APOLLO ENDOSURGERY, INC.
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, 2019 filed on March 26,
2020 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 design, development
and commercialization of innovative 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 defect and complication management or bariatric (weight loss)
intervention.
Our core products are the OverStitch Endoscopic Suturing System ("ESS") and
Intragastric Balloon ("IGB") (most often branded as Orbera). In December 2018 ,
we divested our Surgical product line, which consisted of the Lap-Band® System
and related laparoscopic accessories.
We have 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 .
Impact of COVID-19 on Our Business
The ongoing COVID-19 pandemic has adversely impacted our sales levels, business
operations and results of operations due to significantly decreased procedures
being performed that use our products across our markets and the broader
economic contraction resulting from the pandemic. While the ultimate economic
impact of the COVID-19 pandemic is highly uncertain, we expect our sales levels,
business operations and results from operations will continue to be adversely
impacted to varying degrees for as long as the COVID-19 pandemic and related
reductions in procedures that use our products persist. See Part II, Item 1A.
Risk Factors-Risks Related to Our Business-Our business has been and will
continue to be adversely affected by the ongoing COVID-19 outbreak .
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COVID-19 Response
In March 2020 , the World Health Organization declared that the COVID-19 outbreak
had reached pandemic status and a number of countries, particularly countries in
Europe that comprise the majority of our OUS sales and the United States ,
implemented a number 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 to be utilized for elective or deferrable
procedures, including those that use our products. Following sales growth in the
months of January and February that were consistent with management's
pre-COVID-19 expectations, our sales results in the months of March and April
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, including those
that use our products. Our sales personnel who deliver in-person customer
support and generate additional business with new customers and facilities were
restricted from accessing our customers for these same reasons. Our sales began
to recover in the months of May and June primarily as certain public health
interventions implemented by various countries were lifted. However, as of the
end of the second quarter of 2020, we have not reached the level of product
sales prior to COVID-19, and we cannot predict whether the recovery we have
experienced thus far will be sustained for so long as the pandemic continues and
our markets continue to have risk of further COVID-19 related healthcare
resource diversion, including as a result of government mandates.
Due to the business disruptions stemming directly from the COVID-19 pandemic, we
have taken several actions to preserve our liquidity. As described in Item 9B
of our Annual Report on Form 10-K for the year ended December 31, 2019 filed
on March 26, 2020 , we reduced 2019 cash bonuses and implemented reductions in
compensation across our workforce. Effective April 20, 2020 , we furloughed 57
U.S. employees and reduced the employment arrangements of an additional 34
employees outside the United States . While our intention is for the furlough of
employees to be temporary, the adopted furlough program does not have a specific
end date, and we will continue to evaluate business conditions to determine when
to recall individual or groups of furloughed employees. To date, 16 employees
have returned from furloughed status based on improving customer demand and
business needs. In addition, we implemented a $100,000 salary cap, effective
April 16, 2020 , for all employees. Our intention is for the reductions in salary
to be temporary; however, the salary reductions continue at this time due to the
uncertain duration of the current COVID-19 business disruption.
The objective of the above cost reduction actions is to preserve liquidity with
the goal of keeping our cash use during this period consistent with our
experience prior to the pandemic. In addition, we have maintained an ability to
deliver essential customer support and continue to invest in critical growth
projects including the development of our new lower GI suturing product and the
ongoing MERIT trial and other reimbursement initiatives.
On April 27, 2020 , the Company was granted a Loan of $2.8 million under the
Small Business Administration's ("SBA") Paycheck Protection Program ("PPP")
established under the CARES Act. The Loan matures on April 27, 2022 and bears
interest at a rate of 1.0% per annum with equal interest and principal payments
beginning on November 27, 2020 .
Divestiture of the Surgical Product Line
In December 2018 , we entered into an Asset Purchase Agreement and sold our
Surgical product line to ReShape Lifesciences Inc. ("ReShape"). Our goal with
this transaction was to increase our focus on our Endoscopy products and
monetize a non-strategic asset.
