Good afternoon, ladies and gentlemen, and welcome to the Apollo Endosurgery First Quarter 2022 Results Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Matt Kreps.

Sir, the floor is yours..

Thank you, John. And thanks everyone for participating in today's call to discuss Apollo's first quarter 2022 financial and operating results. Joining me on the call are Chas McKhann, Chief Executive Officer and Jeff Black, our Chief Financial Officer. Today's call will include slides to accompany the audio presentation.

For those of you joining us by telephone-only, you can download a copy of the slides at our investor relations site, ir.apolloendo.com and choosing Events and Presentations.

Before we begin, I’d like to caution listeners that comments made by management during this conference call today will include forward-looking statements within the meaning of federal securities laws, including Apollo's financial outlook and Apollo's plans and timing for product development and sales.

In addition, there is uncertainty about the continued spread of COVID-19 virus and the ongoing impact it may have on our operations, the demand for our products, global supply chains, and economic activity in general. These forward-looking statements involve material risks and uncertainties, and Apollo's actual results may differ materially.

For a discussion of risk factors, I encourage you to review the company's most recent annual report on Form 10-K and our most recent Form 10-Q. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 3, 2022.

Except as required by law, Apollo undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call. Additionally, today's discussion will include certain non-GAAP financial measures, which we believe provide an additional tool for evaluating the company's core performance.

Management uses these metrics in its own evaluation of continuing operating performance, and a baseline for assessing the future earnings potential of the company. Included in our press release issued today is our financial results and corresponding 8-K filing, our supplemental tables reconciling non-GAAP figures to their closest GAAP comparable.

And now I'd like to turn the call over to Chas..

Thank you, Matt, and thank you, everybody, for joining us here today. We really appreciate it. So look, we are about a year into a new strategy to transform Apollo. And I'm really excited about the progress that we've made in a relatively short period of time.

We've repositioned the company to go after larger market opportunities, and we're building a much stronger organization that's poised to capitalize on those opportunities as we focus on energizing the business and then over the course of this year, moving into an acceleration mode and eventually building leadership positions in the markets we serve.

This afternoon, we reported solid performance for the first quarter of the year with sales of $16.7 million, and that was even in the face of the Omicron wave that impacted a lot of companies and procedures around the world really, and then other global macroeconomic challenges, which we'll refer to over the course of the call.

But despite that, and I'll -- some of the highlights for the quarter, we achieved 20% year-on-year growth. And it was well-balanced growth. It was 24% in our ESS franchise. That's our OverStitch device and our X-Tack product. And we also achieved 16% growth with our intragastric balloon franchise, and so again, nice balance across our products.

This quarter, our growth was primarily driven by the US with 33% growth in the US, 40% for IGB franchise, 34% for ESS, so really nice performance here in the US. An interesting fact here over what we've observed, and this is an extension of what we reported on our prior call. Our top 10 accounts grew by 63% year-on-year.

And these are not distributors, these are individual accounts. And the average sales in those top 10 accounts, is right around $1 million annualized. So it gives you a sense of what we can achieve, when our customers really incorporate Apollo's products into their clinical practice and really make it a focus of patient care.

And then in addition, we achieved 14% sequential growth in the number of ordering accounts for X-Tack here in the US. And we also achieved sequential sales growth in terms of -- so ordering accounts up 14% as well as sequential growth in X-Tack sales quarter-on-quarter.

And so while delivering on a strong quarter, we also remain very focused on a broader set of priorities for the overall year, both delivering on the near term but also building the foundation for the growth in years to come. And so, our four main priorities. First is to expand our core GI business and defect closure and fixation.

And that's inclusive of both OverStitch and X-Tack. It involves training new users, continue to build adoption and preparing for the approval of X-Tack, the CE mark approval outside the US. Second priority is leveraging a resurgence in ORBERA.

The intragastric balloon franchise has done very well since I've gotten here, and it's been a big important part of our business, continues to grow. We want to make sure that's sustainable growth, and we're putting a lot of focus and energy behind that.

And that fits part and parcel with our third priority, which is preparing for the launch of Apollo ESG and Apollo REVISE. We're working through the process with the FDA for a new regulatory clearance and preparing for the new product launch associated with that. And all the while building the organization.

We need to have the right capabilities in place to make sure that we can go after those opportunities, and we've been making very important ads really top to bottom, and I will come back to that.

So, Jeff is going to provide some updates on the financial results in the quarter, and then I will come back and talk through each of these four priorities to give you updates on how we're doing against each of them.

Jeff?.

Thank you, Chas, and thank you, everybody, for joining the call today. As Chas said, I'll spend a few minutes here on a little bit of a deeper dive into the financials and then turn it back over to Chas for a more detailed business update. Starting with slide 7 on revenue, again, a strong year-over-year growth across the product portfolio.

It was our fifth consecutive quarter of double-digit growth. And excluding the legacy Lap-Band business, this was the largest revenue quarter on record for Apollo.

