expenses and other current assets as of June 30, 2021 and December 31, 2020 is $2,884 and $2,760 for the final installment due from the sale of the surgical product line.

(6) Property, Equipment and Right-of-Use Assets
Property, equipment and right-of-use assets consists of the following:
Depreciable LivesJune 30, 2021December 31, 2020
(unaudited)
Equipment
5 years
$7,484 $7,452 
Right-of-use assets
1-8 years
3,457 4,031 
Furniture, fixtures and tooling
4-8 years
2,485 2,156 
Computer hardware
3-5 years
1,315 1,244 
Leasehold improvements
3-7 years
1,744 1,744 
Construction in process560 466 
17,045 17,093 
Less accumulated depreciation(11,221)(10,872)
Property, equipment and right-of-use assets, net$5,824 $6,221 
The Company recorded depreciation expense of $357 and $786 for the three and six months ended June 30, 2021 and $453 and $911 for the three and six months ended June 30, 2020, respectively. There were no impairment charges for the three and six months ended June 30, 2021 or 2020.
The Company has operating leases for office space in Texas, the United Kingdom, and Italy, and for the manufacturing facility in Costa Rica. The Company also has various operating lease agreements for equipment and vehicles.
7

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Notes to Unaudited Interim Condensed Consolidated Financial Statements (continued)
(In thousands, except for share data)
As of June 30, 2021, the maturities of the Company's operating lease liabilities are as follows:
2021$516 
2022786 
2023490 
2024444 
2025404 
Thereafter1,172 
Total lease payments3,812 
Less imputed interest(886)
Total operating lease liabilities$2,926 
Operating lease liabilities of $707 are included in accrued expenses and $2,219 are included in long-term liabilities as of June 30, 2021. Operating lease expense and cash paid within operating cash flows for operating leases was $282 and $549 for the three and six months ended June 30, 2021 and $290 and $584 for the three and six months ended June 30, 2020, respectively. As of June 30, 2021, the weighted average remaining lease term was 5.3 years and the weighted average discount rate used to estimate the value of the operating lease liabilities was 8.9%. In June 2021, the Company extended the office lease in Texas for one year.

(7) Accrued Expenses
Accrued expenses consists of the following as of:
June 30, 2021December 31, 2020
(unaudited)
Accrued employee compensation and expenses$4,558 $3,946 
Accrued professional service fees344 358 
Lease liability707 675 
Accrued insurance and taxes717 442 
Accrued interest613 616 
Accrued returns and rebates163 129 
Other1,432 1,191 
Total accrued expenses$8,534 $7,357 

8

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Notes to Unaudited Interim Condensed Consolidated Financial Statements (continued)
(In thousands, except for share data)
(8) Long-Term Debt
Long-term debt consists of the following as of:
June 30, 2021December 31, 2020
(unaudited)
Term loan facility$35,000 $35,000 
PPP loan 2,824 
Deferred interest1,573 1,217 
Deferred financing costs(1,057)(1,213)
Less current portion (636)
Long-term debt$35,516 $37,192 
Term Loan Facility
In March 2019, the Company entered into a Term Loan Facility (the "Credit Agreement") with Solar Capital Ltd. ("Solar") to borrow $35,000. The Credit Agreement, as amended by the Seventh Amendment, provided a six-month extension of the interest only period and the maturity date if certain revenue milestones were achieved before December 2021. These revenue milestones were achieved as of March 31, 2021 and thus the Credit Agreement maturity was extended to March 1, 2025 with principal payments beginning in September 2022. The Credit Agreement bears interest at LIBOR, subject to a minimum floor, plus 7.5%. Principal payments are due on a straight-line basis after the interest-only period concludes. An additional 7.0% of the outstanding amount will be due at end of the loan term and an additional 5.5% fee will be due at the earlier of certain exit events specified in the Credit Agreement or if the Company achieves trailing twelve-month revenue of $100,000 before December 4, 2030. The Credit Agreement includes customary affirmative covenants, negative covenants and financial covenants, including a minimum liquidity requirement and minimum product revenues.
In February 2021, the Company entered into the Eighth Amendment to the Credit Agreement which established the revenue covenant requirements for the year ended December 31, 2021.
As of June 30, 2021, the Company was in compliance with all financial covenants.
PPP Loan
In March 2020, the CARES Act was signed into law providing certain economic aid packages for qualified entities. In April 2020, the Company was granted a loan of $2,824 under the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) established under the CARES Act.
In June 2021, the Company received forgiveness of the full amount of the $2,852 loan, inclusive of interest, from the SBA.
Interest expense on the Company's long-term debt was $1,041 and $2,099 for the three and six months ended June 30, 2021 and $1,049 and $2,090 for the three and six months ended June 30, 2020, respectively.
Principal payments of the Company's long-term debt are as follows:
2021$ 
20224,667 
202314,000 
202414,000 
20252,333 
Thereafter 
$35,000 