ReShape agreed to pay $17.0 million in cash, of which $2.0 million remains
payable in December 2020 and $3.0 million remains payable in December 2021 .
Upon completion of the ReShape transaction, the parties entered into a
transition services agreement, supply agreement and distribution agreements. All
transition and distribution services were completed as of December 31, 2019 . We
remain obligated to perform manufacturing services through December 2020 .
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. 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, 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.
Under the ReShape distribution agreement, we agreed to sell Surgical products to
customers OUS up to one year. Product sales in 2019 include sales in these
serviced markets.
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Other revenue includes amounts recognized for our digital aftercare support
program, transition and supply services we rendered to ReShape and freight
charged to customers.
Cost of Sales
Our ESS products, representing the majority of our Endoscopy product sales, have
historically been purchased from third-party manufacturers, and our cost of
sales for these products has consisted of the actual purchase price from these
manufacturers plus an allocation of our internal overhead cost. Cost of sales
for products which we manufacture includes 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 includes
excess and obsolete inventory charges, royalties, shipping, 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.
Our gross margin comparability between periods has been impacted by the shift in
our revenue mix from Surgical to Endoscopy products. Demand for our divested
Surgical products historically were declining but Surgical product sales
realized a higher gross margin compared to our Endoscopy products, which have
been growing in demand. In addition, 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. Comparability of cost of sales and gross margin between periods could
also be affected by changes in inventory valuation allowances related to
obsolete or excess inventory. We expect 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 our sales, marketing and medical education departments. In
addition, our 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 the corporate management, finance, legal, compliance, information technology
and human resource departments. General and administrative expense also includes
facilities 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, depreciation and
other costs associated with development of our products. Research and
development expense also includes compensation and stock-based compensation
expense 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 and 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,
2019 (the "2019 Form 10-K"), and "Critical Accounting Policies and Estimates"
in Part II, Item 7 of the 2019 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 2019 Form 10-K.
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Non-GAAP Financial Measures
To supplement our financial results we are providing a non-GAAP financial
measure, Endoscopy 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 Endoscopy product sales. Endoscopy 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, 2020 and 2019
Three Months Ended Three Months Ended
June 30, 2020 June 30, 2019
Dollars % of Revenues Dollars % of Revenues
Revenues $ 5,644 100.0 % $ 14,254 100.0 %
Cost of sales 3,215 57.0 % 7,088 49.7 %
Gross margin 2,429 43.0 % 7,166 50.3 %
Operating expenses:
Sales and marketing 2,265 40.1 % 7,803 54.7 %
General and administrative 2,157 38.2 % 3,343 23.5 %
Research and development 1,815 32.2 % 2,689 18.9 %
Amortization of intangible assets 490 8.7 % 528 3.7 %
Total operating expenses 6,727 119.2 % 14,363 100.8 %
Loss from operations (4,298) (76.2) % (7,197) (50.5) %
Interest expense, net 1,316 23.3 % 669 4.7 %
Other expense, net 633 11.2 % 908 6.4 %