33% growth in the US, so we are beginning to see the impact of our planned investments, specifically the expansion of the sales force, while still early stages, we're beginning to see traction and increased productivity. We saw a continued strength in ORBERA on the heels of enhanced marketing efforts.

And again, still some lingering effects of COVID on hospital access and staffing, particularly in academic hospitals, where core GI business is typically very strong.

We saw 6% growth outside the US, strong demand in distributor markets, offset by continued pressure in the quarter in concentrated direct markets, particularly Western Europe, where we also believe to be lingering pandemic effects.

Significant foreign currency impacts, particularly for the euro, which had a nearly $300,000 impact on year-over-year growth. On a constant currency basis, our OUS growth was 10%. Global growth was 22%.

And just as a reminder, because international sales represent more than 40% of our overall revenue, we're disproportionately impacted by negative foreign currency impacts compared to similarly sized Medtech companies that typically don't have such a large OUS footprint.

Other revenue, while it's not material, it was impacted by our planned wind down of Apollo Care for Orbera, which we outsourced to a third-party beginning in 2022. This will ensure we can properly scale support for Orbera, as that business continues to expand without a material financial impact to Apollo.

Overall, we're again pleased with our revenue performance in the first quarter and our ability to successfully navigate a generally slow start for Medtech.

In terms of outlook for 2022, we continue to expect 2022 revenue of $73 million to $75 million, while we're cognizant of potential global recessionary impacts, lingering pandemic headwinds and foreign currency pressures from a strengthened dollar, particularly for the euro, which currently represents nearly half of our OUS revenue.

Moving to gross margin on Slide 8. Gross margin improved by 210 basis points over a year ago. In the US, our margin increased from a higher Orbera mix as well as margin expansion on our ESS product lines. We're seeing the impact of 2021 OverStitch COGS improvement projects.

We're seeing improved overhead efficiencies, and we also saw some price increase impact for both OverStitch and X-Tack. The margin expansion that we saw in the US was offset by a higher mix of distributor sales, OUS, which have a lower gross margin profile.

We remain focused on continued gross margin improvements, particularly with OverStitch, which has a lower gross margin profile than the Orbera and X-Tack.

So major drivers continue to be in gross margin expansion in the future will be product mix, improved overhead absorption, direct COGS improvement programs, like I said, focused primarily on OverStitch.

And at the same time, we're navigating supply chain and manufacturing scale-up complexities, but we remain confident that we'll drive blended gross margin to the mid-60% range in the next three to five years. Moving to OpEx on Slide 9.

As we look at operating spend profile, as we've done in the past, we think it's important to exclude non-cash stock-based compensation to get just a clearer picture of what our non-GAAP core operating run rate is. And as we previously said, 2022 is an investment year for us.

In the near-term, we remain focused on building capabilities following historical underinvestment in the business. The most significant area of increased investment is in sales and marketing in the United States. For example, in the fourth quarter, you'll see our non-GAAP sales and marketing OpEx ran at about 48% of revenue.

This reflects our planned investments in growth initiatives, primarily building out the channel, marketing programs as we prepare for the anticipated launch of our ESG products. As we've said before, in the US, we still have a very small commercial team relative to the size of our opportunities.

We made substantial progress a year ago or last year, expanding our footprint. We continue to do so. At the end of 2021, we had a commercial team of just under 30 in the field. We grew that to 30 territory managers and two regional Endobariatric managers at the end of the first quarter. This team is ramping up.

We anticipate further improvements in rep productivity as they gain additional time and territory and experience with our products and customers. Going forward, we continue to evaluate the appropriate scale of our commercial team and we'll invest as necessary.

Other focused area of our planned investments, are in R&D, medical education, clinical reimbursement, product development and gross margin improvement.

And on the G&A side, we will continue to thoughtfully invest in infrastructure and staff to properly support the business, but we expect to see the heaviest investment in both sales and marketing and R&D. Importantly, that we have the ability to modulate spend as appropriate.

And we're well positioned from a balance sheet perspective to make these investments. So with that said, before I turn it over to Ted, just a couple of comments on cash use and burn.

Moving to our balance sheet, slide 10, as you may recall, last year, we secured over $175 million in new capital and borrowing capacity, enabling us to begin making investments required to capitalize on the opportunities in front of us without really creating a concern about cash runway.

This positions us very well, with a multiyear runway to execute the business, which is especially important now in what has turned out to be an uncertain and volatile capital markets environment. As we expected, we saw a planned up-tick in cash burn in the first quarter relative to 2021.

Of particular note, nearly 1/3 of that burn was $2.9 million in working capital, which represents the pay down of 2021 year-end accruals as well as inventory builds to support the expected growth in demand for our products.

Even with our planned increase in average quarterly burn, we're extremely well positioned to execute on our planned growth initiatives with nearly $150 million in cash and committed cash at the end of the first quarter. And with that, I'll turn the call back over to Chas..

our advanced GI focus as well as endobariatric or endoscopic weight loss. And as you'll see on slide 13, we continue to be focused on large market opportunities and developing from a product standpoint, but also clinical development and reimbursement otherwise, all the different elements that we think will be required to go after these opportunities.

