On March 1, 2018 Apollo Endosurgery, Inc. ("Apollo") (Nasdaq: APEN), a leader in less invasive medical devices for bariatric and gastrointestinal procedures, reported financial results for the fourth quarter and year ended December 31, 2017 (Press release, Lpath, MAR 1, 2018, View Source [SID1234524307]).

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Fourth Quarter 2017 Highlights
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GAAP total revenues increased 5% over the fourth quarter of 2016
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Non-GAAP adjusted total revenues, which excludes U.S. Orbera starter kit sales, increased 9% over the fourth quarter of 2016
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Total Endo-bariatric sales of $9.8 million, up 29% over the fourth quarter of 2016
Full Year 2017 Highlights
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GAAP total revenues of $64.3 million in 2017 compared to $64.7 million in 2016
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Non-GAAP adjusted total revenues, which excludes U.S. Orbera starter kit sales, increased 5% over 2016
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Endo-bariatric sales of $35.9 million, up 13% over 2016
Todd Newton, CEO of Apollo, said, "The fourth quarter marks our second consecutive quarter of consolidated total revenue growth on the sales of our Endo-bariatric products especially in our international markets. Demand for OverStitch was especially strong during the fourth quarter in all markets as the treatments possible with this new technology gained physician adoption. Our Endo-bariatric product sales are now 60% of our total sales and we look to build on this momentum in 2018."
Fourth Quarter 2017 Results
Total revenues in the fourth quarter of 2017 were $16.1 million, compared to $15.3 million in the fourth quarter 2016, an increase of 5%.
Total Endo-bariatric sales increased 29% to $9.8 million in the fourth quarter of 2017 compared to $7.6 million in the fourth quarter of 2016, due to a 64%, or $2.5 million, increase in Endo-bariatric product sales outside the U.S. ("OUS") as a result of higher OverStitch sales in our direct markets and the introduction of Orbera365 in Europe. OUS direct market sales were 64% of total OUS Endo-bariatric product sales in the fourth quarter of 2017, compared to 59% in the fourth quarter of 2016. In the U.S., total Endo-bariatric product sales declined 7%, or $0.3 million in the fourth quarter of 2017 compared to the same quarter of 2016. Excluding U.S. Orbera starter kit sales, U.S. Endo-bariatric product sales increased 8%, or $0.2 million for the fourth quarter of 2017 due to higher physician adoption and utilization of OverStitch products.
Total Surgical product sales in the fourth quarter 2017 were $6.2 million, a decrease of just under 20%, compared to $7.6 million in the fourth quarter of 2016. Total OUS Surgical sales decreased 12% to $2.1 million for the fourth quarter of 2017 compared to $2.3 million for the fourth quarter of 2016. In the U.S., Surgical sales decreased 23% to $4.1 million for the fourth quarter of 2017 compared to $5.3 million for the fourth quarter of 2016.
Gross margin for the fourth quarter of 2017 was 58%, compared to 62% for the fourth quarter of 2016 as a result of a greater proportion of our overall product sales coming from our Endo-bariatric products, which realize a lower gross margin than our Surgical products. Additionally, the mix of Apollo manufactured products sold increased in the fourth quarter of 2017 resulting in more overhead charged as cost of goods sold compared to the fourth quarter of 2016 when we were depleting the inventory we purchased as part of the planned transition from Allergan to Apollo. We expect gross margin to improve as we complete certain identified Endo-bariatric product gross margin improvement projects and improve capacity utilization of our manufacturing facility over the next two years.
Total operating expenses were $15.2 million in the fourth quarter of 2017, compared to $17.2 million in the fourth quarter of 2016 primarily due to decreased general and administrative expenses related to transaction costs incurred in the fourth quarter of 2016 associated with the Lpath merger.