Net loss before income taxes (6,247) (110.7) % (8,774) (61.6) %
Income tax expense 6 0.1 % - - %
Net loss $ (6,253) (110.8) % $ (8,774) (61.6) %
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Six Months Ended Six Months Ended
June 30, 2020 June 30, 2019
Dollars % of Revenues Dollars % of Revenues
Revenues $ 16,362 100.0 % $ 27,465 100.0 %
Cost of sales 8,296 50.7 % 13,058 47.5 %
Gross margin 8,066 49.3 % 14,407 52.5 %
Operating expenses:
Sales and marketing 8,595 52.5 % 15,500 56.4 %
General and administrative 5,496 33.6 % 7,060 25.7 %
Research and development 3,962 24.2 % 6,117 22.3 %
Amortization of intangible assets 986 6.0 % 1,081 3.9 %
Settlement gain - - % (5,609) (20.4) %
Total operating expenses 19,039 116.3 % 24,149 87.9 %
Loss from operations (10,973) (67.0) % (9,742) (35.4) %
Interest expense, net 2,560 15.6 % 1,628 5.9 %
Other expense, net 2,927 17.9 % 157 0.6 %
Net loss before income taxes (16,460) (100.5) % (11,527) (41.9) %
Income tax expense 49 0.3 % 51 0.2 %
Net loss $ (16,509) (100.8) % $ (11,578) (42.1) %
Revenues
Product sales by product group and geographic market for the periods shown were
as follows:
Three Months Ended Three Months Ended
June 30, 2020 June 30, 2019 % Increase/ (Decrease)
U.S. OUS Total Revenues U.S. OUS Total Revenues U.S. OUS Total Revenues
ESS $ 2,384 $ 1,206 $ 3,590 $ 3,780 $ 3,899 $ 7,679 (36.9) % (69.1) % (53.2) %
IGB 760 1,039 1,799 1,458 3,056 4,514 (47.9) % (66.0) % (60.1) %
Total Endoscopy 3,144 2,245 5,389 5,238 6,955 12,193 (40.0) % (67.7) % (55.8) %
Surgical - - - - 1,330 1,330 - % (100.0) % (100.0) %
Other (1) 255 - 255 721 10 731 (64.6) % (100.0) % (65.1) %
Total revenues $ 3,399 $ 2,245 $ 5,644 $ 5,959 $ 8,295 $ 14,254 (43.0) % (72.9) % (60.4) %
% Total revenues 60.2 % 39.8 % 41.8 % 58.2 %
(1) Other U.S. revenue includes $0.2 million and $0.6 million of transition and
manufacturing services provided to ReShape for the three months ended June 30,
2020 and 2019, respectively.
Six Months Ended Six Months Ended
June 30, 2020 June 30, 2019 % Increase/ (Decrease)
U.S. OUS Total Revenues U.S. OUS Total Revenues U.S. OUS Total Revenues
ESS $ 6,139 $ 4,283 $ 10,422 $ 6,787 $ 7,390 $ 14,177 (9.5) % (42.0) % (26.5) %
IGB 1,658 3,667 5,325 2,917 5,919 8,836 (43.2) % (38.0) % (39.7) %
Total Endoscopy 7,797 7,950 15,747 9,704 13,309 23,013 (19.7) % (40.3) % (31.6) %
Surgical - - - - 3,030 3,030 - % (100.0) % (100.0) %
Other (1) 582 33 615 1,404 18 1,422 (58.5) % 83.3 % (56.8) %
Total revenues $ 8,379 $ 7,983 $
16,362
(24.6) % (51.2) % (40.4) % % Total revenues 51.2 % 48.8 % 40.4 % 59.6 % (1) OtherU.S. revenue includes$0.3 million and$1.1 million of transition and manufacturing services provided to ReShape for the six months endedJune 30, 2020 and 2019, respectively. 19 -------------------------------------------------------------------------------- Non-GAAP Endoscopy product sales percentage change in constant currency were as follows: Three Months Ended Six Months Ended June 30, 2020 June 30, 2020 %
Increase/Decrease in Constant
% Increase/Decrease in Constant Currency Currency
OUS Total Revenues OUS Total Revenues
ESS (68.3) % (52.9) % (39.6) % (25.2) %
IGB (65.0) % (59.5) % (36.1) % (38.4) %
Total Endoscopy (66.9) % (55.3) % (38.0) % (30.3) %
Total revenues for the three months ended June 30, 2020 were $5.6 million ,
compared to $14.3 million for the three months ended June 30, 2019 , a decrease
of 60.4%. Total revenues for the six months ended June 30, 2020 were $16.4
million , compared to $27.5 million for the six months ended June 30, 2019 , a
decrease of 40.4%. The decline in revenues for the three and six months ended
June 30, 2020 was primarily due to the COVID-19 pandemic and related
shelter-in-place restrictions and diversion of healthcare resources in our
markets. In addition, total revenue declined $1.7 million and $3.8 million for
the three and six months ended June 30, 2020 , respectively as we completed
certain of our transition service obligations following the divestiture of the
Surgical product line during 2019.