9

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Notes to Unaudited Interim Condensed Consolidated Financial Statements (continued)
(In thousands, except for share data)
(9) Convertible Debt
Convertible debt consists of the following as of:
June 30, 2021December 31, 2020
(unaudited)
Convertible debt$20,445 $20,519 
Deferred financing costs(1,032)(1,132)
Total convertible debt$19,413 $19,387 
In August 2019, the Company issued $20,000 aggregate principal amount of 6.0% convertible senior debentures due 2026 (the "Convertible Debt"), primarily to existing stockholders and officers of the Company. Interest on the Convertible Debt is payable semi-annually in shares of the Company's common stock on January 1 and July 1 of each year at a rate of 6.0% per year. The number of shares of common stock required to settle the amount of interest payable will be based on the volume-weighted average price ("VWAP") of the Company's common stock for the 10 consecutive trading days immediately preceding the applicable interest payment date. However, in the event that the trailing 10-trading day VWAP of the Company's common stock is less than $2.50 per share, interest accrued and payable for the applicable interest payment period will accrete to the principal amount then outstanding. The Convertible Debt will mature on August 12, 2026 unless earlier converted or repaid in accordance with its terms.
The Company issued 161,184 shares and 12,068 shares of the Company's common stock to holders of the Convertible Debt in January 2021 and May 2021, respectively, in fulfillment of accrued interest as of December 31, 2020.
The Convertible Debt converts, at the option of the holders, into shares of the Company's common stock at an initial conversion price of $3.25 per share, subject to adjustment. If the VWAP of the Company's common stock has been at least $9.75 (subject to adjustment) for at least 20 trading days during any 30 consecutive trading day period, the Company may force the conversion of all or any part of the outstanding principal amount of the Convertible Debt, accrued and unpaid interest and any other amounts then owing, subject to certain conditions. In February 2021, $74 of the Convertible Debt, including accrued interest was converted into 22,644 shares of common stock.
Interest expense on the Convertible Debt was $357 and $714 for the three and six months ended June 30, 2021 and $378 and $756 for the three and six months ended June 30, 2020, respectively.

(10) Warrants
Warrants consist of the following as of June 30, 2021:
Warrant Expiration DateNumber of sharesExercise price per share
December 29, 202140,456 $13.70 
February 27, 2022163,915 $21.29 
No expiration14,369,008 $0.001 
Total number of warrants outstanding14,573,379 
Weighted average exercise price of warrants outstanding$0.28 
Pre-funded warrants were exercised into 1,000,000 and 1,043,956 shares of common stock in March and June 2021, respectively.