Interest expense for the fourth quarter of 2017 decreased $10.3 million when compared to the fourth quarter of 2016. This decline was largely due to non-cash charges associated with convertible notes that were exchanged for common stock in connection with the Lpath merger in the fourth quarter of 2016.
Net loss for the fourth quarter 2017 was $7.3 million compared to $19.7 million for the fourth quarter 2016.
Full Year 2017 Financial Results
Total revenues for 2017 were $64.3 million, compared to $64.7 million in 2016.
Total Endo-bariatric sales increased 13% to $35.9 million in 2017, compared to $31.9 million in 2016, comprising 56% of total revenue in 2017 compared to 49% in 2016. Excluding U.S. Orbera starter kit sales, total Endo-bariatric sales increased 27% for the year. Total OUS Endo-bariatric product sales increased 32%, or $5.2 million in 2017 compared to 2016, primarily due to higher OverStitch sales in our direct markets. OUS direct market sales were 69% of total OUS Endo-bariatric product sales in 2017 compared to 65% for 2016. U.S. Endo-bariatric product sales for 2017 decreased 8%, or $1.2 million when compared to 2016. Excluding U.S. Orbera starter kit sales, U.S. Endo-bariatric product sales increased 20%, or $2.3 million in 2017 primarily due to higher OverStitch product sales and higher Orbera product sales from the first half of 2017.
Total Surgical product sales in 2017 were $27.6 million, a decrease of 15%, compared to $32.3 million in 2016. Total OUS Surgical product sales decreased 5% to $10.2 million in 2017 compared to $10.7 million in 2016. In the U.S. Surgical sales decreased 20% to $17.4 million in 2017 compared to $21.6 million in 2016.
Gross margin increased to 62% for 2017 from 61% in 2016. Cost of sales included inventory impairment charges of $0.7 million and $3.8 million for 2017 and 2016, respectively. In 2016, we recorded an inventory impairment charge related to expiring finished good inventory and excess raw materials transferred from Allergan as required under the transition services agreement. Excluding inventory impairment charges, gross margin was 63% for 2017 and 67% for 2016. This lower gross margin, excluding the impact of inventory impairment charges, is due to the ongoing shift in our product sales mix from higher margin Surgical products to Endo-bariatric products that realize lower relative gross margins and the shift in the mix of Apollo manufactured products sold as discussed above in fourth quarter results.
Total operating expenses were $62.2 million in 2017, compared to $60.2 million in 2016 primarily due to higher sales and marketing expenses associated with our Endo-bariatric product sales growth.
Interest expense decreased $13.7 million in 2017, compared to 2016 mainly due to the elimination of non-cash charges associated with the convertible notes that were exchanged for common stock.
Net loss for 2017 was $27.3 million compared to $41.2 million for 2016.
Cash, cash equivalents and restricted cash were $31.4 million as of December 31, 2017.
Capitalization Update
On December 4, 2017, we filed a registration statement on Form S-3 to offer and sell up to a maximum amount of $50.0 million of common stock and entered a sales agreement to sell up to $16.0 million of shares of those shares in an "at-the-market" program.
Conference Call
Apollo will host a conference call on Thursday, March 1, 2018 at 3:30 p.m. Central Time / 4:30 p.m. Eastern Time to discuss Apollo’s operating results for the fourth quarter and year ended December 31, 2017.
To participate in the conference call dial (888) 394-8218 for domestic callers and (323) 701-0225 for international callers. The conference ID number is 8902763. A live webcast of the conference call will be made available on the "Events and Presentations" section of our Investor Relations website: www.ir.apolloendo.com.
A replay of the webcast will remain available on Apollo’s website, www.apolloendo.com, until Apollo releases its first quarter 2018 financial results. In addition, a telephonic replay of the call will be available until March 8, 2018. The replay dial-in numbers are (844) 512-2921 for domestic callers and (412) 317-6671 for international callers. The replay conference ID number is 8902763. A transcript of the earnings call will be made available on the "Events and Presentations" section of our Investor Relations website: www.ir.apolloendo.com.

Non-GAAP Financial Measures
To supplement to our financial results we are providing a non-GAAP financial measure, adjusted total revenues which exclude U.S. Orbera starter kit sales. This supplemental measure of our performance is not required by, and is not determined in accordance with, GAAP.
Non-GAAP financial information is not a substitute for any financial measure determined in accordance with GAAP and should be read only in conjunction with Apollo’s condensed consolidated financial statements prepared in accordance with GAAP. Apollo’s management uses certain supplemental non-GAAP financial measures internally to understand, manage and evaluate Apollo’s business, and make operating decisions. Reconciliations for each non-GAAP financial measure to its most directly comparable GAAP financial measure is provided in the tables below. Management believes that making non-GAAP financial information available to investors, in addition to GAAP financial information, may facilitate more consistent comparisons between the company’s 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.