Following sales growth in the months of January and February that were
consistent with management's pre-COVID-19 expectations, our sales results in the
months of March and April declined commensurate with the global decline in
elective procedures and began to recover in the months of May and June, as a
result of the lifting of certain public health interventions implemented by
various countries. U.S. sales in the month of June 2020 approximated 90% of June
2019 month sales; however, the rate of recovery of OUS markets has been slower
to date than in the U.S. , and we have less visibility into underlying procedure
trends in distributor markets. Total Endoscopy product sales decreased $6.8
million , or 55.8%, for the three months ended June 30, 2020 from $12.2 million
in the same period of 2019 and $7.3 million , or 31.6%, for the six months ended
June 30, 2020 from $23.0 million in the same period of 2019. Direct market
Endoscopy product sales accounted for approximately 88.6% and 83.7% of total
Endoscopy product sales for the three and six months ended June 30, 2020 ,
compared to 79.1% and 79.8% for the same periods of 2019, respectively.
Total ESS product sales decreased $4.1 million and $3.8 million , or 53.2% and
26.5%, for the three and six months ended June 30, 2020 , when compared to the
same periods of 2019, respectively. U.S. ESS product sales decreased $1.4
million and $0.6 million , or 36.9% and 9.5%, for the three and six months ended
June 30, 2020 , when compared to the same periods in 2019, respectively. OUS ESS
product sales decreased $2.7 million and $3.1 million , or 69.1% and 42.0%, for
the three and six months ended June 30, 2020 when compared to the same periods
of 2019. Decreased ESS product sales worldwide is due to the impact of the
COVID-19 pandemic described above.
Total IGB product sales decreased $2.7 million and $3.5 million , or 60.1% and
39.7%, for the three and six months ended June 30, 2020 , when compared to the
same period of 2019, respectively, primarily due to the impact of the COVID-19
pandemic described above. U.S. IGB product sales decreased $0.7 million and $1.3
million , or 47.9% and 43.2%, while OUS IGB product sales decreased $2.0 million
and $2.3 million , or 66.0% and 38.0%, for the three and six months ended June
30, 2020 , when compared to the same period in 2019, respectively.
Included in other revenues is $0.2 million and $0.3 million for the three and
six months ended June 30, 2020 and $0.6 million and $1.1 million for the same
periods in 2019, respectively, of transition and manufacturing services provided
to ReShape. We remain obligated to perform manufacturing services through
December 2020 .
Cost of Sales
Costs of product sales for the periods shown were as follows:
Three Months Ended Three Months Ended
June 30, 2020 June 30, 2019
Dollars % Total Revenues Dollars % Total Revenues
Materials, labor and purchased goods $ 1,778 31.5 % $ 5,120 35.9 %
Overhead 1,148 20.3 % 1,242 8.7 %
Other indirect costs 289 5.2 % 726 5.1 %
Total cost of sales $ 3,215 57.0 % $ 7,088 49.7 %
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Six Months Ended Six Months Ended
June 30, 2020 June 30, 2019
Dollars % Total Revenues Dollars % Total Revenues
Materials, labor and purchased goods $ 5,151 31.5 % $ 8,773 31.9 %
Overhead 2,287 14.0 % 2,757 10.0 %
Other indirect costs 858 5.2 % 1,528 5.6 %
Total cost of sales $ 8,296 50.7 % $ 13,058 47.5 %
Gross Margin
Gross margin as a percentage of revenue was 43.0% and 49.3% for the three and
six months ended June 30, 2020 , compared to 50.3% and 52.5% for the same periods
of 2019, respectively. The decline in gross margin percentage is primarily due
to $0.5 million of unabsorbed overhead costs due to lower production volumes
charged to cost of sales for the three months ended June 30, 2020 as we reduced
our manufacturing activities in order to preserve liquidity in response to the
anticipated impact of the COVID-19 pandemic. Excluding these unabsorbed overhead
costs, Endoscopy product gross margin was 50.7% and 51.5% for the three and six
months ended June 30, 2020 , compared to 50.1% and 50.4% for the same periods of
2019.