10

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Notes to Unaudited Interim Condensed Consolidated Financial Statements (continued)
(In thousands, except for share data)
(11) Stock-Based Compensation
A summary of the stock option activity as of June 30, 2021 is presented below.
OptionsWeighted Average Exercise PriceWeighted Average Remaining Contractual TermAggregate Intrinsic Value
Options outstanding, December 31, 20202,921,946 $3.86 7.6 years$1,664 
Options granted1,357,872 6.10 
Options exercised(313,005)3.38 
Options forfeited(115,074)3.50 
Options outstanding, vested and expected to vest, June 30, 20213,851,739 $4.70 8.1 years$13,620 
Options exercisable1,639,365 $4.61 6.5 years$6,234 
Shares subject to awards granted under the 2017 Plan which expire, are repurchased, or are canceled or forfeited will again become available for issuance under the 2017 Plan. The shares available will not be reduced by awards settled in cash or by shares withheld to satisfy tax withholding obligations. Only the net number of shares issued upon the exercise of options by means of a net exercise will be deducted from the shares available under the 2017 Plan.
The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
Six Months Ended
June 30, 2021
Six Months Ended
June 30, 2020
Risk free interest rate1.0%0.4%
Expected dividend yield%%
Estimated volatility81.1%73.8%
Expected life6.1 years5.8 years
The aggregate intrinsic value in the tables above represents the total pre-tax value of the options shown, calculated as the difference between the Company’s closing stock price on June 30, 2021 and the exercise prices of the options shown, multiplied by the number of in-the money options. This is the aggregate amount that would have been received by the option holders if they had all exercised their options on June 30, 2021 and sold the shares thereby received at the closing price of the Company’s common stock on that date. This amount changes based on the closing price of the Company’s common stock.
Additional information regarding options is as follows:
Six Months Ended
June 30, 2021
Six Months Ended
June 30, 2020
Weighted-average grant date fair value of options granted during the period$4.22 $1.31 
Aggregate intrinsic value of options exercised during the period$1,377 $ 
In March 2021, the Company awarded 848,733 stock options to the Company’s chief executive officer in connection with the commencement of his employment.
In connection with the departure of two executive officers, the terms for the stock option vesting period and exercise period were modified which resulted in additional stock-based compensation of $196 for the three and six months ended June 30, 2021.
Unrecognized compensation expense related to unvested options was approximately $6,694 at June 30, 2021, with a weighted average remaining amortization period of 3.2 years.
11

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Notes to Unaudited Interim Condensed Consolidated Financial Statements (continued)
(In thousands, except for share data)
A summary of the restricted stock unit and performance stock unit activity under the Company's Equity Plans as of June 30, 2021 is presented below.
UnitsWeighted Average Grant Date Fair ValueAggregate Intrinsic Value
Restricted stock units and performance stock units outstanding, December 31, 2020664,666 $2.55 $2,260 
Restricted stock units and performance stock units granted911,437 6.06 
Restricted stock units released(252,938)2.59 
Restricted stock units forfeited(53,965)3.49 
Restricted stock units and performance stock units outstanding, June 30, 20211,269,200 $5.02 $10,281 
In March 2021, the Company awarded 707,278 performance-based restricted stock units to the Company’s chief executive officer in connection with the commencement of his employment. The performance-based restricted stock units vest in four equal tranches upon the achievement of revenue for the trailing four quarters equal to $50,000, $65,000, $80,000, and $95,000. The revenue milestone for the first tranche was achieved as of June 30, 2021.
In connection with the departure of an executive officer, the vesting terms for restricted stock units outstanding were modified which resulted in additional stock-based compensation of $76 for the three and six months ended June 30, 2021.
Unrecognized compensation expense related to unvested restricted stock units and performance-based stock units was approximately $2,000 and $2,626, respectively, at June 30, 2021, with a weighted average remaining amortization period of 1.9 years.

(12) Income Taxes
The provision for income taxes for the three and six months ended June 30, 2021 and 2020 primarily consists of foreign income taxes.
The Company has established a valuation allowance due to uncertainties regarding the realization of deferred tax assets based on the Company's lack of earnings history and potential limitations pursuant to changes in ownership under Internal Revenue Code Section 382.
As of June 30, 2021, the Company has no unrecognized tax benefits or accrued interest or penalties associated with uncertain tax positions.