I mentioned our four priorities across the business for the year. And so let's provide an update here on each of them. First, on the core GI, the defect closure and fixation side of our business. We've got OverStitch, which really is a unique one-of-a-kind product, primarily focused on full thickness suturing in the upper GI.

We are continuing to work to build and develop the defect closure side of the business with OverStitch.

That involves training new users as well as expanding the different applications that users -- that our customers use OverStitch and making sure that they're familiar with and really apply the product in such a wide range of opportunities, which we know it can in fact positively impact patient care. That's true also in the -- outside the U.S.

where the core GI has been a lower percentage of our overall business for OverStitch, and we've got plans in place that we're executing to build that part of the business outside the U.S. We then add in X-Tack, which as you can see on the chart, is a really nice complement OverStitch.

It fills an important therapeutic gap between Through-the-scope clips and OverStitch in terms of complexity of the defect and size of the defect and the durability of the fixation. And again, we continue to make very good progress. We just launched X-Tack right around this time last year. And so we're seeing still very good progress with customers.

We continue to refine our targeting and focus on high-volume centers. We continue to develop our sales training. As Jeff mentioned, we have a relatively new sales force with more than half the reps in the US hired within the last year.

We continue to build the supporting body of clinical evidence and I'm going to come back in a minute to the upcoming DDW Meeting, which is the Digestive Disease Week Meeting. It's the largest GI meeting in the world and we expect both OverStitch and X-Tack to be very well represented at that meeting.

We're expanding our peer-to-peer marketing programs, both through things like webcast. We just did an outstanding one with Dr. Darin Dufault from Duke University as well as old-fashioned face-to-face meetings where colleagues can hear from each other in terms of how they're applying this new device into their clinical practices.

And then finally, we are absolutely working on preparing for the OUS launch of X-Tack. We already have a presence in a few select markets outside the US. The most recent one has been Australia, which we are just getting going here as of this month.

But the key one will be getting CE Mark clearance for X-Tack, and we're still working through that regulatory process and -- but preparing commercially for when that occurs, and we'll be excited when it does. The next slide just shows some of the -- just the complements around OverStitch and X-Tack.

You can see the kind of blue dots on the page, and for those of you who aren't -- don't have the slides in front of you, basically, what it's showing is that X-Tack opens up the right side of the colon, the lower GI for us. And that's where the predominant of procedures are in the lower GI and these are polyp-removal procedures.

So, think about when you're in your colonoscopy and they find a large polyp defect that needs to be removed. If it's over about two centimeters, there's a lot of evidence that those are the defects that need to be prophylactically closed. And that's an important target market for X-Tack.

But in addition, our customers are finding many other core applications for the device, which is great to see and many of them are listed on the page. So, fistulas and perforations, a POEM procedure, which is more of an upper GI procedure, mucosal tear, there's a whole range.

And so we're pleased to see the progress there and continue to build and capitalize on that. Next slide. So, next up is ORBERA.

Again, we want to continue to maintain the momentum with ORBERA and really ensure that it's sustainable because it's been a tremendous turnaround for a product and a category that frankly struggled for a number of years, but we've seen very nice growth with ORBERA. We've seen it globally.

We continue to capitalize on some macro factors in terms of weight gain during the pandemic and coming out of the pandemic, I think, has been favorable to a product that has a lot of evidence of at least a 10% total body weight loss. Right around this time last year, we have the new AGA Clinical Practice guidelines.

First time ever that a major society endorsed intragastric balloon therapy and that's kind of a seal of approval as it were for intragastric balloon therapy.

We are proud of the fact that ORBERA has, by far, the most clinical evidence of any intragastric balloon in the market and it's an important element to a safety and trust element around the product. We've seen an increase in physician interest. We've done more training for ORBERA in the US in the past few months than we've done in a number of years.

And we're putting more focus on it from a sales and marketing standpoint, which is helping to contribute to the sustainability of those results. And then importantly, we're seeing some very important competitive wins outside the US. In the US, we are primarily the main product available for intragastric balloons.

There's a recent market entrant that's still in the very early stages of having to do a post-approval trial. So we're really in the US. Outside the US, it is a very competitive market, but we are seeing nice wins outside the US that are helping to contribute to our ongoing growth.

And it comes back to you that we've got a really good product with a long track record of safety and efficacy. And then that ties right into our broader strategy around endobariatric, and our preparation for the launch of Apollo ESG and Apollo REVISE.

So we showed this slide on the last earnings call, and I'll just use this as an opportunity to provide some important updates as we are working across a broad comprehensive launch plan for these products.

We are still working through the De Novo 510(k) clearance with the FDA and we'll look forward to providing input an update on that as things progress. We are actively engaging with leading physician societies on both the GI and the surgery side.

