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 endedDecember 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 ofApollo Endosurgery, Inc. inthe 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). InDecember 2018 , we divested our Surgical product line, which consisted of the Lap-Band® System and related laparoscopic accessories. We have offices in theUnited Kingdom andItaly that oversee commercial activities outside theU.S. and a products manufacturing facility inCosta Rica . All other activities are managed and operated from facilities inAustin, 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 . 15 -------------------------------------------------------------------------------- COVID-19 Response InMarch 2020 , theWorld Health Organization declared that the COVID-19 outbreak had reached pandemic status and a number of countries, particularly countries inEurope that comprise the majority of our OUS sales andthe 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 personnelwho 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 onMarch 26, 2020 , we reduced 2019 cash bonuses and implemented reductions in compensation across our workforce. EffectiveApril 20, 2020 , we furloughed 57U.S. employees and reduced the employment arrangements of an additional 34 employees outsidethe 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, effectiveApril 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. OnApril 27, 2020 , the Company was granted a Loan of$2.8 million under theSmall Business Administration's ("SBA") Paycheck Protection Program ("PPP") established under the CARES Act. The Loan matures onApril 27, 2022 and bears interest at a rate of 1.0% per annum with equal interest and principal payments beginning onNovember 27, 2020 . Divestiture of the Surgical Product Line InDecember 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 inDecember 2020 and$3.0 million remains payable inDecember 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 ofDecember 31, 2019 . We remain obligated to perform manufacturing services throughDecember 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 distributorswho 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 intoU.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. 16 -------------------------------------------------------------------------------- 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 inU.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 withU.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. 17 -------------------------------------------------------------------------------- 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 endedJune 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) % 18
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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 EndedJune 30, 2020 June 30, 2019 % Increase/ (Decrease)U.S. OUS Total RevenuesU.S. OUS Total RevenuesU.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) OtherU.S. revenue includes$0.2 million and$0.6 million of transition and manufacturing services provided to ReShape for the three months endedJune 30, 2020 and 2019, respectively. Six Months Ended Six Months EndedJune 30, 2020 June 30, 2019 % Increase/ (Decrease)U.S. OUS Total RevenuesU.S. OUS Total RevenuesU.S. OUS Total Revenues ESS$ 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 endedJune 30, 2020 were$5.6 million , compared to$14.3 million for the three months endedJune 30, 2019 , a decrease of 60.4%. Total revenues for the six months endedJune 30, 2020 were$16.4 million , compared to$27.5 million for the six months endedJune 30, 2019 , a decrease of 40.4%. The decline in revenues for the three and six months endedJune 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 endedJune 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 ofJune 2020 approximated 90% ofJune 2019 month sales; however, the rate of recovery of OUS markets has been slower to date than in theU.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 endedJune 30, 2020 from$12.2 million in the same period of 2019 and$7.3 million , or 31.6%, for the six months endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2020 and$0.6 million and$1.1 million for the same periods in 2019, respectively, of transition and manufacturing services provided to ReShape. We remain obligated to perform manufacturing services throughDecember 2020 . Cost of Sales Costs of product sales for the periods shown were as follows: Three Months Ended Three Months Ended June 30, 2020 June 30, 2019 Dollars % Total Revenues Dollars % Total Revenues Materials, labor and purchased goods$ 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 % 20
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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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2020 when compared to the same periods in 2019, respectively. Settlement gain. Settlement gain of$5.6 million for the six months endedJune 30, 2019 resulted from the resolution of a dispute withAllergan 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 endedJune 30, 2020 was$4.3 million and$11.0 million compared to$7.2 million and$9.7 million for three and six months endedJune 30, 2019 , respectively. Excluding the settlement gain recorded in the six months endedJune 30, 2019 of$5.6 million , our loss from operations decreased by$4.4 million , or 28.5%, in the six months endedJune 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 endedJune 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 inU.S. dollars payable by our foreign subsidiaries. During the three and six months endedJune 30, 2020 , unrealized exchange rate losses on these intercompany loans were$0.6 million and$2.8 million for the three and six months endedJune 30, 2020 compared to unrealized losses of$1.3 million and$0.4 million for the three and six months endedJune 30, 2019 . 21 -------------------------------------------------------------------------------- Liquidity and Capital Resources We have experienced operating losses since inception and have an accumulated deficit of$266.7 million as ofJune 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. InJuly 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 InMarch 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 onSeptember 1, 2023 , with principal payments beginning inMarch 2021 , and bears interest at the greater of LIBOR or 1.35575%, plus 7.5%. Interest only is payable in arrears untilMarch 1, 2021 (orJuly 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 beforeMarch 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 inMarch 2020 ,April 2020 , andJuly 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 endedDecember 31, 2019 . Convertible Senior Debt InAugust 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 onJanuary 1 andJuly 1 of each year, beginning onJanuary 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 onAugust 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 ofJune 30, 2020 ,$20.0 million aggregate principal amount was outstanding under the Convertible Debt. InJuly 2020 ,$0.6 million of interest due for the six-month period endedJune 30, 2020 automatically accreted into principal outstanding under the Convertible Debt. CARES Act OnMarch 27, 2020 , the CARES Act was signed into law providing certain economic aid packages for qualified entities. InApril 2020 , we were granted a loan of$2.8 million under the PPP established under the CARES Act. The Loan matures onApril 27, 2022 and bears interest at a rate of 1.0% per annum with equal interest and principal payments beginning onNovember 27, 2020 . 22 -------------------------------------------------------------------------------- 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 ofJune 30, 2020 , we have incurred approximately$2.4 million in qualifying expenses; however, we are not able to determine the amount, if any, that might be forgiven. OnJune 5, 2020 , the PPP Flexibility Act was signed into law which, among other things, (i) extended the covered period from 8 weeks after the date of PPP funding to 24 weeks after the date of PPP funding, (ii) reduced the required amount of payroll expenditures from 75% to 60%, (iii) removed the prior ban on borrowers taking advantage of payroll tax deferral after loan forgiveness and (iv) extended the repayment deferral period to be the earlier of (a) the date forgiveness funds are received or (b) 10 months from the end of the covered period. We are evaluating the impact of these changes on the PPP Loan, including the payment date and the amounts available for forgiveness. The CARES Act also includes provisions to allow for the deferral of the employer portion of payroll taxes during the period ofMarch 27, 2020 throughDecember 31, 2020 . The payroll tax deferrals are required to be paid over two years with half of the amount to be paid byDecember 31, 2021 and the other half byDecember 31, 2022 . We began to exercise this deferral inJuly 2020 . Cash Flows The following table provides information regarding our cash flows:
Six Months Ended
2020 2019 Net cash used in operating activities$ (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 endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2020 was primarily related to the proceeds received from the PPP Loan granted inApril 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 endedJune 30, 2019 was primarily related to the net proceeds received from the Term Loan Facility refinancing. 23
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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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