(13) Net Loss Per Share
The basic and diluted net loss per common share presented in the condensed consolidated statements of operations and comprehensive loss is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Potentially dilutive shares, which include warrants for the purchase of common stock, convertible debt, restricted stock units, and options outstanding under the Company's equity incentive plans, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.
Potentially dilutive securities that are not included in the calculation of diluted net loss per share attributable to common stockholders because to do so would be anti-dilutive are as follows (in common stock equivalent shares on a weighted-average basis):
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Warrants for common stock14,573,379 1,204,371 14,573,379 1,204,371 
Convertible debt6,344,334 6,292,563 6,326,530 6,246,154 
Common stock options3,725,852 2,584,877 3,247,881 2,226,245 
Restricted stock units1,219,570 472,590 891,185 318,904 
25,863,135 10,554,401 25,038,975 9,995,674 

12

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Notes to Unaudited Interim Condensed Consolidated Financial Statements (continued)
(In thousands, except for share data)
(14) Fair Value Measurements
The carrying amounts of the Company's financial instruments, which primarily include cash, cash equivalents, and restricted cash, accounts receivable, accounts payable and accrued expenses, approximate their fair values due to their short maturities. The fair value of the Company's long-term debt and Convertible Debt is estimated by management to approximate $38,600 and $20,400, respectively at June 30, 2021. Management's estimates are based on comparisons of the characteristics of the Company's obligations, comparable ranges of interest rates on recently issued debt, and maturity. Such valuation inputs are considered a Level 3 measurement in the fair value valuation hierarchy.
The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

(15) Segment and Geographic Information
Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company globally manages the business within one reportable segment. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance.
Product sales by product group and geographic market, based on the location of the customer, whether the U.S. or outside the U.S. ("OUS") for the periods shown were as follows:
Three Months Ended June 30, 2021Three Months Ended June 30, 2020
(unaudited)
U.S.OUSTotal Revenues% Total RevenuesU.S.OUSTotal Revenues% Total Revenues
ESS$6,860 $3,764 $10,624 64.0 %$2,384 $1,206 $3,590 63.6 %
IGB2,094 3,659 5,753 34.6 %760 1,039 1,799 31.9 %
Other232 1 233 1.4 %255  255 4.5 %
Total revenues$9,186 $7,424 $16,610 100.0 %$3,399 $2,245 $5,644 100.0 %
% Total revenues55.3 %44.7 %60.2 %39.8 %
Six Months Ended June 30, 2021Six Months Ended June 30, 2020
(unaudited)
U.S.OUSTotal Revenues% Total RevenuesU.S.OUSTotal Revenues% Total Revenues
ESS$12,255 $7,008 $19,263 63.2 %$6,139 $4,283 $10,422 63.7 %
IGB3,564 7,152 10,716 35.2 %1,658 3,667 5,325 32.5 %
Other474 14 488 1.6 %582 33 615 3.8 %
Total revenues$16,293 $14,174 $30,467 100.0 %$8,379 $7,983 $16,362 100.0 %
% Total revenues53.5 %46.5 %51.2 %48.8 %
Total distributor sales were 37.2% and 40.3% of total OUS revenues for the three and six months ended June 30, 2021 and 27.5% and 32.2% for the three and six months ended June 30, 2020, respectively. Sales in the next largest individual country outside the U.S. were 7.0%-8.0% of total revenues for the three and six months ended June 30, 2021 and 2020.
13

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES
Notes to Unaudited Interim Condensed Consolidated Financial Statements (continued)
(In thousands, except for share data)
The following table represents property, equipment and right-of-use assets based on the physical location of the asset:
June 30, 2021December 31, 2020
(unaudited)
U.S.$1,991 $2,149 
Costa Rica3,492 3,641 
Other341 431 
Total property, equipment and right-of-use assets, net$5,824 $6,221 