On the GI side, there's groups like the American Gastroenterology Association and the ASGE, two of the leading societies as well as ACG, so a lot of GI societies. There's also major surgical societies. So SAGES and then the ASMBS, which is the metabolic Surgery Society.

And we've been spending a lot of time with them describing our plans around the new indications, talking to them about where we see endoscopic therapies fitting within the broader continuum of care and making sure that we've got good alignment across, again, both GIs and surgeons.

And then talking about ways we can best work together on important elements of things like training and education and support on efforts on things like reimbursement and market access. And those have been very productive discussions. And I think a big part of a broader market development process that we're working on.

We are aware of efforts that a number of these societies already have underway on things like clinical practice guidelines. Now those processes take time. There's a lot that goes into a new set of practice skylines.

But the fact that they're already working on those efforts is a really good sign that the societies are looking towards where these new procedures will fit in the broader continuum of care. We are also actively learning from our early adopters.

There are a number of customers, both in -- outside the US as well as in the US that are already incorporating ESG and revisions into their clinical practice. We are very careful from a promotional standpoint, but physicians can use OverStitch for these procedures. And so, we are already kind of learning from those customers.

And we call them internally the waven accounts. And it's really interesting because what we're seeing is a really nice mix of different models. We see some models that are in academic medical centers, some of the leading centers in the world.

We see others that are individual private practice physicians or small groups of physicians, and we're seeing success in either case. We're seeing some models that are surgeon led. We're seeing some models that are GI led. We've seen some that are integrated, GIS and surgeons working together. There are commonalities though.

The ones that are most successful have a laser focus on clinical outcomes and how they're working to make sure before the procedure, during the procedure and after the procedure and patient follow-up that they're doing everything necessary to achieve the best possible outcomes for patients.

And so we're kind of going to school on those initial set of customers. We're developing the playbooks that we will be using with the next waves of accounts as they move forward once we get a new indication. In the meantime, we can gain a lot of practical experience with ORBERA. I mentioned the renewed marketing efforts around ORBERA.

I'll give you an example.

We are doing co-marketing programs with some of these Wave 1 accounts, frankly, who offer the intragastric balloon, as well as some other accounts that have demonstrated the ability to attract patients and talk to them about the procedures and ensure that if you're doing marketing, patient marketing, that it results in actual procedures.

And so, we've been able to do that with ORBERA. We initiated this late last year and had been moving forward here and having really good outcomes and experience and measurable results that we can both obviously support the ORBERA business, but also learn in terms of how this will play ultimately in a broader endobariatric world.

So we're excited by those early learnings, and we're going to keep building on them. And then last, but certainly not least, we are absolutely building out our reimbursement and market access team. We, in January, announced the hiring of a new VP of Reimbursement and Market Access.

Chas since added a Director of Payer Engagement, who has already joined and is a full-time employee focused specifically on how we will work with payers. And we are strengthening our capabilities in areas like health economics and others.

So this is a critically important area and a broader market development and a set of skills and capabilities that we are really building here at Apollo. So a few times now, I've already mentioned the upcoming Digestive Disease Week meeting, and we're really excited about it. So this is the largest gastroenterology meeting in the world.

This is the first time the meeting will be taking place in person for three years. It's been gone to virtual in the last couple of years. And so, as we talk to people in the medical community, they're really excited to get back together. I think the fact that it's in San Diego doesn't hurt.

But as part of that, what we're really looking forward to is that, simply put, we expect DDW to be an excellent showcase of Apollo's products and procedures. They've only, at this point, released the preliminary agenda. More details will be coming out in the next week or two.

So even based off of these preliminary information from the organizers, we are already aware of over 40 posters and video presentations about Apollo products and procedures and more than 60 lectures and podium presentations.

So there's going to be a lot of discussion about Apollo products at the meeting, and including some important new clinical data and new clinical studies. So let me highlight a few there. And again, this is a preliminary list, before the meeting, we will likely do a press release informing you of others to be on a lookout for DDW.

First is the MERIT study. Many of you know, MERIT is the randomized controlled trial that Apollo sponsored, testing the ESG procedure compared to diet and exercise. The preliminary results were presented at the IPSO meeting, a surgery meeting in a virtual session in October.

And I'm pleased to report that, at DDW, the full results of MERIT will be released by Dr. Barham Abu Dayyeh in two sessions, both in a plenary session on Saturday, May 21, and then again in more detail in a full session on Tuesday at the meeting. So very excited for the full results for MERIT.

It will just be additive to the information we've already -- that's already been presented. Another really interesting presentation will come from Dr. Chris McGowan. Chris is -- Dr. McGowan is based out of Cary, North Carolina, private practice position at True You Weight Loss.

He does an excellent job of following up all his patients, and he's going to be presenting data on patients with Class III obesity, meaning patients with a BMI of more than 40. And so we're looking forward to those data and the presentation of Dr. McGowan. Dr.