Operating Expenses
Sales and Marketing Expense. Sales and marketing expense decreased $5.5 million
and $6.9 million for the three and six months ended June 30, 2020 when compared
to the same periods in 2019, respectively, as a result of the cost saving
actions we initiated in response to the COVID-19 pandemic.
General and Administrative Expense. General and administrative expense decreased
$1.2 million and $1.6 million for the three and six months ended June 30, 2020
when compared to the same periods of 2019, respectively, primarily due to lower
audit fees during the first quarter and as a result of the cost saving actions
we initiated in response to the COVID-19 pandemic.
Research and Development Expense. Research and development expense decreased
$0.9 million and $2.2 million for the three and six months ended June 30, 2020
when compared to the same periods for 2019, respectively, primarily due to lower
clinical trial costs during the first quarter as enrollment milestones were
achieved in 2019 for clinical studies that we are funding and as a result of the
cost saving actions we initiated in response to the COVID-19 pandemic.
Amortization of Intangible Assets. Amortization of intangible assets remained
unchanged and decreased $0.1 million for the three and six months ended June 30,
2020 when compared to the same periods in 2019, respectively.
Settlement gain. Settlement gain of $5.6 million for the six months ended June
30, 2019 resulted from the resolution of a dispute with Allergan Inc. related to
amounts previously charged for inventory purchases and transition services
provided through 2016.
Loss from Operations
Loss from operations for the three and six months ended June 30, 2020 was $4.3
million and $11.0 million compared to $7.2 million and $9.7 million for three
and six months ended June 30, 2019 , respectively. Excluding the settlement gain
recorded in the six months ended June 30, 2019 of $5.6 million , our loss from
operations decreased by $4.4 million , or 28.5%, in the six months ended June 30,
2020 as our cost saving actions initiated in the second quarter of 2020 in
response to the COVID-19 pandemic offset the reduction in gross margin due to
lower revenues.
Other Expenses
Interest Expense, net. Net interest expense increased by $0.6 million and $0.9
million for the three and six months ended June 30, 2020 when compared to the
same periods in 2019, respectively, primarily due to non-cash interest on the
Convertible Debt and lower interest income.
Other Expense, net. Other expense primarily consists of realized and unrealized
foreign exchange losses on short-term intercompany loans denominated in U.S.
dollars payable by our foreign subsidiaries. During the three and six months
ended June 30, 2020 , unrealized exchange rate losses on these intercompany loans
were $0.6 million and $2.8 million for the three and six months ended June 30,
2020 compared to unrealized losses of $1.3 million and $0.4 million for the
three and six months ended June 30, 2019 .
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Liquidity and Capital Resources
We have experienced operating losses since inception and have an accumulated
deficit of $266.7 million as of June 30, 2020 . To date, we have funded our
operating losses and acquisitions through equity offerings and the issuance of
debt instruments. We have occasionally been out of compliance with our debt
covenants which have resulted in amendments to the terms of our debt
instruments. Our ability to fund future operations and meet debt covenant
requirements will depend upon our level of future revenue and operating cash
flow and our ability to access additional funding through either equity
offerings, issuances of debt instruments or both.
In July 2020 , we issued shares of our common stock and pre-funded warrants for
aggregate gross proceeds of approximately $25.0 million and entered into the
Sixth Amendment to our loan and security agreement with Solar Capital, Ltd. that
waives the minimum revenue covenant requirements for the remainder of 2020 and
also decreased our minimum liquidity requirement from $20.0 million to $12.5
million .
Management believes its existing cash and cash equivalents, product revenues,
and available debt and equity financing arrangements will be sufficient to meet
covenant, liquidity and capital requirements for at least the next twelve
months, although there can be no assurances that we will be able to do so.
Management periodically evaluates our liquidity requirements, alternative uses
of capital, capital needs and available resources. As a result of this process,
we have in the past, and may in the future, explore alternatives to finance our
business plan, including, but not limited to, sales of common stock, preferred
stock, convertible securities or debt financings, reduction of planned
expenditures, or other sources. There are no assurances that such additional
funding will be obtained, including due to the degree or duration that the
COVID-19 pandemic will negatively impact our business, sales levels and
liquidity.