14


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report (“Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks, uncertainties and other important factors. In particular, statements, whether express or implied, concerning future operating results or the ability to generate sales, income or cash flow are forward-looking statements. They involve risks, uncertainties and assumptions that are beyond our ability to control or predict, including those discussed in Part II, Item 1A, of this Quarterly Report, such as the continuing effects of the COVID-19 pandemic on our financial condition and results of operations. Given these risks, uncertainties and other important factors, you should not place undue reliance on these forward-looking statements as predictions of future events. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
The following discussion should be read in conjunction with the condensed consolidated financial statements and accompanying notes, and our Annual Report on Form 10-K for the year ended December 31, 2020 filed on February 25, 2021 with the Securities and Exchange Commission ("SEC"). “Apollo,”, Orbera®, OverStitch™, the Apollo logo and other trademarks, service marks and trade names of Apollo are registered and unregistered marks of Apollo Endosurgery, Inc. in the United States and other jurisdictions.

Overview 
We are a medical technology company primarily focused on the development of next-generation, less invasive medical devices to advance gastrointestinal therapeutic endoscopy. We develop and distribute devices that are used by surgeons and gastroenterologists for a variety of procedures related to gastrointestinal conditions including closure of gastrointestinal defects, managing gastrointestinal complications and the treatment of obesity.
Our core products include the OverStitch™ Endoscopic Suturing System, the OverStitch Sx™ Endoscopic Suturing System, X-TackTM Endoscopic HeliX Tacking System (collectively "ESS") and the ORBERA® Intragastric Balloon ("IGB").
We have offices in the United Kingdom and Italy that oversee commercial activities outside the U.S. (“OUS”) and a products manufacturing facility in Costa Rica. All other activities are managed and operated from facilities in Austin, Texas.
Impact of COVID-19 on Our Business
Beginning in early March 2020, the COVID-19 pandemic and the measures imposed to contain this pandemic disrupted our business, financial condition, and results of operations. The United States and other countries implemented a variety of public health interventions to reduce the risk of disease transmission and conserve healthcare resources for addressing the community health needs of COVID-19. This resulted in an unprecedented decline in global healthcare resources available for procedures that use our products. Following sales growth in the months of January and February 2020 that were consistent with management’s pre-COVID-19 expectations, our sales results in the months of March and April 2020 declined commensurate with the global decline in elective procedures and reduced patient access to treatments by shelter in place and social distancing rules, which resulted in cancellation or postponement of procedures that use our products. Beginning in May 2020, our sales began to recover primarily as certain public health interventions implemented by various countries to reduce COVID-19 transmission risks were eased and procedures that use our products increased. Demand for our products and our business continued to recover as hospitals began to accept patients for elective procedures though there can be no assurance that this recovery will continue.
The COVID-19 pandemic remains active and continues to represent uncertainty concerning our sales outlook and risk to our business operations. Business challenges and periodic disruption resulting from COVID-19 will likely continue for the duration of the pandemic, which is uncertain. We cannot assure you that our recent recovery will be indicative of future results or that we will not experience future sales or business disruptions due to COVID-19, including variants, which could be significant. See Part II, Item 1A. Risk Factors—Risks Related to Our Business—Our business will be adversely affected by the effects of the recent COVID-19 outbreak.
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Financial Operations Overview
Revenues
Our principal source of revenues are sales of our endoscopy products. The majority of our sales come from direct markets where sales are made to the final end customers, typically healthcare providers and institutions. In other markets, we sell our products to distributors who resell our products to end users. Revenues between periods will be impacted by several factors, including the continuing COVID-19 pandemic, physician procedures and therapy preferences, patient procedures and therapy preferences, buying patterns of distributors, other market trends, the stability of the average sales price we realize on products and changes in foreign exchange rates used to translate foreign currency denominated sales into U.S. dollars.
Other revenue includes amounts recognized for our digital aftercare support program, manufacturing services, and freight charged to customers.
Cost of Sales