Reem Sharaiha from Cornell is going to be presenting a five-year follow-up data with comorbidity information and the impact on comorbidities, and Dr. Beran is also going be presenting systematic review, pardon me – and meta-analysis comparing ESG to laparoscopic sleeves.

And again, this is just a cross-section of some of the data that will be presented. On the revision side, Dr. Anna Carolina Hoff has a oral presentation focused on combination therapy of revisional procedures along with GLP-1 inhibitors. As many of you may recall that last year at the DDW meeting, Dr.

Hoff had one of the top papers at DDW focused on combination therapy of ESG plus semaglutide. It was a randomized controlled trial and the headline was basically that when you combine ESG plus semaglutide, which has the brand name Wegovy, you get essentially surgical level of outcomes. It was more than 25% total body weight loss in that study.

And so we're excited to see the new presentation from Dr. Hoff. And we are well aware that some of the newer medications, including semaglutide and the recent results from a new medication from Eli Lilly and Company.

We expect will have an important impact in addressing the global obesi epidemic, but we see a really interesting role in combination therapies, and so more data on that will be coming at DDW. Not to be outdone, the defect closure side of our business will also be very well represented at the meeting.

There is a session, I think, this is on Saturday that Dr. Christopher Gostout, who is our Chief Medical Officer, is co-chairing with Dr. Harry Aslanian from Yale University that's going to be talking about defect closure in everyday practice. And that will include discussions around suturing with OverStitch and case studies with X-Tack.

There is new data from a multicenter experience on X-Tack. There is a new another study looking specifically at X-Tack in colonic EMR defects. There's another paper involved with ESD closure. So again, this is just a summary of what we expect to be a significant amount of information at the meeting, so we're excited about that.

Speaking of clinical data, a study that was released in Q1 that I'll draw your attention to. And I'm on slide 20 for those who are following along. This was in GIE -- Gastrointestinal Endoscopy, which is one of the leading journals in the field. So the study was authored by Dr. Alqahtani out of Saudi Arabia.

And one of the most impressive element -- one element is just the scale of the study. It is -- it involves more than 3,000 patient pairs. It's a propensity match study of ESG compared to patients who received laparoscopic sleeve. So that's more than a 6,000 patient study, which is really unusual in the device world.

Some of the headlines is that it showed durable results with ESG out to three years with a 14% total body weight loss at sustained out to three years. In addition, the comorbidity remission in this study with ESG was very similar to what was found in LSG patients. And, in fact, was slightly better in the areas of dyslipidemia and hypertension.

Showed an excellent safety profile for the procedures. We're just showing that in real-world clinical practice, ESG is a very safe procedure. And then also provides good evidence that, if patients needed it, they could either get a repeat ESG basically a retightening, or they could revert to an LSG. And that's important.

It's an important element to be able to leave all options open to patients. And we've known that about ESG, but to have additional clinical data that shows the feasibility of that, important, especially to a surgical audience who like to know that they can still have different options available to them.

Turning now to the organization side of our business and things we're developing. On the left is a summary of the core values of Apollo that we've really focused on. We're very focused on building a strong culture of the company, a winning culture that's customer-focused, it's patient-focused, and it's a big part of who we are.

So we've been introducing these internally. It's becoming a big part of how we manage our business. And all the while, we are adding to the organization really from top to bottom as it were. We are very pleased to announce just a few weeks ago, having announced the hiring of Jeannette Bankes to join our Board of Directors.

Jeannette is the President and General Manager of the Global Surgical franchise at Alcon. And she brings tremendous experience in developing and commercializing new technologies, including in markets around the world. So really good global experience and so we are thrilled to have Jeanette join our Board of Directors.

I mentioned new hires in the reimbursement and market access side. We've promoted a new Head of VP of R&D to really renew and reengage our efforts on the pipeline development. And then as Jeff mentioned, we are selectively and very targeted making additions throughout the organization to make sure that we've got the right scale to grow.

One of the biggest areas that we are focusing on, and you saw it in the financial numbers, has been on our commercial team and so just an update of where we are. We are – as Jeff mentioned, we've grown – added a few positions here over the first part of the year in the US and plan to continue to grow over the course of the year.

We are adding new training capabilities as we do have a relatively new team. And we've seen increased productivity as we brought people on board, but we absolutely expect that to continue going forward. We're improving our sales and analytics.

And as I described in some of the launch planning for ESG, we really are building out our marketing capabilities as well. Importantly, on the OUS side of our business, as Jeff mentioned, it is more than 40% of our business, and we're making important additions there as well.

Again, selective adds in key markets to drive growth, especially on the ESS side and preparing for the X-Tack launch. We really have reignited our physician training programs outside the US. They did struggle for a while during the COVID period, and even into next year because many of those trading programs do require travel.

And as we all know, international travel has had its challenges. But when they are fully running again, we've had great participation. And we're also developing plans to expand into large untapped market opportunities. Just today in the earnings release, we announced in Japan.