Term Loan Facility
In March 2019 , we entered into a term loan facility agreement with Solar
Capital, Ltd. to borrow $35.0 million (the "Credit Agreement"). The Credit
Agreement matures on September 1, 2023 , with principal payments beginning in
March 2021 , and bears interest at the greater of LIBOR or 1.35575%, plus 7.5%.
Interest only is payable in arrears until March 1, 2021 (or July 1, 2021 if
certain revenue milestones are achieved). Principal payments are due on a
straight-line basis after the interest-only period concludes. An additional 4.9%
of the outstanding amount will be due at end of the loan term and an additional
4.5% fee of the Term Loan funded amount will be due at the earlier of an Exit
Event (as defined in the Credit Agreement) or if we achieve trailing
twelve-month revenue of $100.0 million before March 15, 2029 . The Credit
Agreement provides that we may borrow an additional $5.0 million upon our
request, subject to further credit approval. The Credit Agreement includes the
customary affirmative covenants, negative covenants and financial covenants,
including a minimum liquidity requirement and minimum product revenues. We used
$22.4 million of the proceeds of the Credit Agreement to repay our previous
senior secured credit agreement in full, including interest.
The Credit Agreement has been amended in March 2020 , April 2020 , and July 2020 .
These amendments, among other things, (i) waives the trailing six-month
Endoscopy revenue requirements through the end of 2020, (ii) reduces the minimum
liquidity requirement to $12.5 million , (iii) establishes a minimum LIBOR
interest rate, (iv) increases the final fee due at the end of the loan term to
5.0% from 4.9%, (v) permitted us to enter into a loan under the SBA's PPP
established under the Coronavirus Aid, Relief, and Economic Security ("CARES")
Act, and (vi) waived the financial statement covenant default associated with
the going concern opinion of our independent registered public accounting firm
for the year ended December 31, 2019 .
Convertible Senior Debt
In August 2019 , we issued $20.0 million aggregate principal amount of
Convertible Debt. Interest on the Convertible Debt will be payable semi-annually
in shares of our common stock on January 1 and July 1 of each year, beginning on
January 1, 2020 , 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 our common stock for the 10
consecutive trading days immediately preceding the applicable interest payment
date. The Convertible Debt will mature on August 12, 2024 unless earlier
converted or repurchased in accordance with its terms.
The Convertible Debt converts, at the option of the holders, into shares of our
common stock at an initial conversion price of $3.25 per share, subject to
adjustment. If the VWAP of our common stock has been at least $9.75 (subject to
adjustment) for at least 20 trading days during any 30 consecutive trading day
period, we 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.
As of June 30, 2020 , $20.0 million aggregate principal amount was outstanding
under the Convertible Debt. In July 2020 , $0.6 million of interest due for the
six-month period ended June 30, 2020 automatically accreted into principal
outstanding under the Convertible Debt.
CARES Act
On March 27, 2020 , the CARES Act was signed into law providing certain economic
aid packages for qualified entities. In April 2020 , we were granted a loan of
$2.8 million under the PPP established under the CARES Act. The Loan matures on
April 27, 2022 and bears interest at a rate of 1.0% per annum with equal
interest and principal payments beginning on November 27, 2020 .
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Under the terms of the CARES Act, PPP loan recipients can apply for and be
granted forgiveness for all or a portion of the loan granted under the PPP, with
such forgiveness to be determined, subject to limitations, based on the use of
the loan proceeds for payment of payroll costs, rent, utilities, and interest on
debt. The terms of any forgiveness may also be subject to further requirements
in any regulations and guidelines the SBA may adopt. As of June 30, 2020 , we
have incurred approximately $2.4 million in qualifying expenses; however, we are
not able to determine the amount, if any, that might be forgiven.