Cost of sales for purchased products consists of the actual purchase price from manufacturers plus an allocation of our internal manufacturing overhead cost. Cost of sales for products we manufacture include raw materials, labor, and manufacturing overhead. Raw materials used in our manufacturing activity are generally not subject to substantial commodity price volatility, and most of our manufacturing costs are incurred in U.S. dollars. Cost of sales also include royalties, shipping, excess and obsolete inventory charges, inspection and related costs incurred in making our products available for sale or use. In periods of reduced production volume, unabsorbed manufacturing overhead costs are charged to expense when incurred.
Manufacturing overhead as a percentage of revenue between periods can fluctuate as a result of manufacturing rates and the degree to which manufacturing overhead is allocated to production during the period. We expect to continue to improve gross margins as we complete certain identified gross margin improvement projects and improve capacity utilization of our manufacturing facility.
Sales and Marketing Expense
Sales and marketing expense primarily consists of salaries, commissions, benefits and other related costs, including stock-based compensation, for personnel employed in sales, marketing and medical education. In addition, sales and marketing expense includes costs associated with physician training, industry events, advertising and other promotional activities.
General and Administrative Expense
General and administrative expense primarily consists of salaries, benefits and other related costs, including stock-based compensation, for personnel employed in corporate management, finance, legal, compliance, information technology and human resources. General and administrative expense also includes facility cost, insurance, audit fees, legal fees, bad debt expense and costs to develop and maintain our intellectual property portfolio.
Research and Development Expense
Research and development expense includes product development, clinical trial costs, quality and regulatory compliance, consulting services, outside prototyping services, outside research activities, materials and other costs associated with development of our products. Research and development expense also includes salaries, benefits and other related costs, including stock-based compensation, for personnel dedicated to these activities. Research and development expense may fluctuate between periods depending on the activity associated with our various product development and clinical obligations.
Amortization of Intangible Assets
Definite-lived intangible assets primarily consist of customer relationships, product technology, trade names, patents, trademarks and capitalized software. Intangible assets are amortized over the asset's estimated useful life.
Critical Accounting Policies and Estimates 
The preparation of financial statements and related disclosures is in conformity with U.S. generally accepted accounting principles and the Company's discussion and analysis of its financial condition and operating results require the Company's management to make judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical evidence and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.
Note 2, "Significant Accounting Policies" in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 (the "2020 Form 10-K"), and
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"Critical Accounting Policies and Estimates" in Part II, Item 7 of the 2020 Form 10-K describe the significant accounting policies and methods used in the preparation of the Company's condensed consolidated financial statements. There have been no material changes to the Company's critical accounting policies and estimates since the 2020 Form 10-K.
Non-GAAP Financial Measures
To supplement our financial results we are providing a non-GAAP financial measure, product sales percentage change in constant currency, which removes the impact of changes in foreign currency exchange rates that affect the comparability and trend of our product sales. Product sales percentage change in constant currency is calculated by translating current foreign currency sales using last year's exchange rate. This supplemental measure of our performance is not required by, and is not determined in accordance with GAAP.
We believe the non-GAAP financial measure included herein is helpful in understanding our current financial performance. We use this supplemental non-GAAP financial measure internally to understand, manage and evaluate our business, and make operating decisions. We believe that making non-GAAP financial information available to investors, in addition to GAAP financial information, may facilitate more consistent comparisons between our performance over time with the performance of other companies in the medical device industry, which may use similar financial measures to supplement their GAAP financial information. However, our non-GAAP financial measure is not meant to be considered in isolation or as a substitute for the comparable GAAP metric.
Results of Operations
Comparison of the three and six months ended June 30, 2021 and 2020
Three Months Ended
June 30, 2021
Three Months Ended
June 30, 2020
Dollars% of RevenuesDollars% of Revenues
Revenues$16,610 100.0 %$5,644 100.0 %
Cost of sales7,487 45.1 %3,215 57.0 %
Gross margin9,123 54.9 %