So we've had some access into Japan through some limited use kind of pathways, but we've just received clearance for OverStitch Sx in Japan, which is a nice opportunity for us. We still have some work to do on the reimbursement front, but this will allow us to continue to build and grow there.

We've got initial footholds into the Chinese market that also can build and grow and expand over time. And somewhat ironically, given the sale of our international business in Canada, we currently have clearances for the Intragastric Balloon, but do not have yet clearances for X-Tack and OverStitch, and we're working to address those as well.

So continued significant growth opportunities outside the US while we grow and develop in the US as well.

And by the way, when I mentioned the prelaunch planning around ESG and Apollo REVISE, many of the elements that we're working on in the US have broad applicability outside the US as well, because we are able to really -- for example, the reimbursement efforts that we focus on here in other markets, we will focus on as well.

And so to wrap up, we delivered a solid quarter in Q1 despite some of the macroeconomic headwinds, and we also have made substantial progress across each of our priorities for the year, and we remain very excited about the prospects for our products and our procedures and the impact that we can have in markets around the world.

And so with that, let me turn it back over to John for the Q&A..

Thank you. [Operator Instructions] Ladies and gentlemen, the floor is open for questions. [Operator Instructions] Okay. And the first question here is coming from Matt Hewitt with Craig-Hallum Capital. Your line is live.

Thank you. And congratulations on the strong quarter, kind of bucking the normal seasonal pattern, especially given the headwinds you faced in January from COVID. I guess my first question is regarding progress with X-Tack, I think last quarter, you really started to focus on your desire to drive utilization.

I think during your prepared remarks, you mentioned 14% growth, if I heard you correctly.

Do you have kind of a target that you're hoping to hit from a utilization standpoint, or how should we be looking at that over the remainder of this year and going forward?.

Yes. No, Matt, thank you. Appreciate the question. We were pleased with sequential growth, both in new accounts as well as in overall utilization with X-Tack. That was despite what often we do see some seasonal patterns as well as there was a pretty significant COVID impact here in the first part of the quarter. It improved as the quarter progressed.

I think that's a very consistent theme with other med tech companies as well. And so we will look to continue to build on that same kind of quarter-on-quarter additional growth as we -- as our newer reps get up to speed as it were as new data comes out, all the different elements I mentioned.

And so we feel good about a prime continued sequential growth quarter-to-quarter, and that's what we'll be looking for from our US sales team. And then over time, we'll add on the US side of that as well..

Understood. Okay.

And then one of the questions that I get a lot, especially here over the past couple of weeks when others from -- on the device side have been reporting is this question about how much of Q1, were you seeing a rebound in just getting back to normal, or was there some backlog to kind of work through? And maybe if you could walk through what you're seeing even now through April, are we getting back to a normal that it's not so much a backlog.

This is a normal growth rate for the business and what we should be expecting going forward?.

Yes, it's a good question and one that's a little hard to tease out, except to say that we certainly saw an impact in late last year and early this year. We did see a nice improvement over the course of the quarter. But I think it varies by different segments and different markets.

We didn't see a sort of snapback rebound that, I think, for example, orthopedics, some did.

Because where we saw the biggest impacts were in some of the larger academic medical centers and the equivalents in places like Europe, and those have come back, but a bit more gradually because you have a combination of both COVID, but also -- and I'm sure you guys have all heard about various staffing-related issues that impact a lot of those same institutions.

So we're seeing an improvement, but we haven't really felt it as a snapback rebound more just a good gradual improvement and I think we're tracking in the right direction..

Got it. And then maybe one last one for me, and I'll hop back in the queue and it kind of touches on what you're just saying there, as far as staffing issues and some of that, I think, at least on the hospital side, as we're reading it is some doctors are just transferring from one hospital to another. In other cases, they are leaving the market.

But does that -- I would imagine that, that actually can represent an opportunity for you as well, a doctor that's familiar with OverStitch and Orbera and X-Tack and leaving one practice and going to another, bringing you along gives you a new in a new group to train or bring up to speed.

Are you seeing some of that with some of the issues that healthcare has been seeing on the hiring side, or what could -- what do you think is going to drive that next leg of adoption, or is it just hitting the payment and introducing the products..

Yes. Now let me separate out two things. I think the bigger constraint we've seen has been more on the nurse side than on the physician side. And again, these have been well documented and just in the types of settings I've mentioned. And I think the situation is improving, but that's been coming out of COVID, just a challenge for certain institutions.

And I think, like I said, they're starting to get a handle on it and it's improving. On the physician side, there is some movement, but mostly for us, it really is just a matter of continuing to train new users for -- across our products.

And then doing, as you said, the leg work once someone is trained, making sure they become totally comfortable with the devices and the procedures and expanding the different kinds of procedures they can use it for in the case of both OverStitch and X-Tack.

And in the case of the Orbera side of things, understanding how to really develop their practices and patient marketing some of those other areas where we're doing some of the co-marketing elements..