On June 5, 2020 , the PPP Flexibility Act was signed into law which, among other
things, (i) extended the covered period from 8 weeks after the date of PPP
funding to 24 weeks after the date of PPP funding, (ii) reduced the required
amount of payroll expenditures from 75% to 60%, (iii) removed the prior ban on
borrowers taking advantage of payroll tax deferral after loan forgiveness and
(iv) extended the repayment deferral period to be the earlier of (a) the date
forgiveness funds are received or (b) 10 months from the end of the covered
period. We are evaluating the impact of these changes on the PPP Loan, including
the payment date and the amounts available for forgiveness.
The CARES Act also includes provisions to allow for the deferral of the employer
portion of payroll taxes during the period of March 27, 2020 through December
31, 2020 . The payroll tax deferrals are required to be paid over two years with
half of the amount to be paid by December 31, 2021 and the other half by
December 31, 2022 . We began to exercise this deferral in July 2020 .
Cash Flows
The following table provides information regarding our cash flows:
Six Months Ended
2020 2019
Net cash used in operating activities $ (13,272) $ (12,727)
Net cash used in investing activities (458) (458)
Net cash provided by financing activities 2,585 12,118
Effect of exchange rate changes on cash (67) (11)
Net change in cash, cash equivalents and restricted cash $ (11,212) $ (1,078)
Operating Activities
Cash used in operating activities of $13.3 million for the six months ended June
30, 2020 was primarily the result of a net loss of $16.5 million offset by
non-cash items of $6.8 million , primarily related to depreciation, amortization,
foreign currency on intercompany loans, non-cash interest, and stock based
compensation. Net loss, after adjustment for non-cash items, improved $3.9
million compared to the same period in 2019 due to lower operating expenses,
primarily due to cost saving actions we initiated to preserve our liquidity
during the COVID-19 pandemic, which offset reduced gross margin. Additionally,
cash used by operating assets and liabilities of $3.5 million related to working
capital changes primarily related to accounts receivable, inventory, accounts
payable and accrued expenses.
Cash used in operating activities of $12.7 million for the six months ended June
30, 2019 was primarily the result of a net loss of $11.6 million plus non-cash
items of $2.0 million primarily related to the settlement gain of $5.6 million ,
depreciation, amortization, foreign currency on intercompany loans, and stock
based compensation. Additionally, cash provided by operating assets and
liabilities of $0.9 million related to working capital changes primarily related
to inventory, accounts payable and accrued expenses.
Investing Activities
Cash used in investing activities of $0.5 million for both the six months ended
June 30, 2020 and 2019 were primarily related to equipment purchases associated
with our product development and gross margin improvement projects, as well as
ongoing investments in our intellectual property portfolio.
Financing Activities
Cash provided by financing activities of $2.6 million for the six months ended
June 30, 2020 was primarily related to the proceeds received from the PPP Loan
granted in April 2020 , offset by the payment of financing costs associated with
the Fourth and Fifth Amendments to our Credit Agreement.
Cash provided by financing activities of $12.1 million for the six months ended
June 30, 2019 was primarily related to the net proceeds received from the Term
Loan Facility refinancing.
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Future Funding Requirements As ofJune 30, 2020 , we had cash, cash equivalents and restricted cash balances totaling$19.7 million . With the additional$25.0 million of equity raised inJuly 2020 , we believe our existing cash and cash equivalents, product revenues, and available debt and equity financing arrangements will be sufficient to meet covenant, liquidity and capital requirements for at least the next twelve months, although there can be no assurances that we will be able to do so. Any future capital requirements will depend on many factors including market acceptance of our products, the costs of our research and development activities, the cost and timing of additional regulatory clearance and approvals, the cost and timing of identified gross margin improvement projects, the cost and timing of clinical programs, the ability to maintain covenant compliance with our lending facility, and the costs and timing of sales, marketing, distribution and manufacturing activities. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition could be adversely affected. Off-balance Sheet Arrangements We do not have any off-balance sheet arrangements as defined by rules enacted by theU.S. Securities and Exchange Commission ("SEC"). Recent Accounting Pronouncements See Note 2(c) to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report for a discussion of recently enacted accounting pronouncements.
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