Got it. Thanks very much..

Okay. The next question is coming from Adam Maeder with Piper Sandler. Your line is live..

Hi, Charles and Jeff, this is Simran on for Adam. Congrats on a great quarter, guys. I guess I'll start off asking about just kind of your business and exiting Q1, you said there's some momentum with recovery.

So how should we think about models in Q2 and quarterly cadence throughout the duration of the year?.

Sure. We've -- we've been investing, as Jeff mentioned, in different aspects of growth. And so certainly are looking to continue to see that. We saw a good evidence of results of that in Q1, but I do expect to see that progress.

And certainly to achieve our guidance range for the year, we expect that to continue to step up and are focused on delivering on that. And that will be globally based to get things like some order patterns outside the US with some of our distributors as well.

And so we feel good about a nice progression here and reiterating our guidance even with -- and Jeff alluded to this, but just to be really clear, we do have a bit of a headwind on the FX side, more than most companies our size, but are still focused on the guidance we've delivered and internally, we want to exceed that..

Okay. Perfect.

Should we be seeing any meaningful impact from the cadence of new product launches that you could potentially be having this year in terms of ESG revised as well as OverStitch in Japan, just kind of what can you say about the impact of these launches and approvals?.

Sure. Yeah. No, so for ESG and revise, when we submitted to the FDA, which was back in -- late in Q3 of last year, we said that on average, de novo 510(k) take about a year. That is average. There is -- there are wide error bars in those data because de novo 510(k) almost by definition, have a little bit more uncertainty than a traditional 510(k).

So it's a little hard to pinpoint. We are preparing for it, and we hope to see that in the second half of the year and doing everything we can to support that process. The -- another big launch that we are working on, clearly, is the X-Tack launch outside the US.

We have spoken on previous calls about there's a regulatory change in paradigm going on in Europe. There's a transition to the medical device regulations MDR. You guys may be familiar with your other med tech companies you follow as well. The net result of that is just things are taking longer.

And so if we do see an impact, it would be later in the year that we expect, and we said that throughout that it's going to take a while. And then the Japan side for OverStitch, we're very pleased to get the clearance.

As I mentioned in my comments, there's still some regulatory work to be done to really open up the market around OverStitch, but it will, I think, on the margin, have some positive impacts on our US business..

Okay. Perfect. And then if I could squeeze in one more.

Anything to call out from a supply chain standpoint? And just going off of that, how should we think about gross margin trajectory this year with those gross margin improvement projects that you guys are working on for OverStitch in particular?.

Yeah, Serena [ph], this is Jeff. Yeah, I think as we've said in the past, I think -- we don't expect that we'll see any sort of step change in margin. It will be a gradual improvement. And a lot of what you saw in -- or what you saw in Q1 was really a mix of a number of factors, overhead efficiency.

And as we improve the top line, we'll start to see even better efficiencies on overhead absorption. We did start to see the impact of the cost improvement projects that we executed last year. We'll continue to see those. So I would say expect more of a gradual improvement as opposed to any step change in any single quarter.

Your question on supply chain, I would characterize our supply chain complexity is less about supply and more about just ensuring that we are working closely with our contract manufacturers on capacity and staffing.

But we've not run into any situations where we're overly concerned about either incremental costs that we're not expecting or significant capacity constraints that we're not able to address..

Okay. Perfect. Thank you for taking my questions..

Thank you..

[Operator Instructions] Up next, we have Chris Cooley with Stephens. Your line is live..

Good afternoon and congratulations on a great start to the year. Just two quick ones for me, if I may. First, when you think about your top 10 accounts, that was very impressive when we think about the sequential dollar or the implied annual run rate growth coming from about $600,000 at the end of last year to approximately $1 million now.

Could you help us better understand the characterization of these accounts? I'm assuming these are primarily endobariatric practices, but what's leading to that kind of step-up in growth? And then how do you scale that beyond those top 10? I've got one quick follow-up after that. Thank you..

Yes, Chris. We're excited to see the traction that some of these larger accounts are getting. And it's a mix in terms of the nature of the accounts. Some of them are not endobariatric. I mean they're just kind of broad-based users of across the portfolio, some of the larger academic centers.

But I would say the majority -- and this is -- it's a global list, so inclusive of both the US and internationally are some of these early adopters are really embracing the endobariatric side of things.

And so for that group, that goes back to a bit of the homework we're doing on how they're approaching the markets, right? They are seeing a really good response to, frankly, the procedures they're offering, right, between intragastric balloons and being a part of that for many of them, not all, but for most.

But then also with the ESG and endoscopic revisions, it's a nice affirmation for us that the value proposition resonates with patients. And that's true today even in a primarily cash pay environment or as I've mentioned before, in the kind of case-by-case reimbursement situations that some have access to. But it's been really nice to see.

And we will be excited at a time when we do have indication to say how do we support that or look to ways that others can follow in their footsteps..

Appreciate the additional color there. And then you touched on this a little bit in a prior question, but I just want to make sure we fully appreciate the underlying kind of trends here. But when we think about X-Tack, I realize it's still very early days there.

But just going back to the third quarter of last year and in the fourth quarter, and then now, we've had a fairly decent deceleration sequentially in the growth rate. And you touched on COVID, obviously, as we started the calendar year, some seasonality there and I'm assuming heightened focus on OverStitch post the MERIT study.

But can you just kind of help us unpack a little bit that sequential deceleration in the growth rate from the 4Q to the 1Q? I think it was 40 to 14, if I have my math correct and 70 back in the third quarter, which I would assume would be arbitrarily high as you were ramping up.

But just help us kind of understand that trend and then how we should think about that going forward here throughout calendar 2022? Thank you..

Yes, I think there are a number of factors going on, Chris. One is there is some things around, for example, both seasonality and some COVID impacts, which impacts a bit of what you see in terms of those numbers.

We also see, as you move from an environment early on in the launch where a lot of it has to do with some stocking of new accounts and moving to true utilization. And so I think our utilization -- our underlying growth in utilization is probably a little higher from that standpoint.

And then we're continuing, I think, in the kind of focus with our sales team of building that sustainable growth. And certainly, we'd like to see continued and even improved quarter-on-quarter growth. And some of that is just some of the newer folks fully getting up to speed and delivering it and producing at the level we expect them to.

So, it's a big focus area for us to make sure we continue to sustain it. And I do think that additional clinical information and critical validation around X-Tack, for example, at DDW meeting, will help a lot..

Thank you..

Okay. The next question is coming from Matthew Blackman with Stifel. Your line is live..

Hi. This is Colin on for Matt. I wanted to focus on X-Tack for a minute. As you guys mentioned, it's currently underweight in that lower GI use segment, which is really a much broader market opportunity.

What are sort of the next steps in addressing that opportunity? Are you focused on education as the first priority, or is it really access to practices with a different focus than your new overage practices, you use OverStitch and ORBERA a lot, or is it really adding that clinical data, which you guys plan to present at DDW? Thanks..

Yeah. Thanks, Colin. It's a little bit of all the above. You've kind of touched on a number of the things that we are in the process of doing and have been, but I think are really emphasizing here.

One, it's not surprising that we have an established customer base that is more familiar in the upper GI, and so really pushing our reps to move beyond kind of the established customers into a broader set. That is easier to do as we expand our team and they've got kind of smaller territories. And so we're absolutely doing that.

We also have better targeting data with more recent clinical procedure numbers that allows them to be able to really focus on where the volumes are and make sure they're engaging the right physicians there.

We're doing more in terms of engaging some of the key KOLs that really are the experts in the lower GI and having good -- very good experiences with some of them. But I do think the last piece around clinical data does matter. And so some of the data sets in colonic EMRs, that I mentioned in my opening comments, will be important.

We don't know the outcomes of those studies, but we -- anecdotally, we've heard very good things about how people have done. So again, once we certainly know the outcomes of what is presented and both presentations and posters at DDW, being able to leverage that in those conversations.

And a lot of the peer-to-peer kind of marketing is really important. I mentioned doing webcast and face-to-face, just making sure people are hearing from their colleagues about how they are incorporating this new approach into their clinical practice. Inertia is a powerful thing in medicine, and we're looking to change that..

I appreciate that. And then on the new hires in the U.S. at late 2022 and -- a late 2021 and during the first quarter, I was wondering if they're focused on preparing for either the X-Tack U.S.

launches or the ESG revised releases and approvals or if they're really focused on selling the full bag of the three products? Any color there would be helpful? Thanks..

Sure. So we're kind of doing two things simultaneously. We've got our territory managers that typically are focused on selling each of the products. And especially as a new hire getting up to speed on the training around them, the procedures, supporting the accounts and focusing across all three products.

In parallel, Jeff and his comments on one of the slides we've mentioned, this newer role of what we're calling a regional endobariatric manager.

These are folks that are either been hired or in some cases, rehired or come back to Apollo, who understand all of the different components that will be required to really have a successful practice kind of from a patient standpoint, before the procedure, during the procedure and after the procedure and can really help support and develop those efforts.

For now, it's very much focused on ORBERA, because it's on label for us, and they can kind of focus on those efforts while getting to know the practice is involved. And right now, as Jeff mentioned, at the end of the quarter, we have two of those roles very much was a pilot phase to make sure it's delivering the way we think it can.

And then assuming, it does and as we move forward with the indication, that's an area that we would plan to enhance and grow. So you have not a splitting of the sales force, but kind of a layering of different capabilities..

Great. Thank you very much..

I would now like to turn the floor back to Chas McKhann for closing remarks..

Well, listen, thank you all very much for joining us today. We appreciate your time and your support. On this slide, we have upcoming activities, and you're welcome to join of them. And then otherwise, we really appreciate your time today. Thank you very much..

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation..