10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to              

Commission file number: 001-35706

APOLLO ENDOSURGERY, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization) 16-1630142 (I.R.S. Employer Identification No.)

1120 S. Capital of Texas Highway, Building 1, Suite #300, Austin, Texas (Address of principal executive offices)	78746 (Zip Code)
Registrant’s telephone number (512) 279-5100

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

As of April 30, 2018, there were 17,509,449 shares of the issuer’s $0.001 par value common stock issued and outstanding.

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES

FOR THE QUARTER ENDED MARCH 31, 2018

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION		1
Item 1.	Unaudited Condensed Consolidated Financial Statements	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss	2
	Condensed Consolidated Statements of Changes in Stockholders’ Equity	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16
Item 4.	Controls and Procedures	16
PART II. OTHER INFORMATION		18
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
	Signatures	38

i

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except for share data)

	March 31, 2018			December 31, 2017
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	22,341		$	30,513
Accounts receivable, net of allowance for doubtful accounts of $483 and $452, respectively	11,860			11,729
Inventory, net	15,443			14,343
Prepaid expenses and other current assets	1,255			1,015
Total current assets	50,899			57,600
Restricted cash	916			905
Property and equipment, net of accumulated depreciation of $7,184 and $6,658, respectively	6,879			6,885
Goodwill	6,828			6,828
Intangible assets, net of accumulated amortization of $30,263 and $28,415, respectively	34,693			36,421
Other assets	404			422
Total assets	$	100,619		$	109,061
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	18,840		$	18,327
Accrued expenses	6,842			7,500
Total current liabilities	25,682			25,827
Long-term debt	33,118			33,321
Total liabilities	58,800			59,148
Commitments and contingencies
Stockholders' equity:
Common stock; $0.001 par value; 100,000,000 shares authorized; 17,335,627 and 17,291,209 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively	17			17
Additional paid-in capital	225,548			225,122
Accumulated other comprehensive income	1,409			1,795
Accumulated deficit	(185,155		)	(177,021		)
Total stockholders' equity	41,819			49,913
Total liabilities and stockholders' equity	$	100,619		$	109,061

See accompanying notes to the condensed consolidated financial statements.

1

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except for share data)

(unaudited)

	Three Months Ended March 31,
	2018			2017
Revenues	$	15,743		$	14,517
Cost of sales	6,553			5,096
Gross margin	9,190			9,421
Operating expenses:
Sales and marketing	9,245			8,274
General and administrative	3,319			4,187
Research and development	2,456			1,957
Amortization of intangible assets	1,802			1,814
Total operating expenses	16,822			16,232
Loss from operations	(7,632		)	(6,811		)
Other expenses:
Interest expense, net	960			1,481
Other income	(516		)	(125		)
Net loss before income taxes	(8,076		)	(8,167		)
Income tax expense	58			50
Net loss	$	(8,134	)	$	(8,217	)
Other comprehensive income (loss):
Foreign currency translation	(386		)	142
Comprehensive loss	$	(8,520	)	$	(8,075	)
Net loss per share, basic and diluted	$	(0.47	)	$	(0.77	)
Shares used in computing net loss per share, basic and diluted	17,299,414			10,694,221

See accompanying notes to the condensed consolidated financial statements.

2

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended March 31, 2018

(In thousands, except for share data)

(unaudited)

	Common Stock				Additional Paid-in Capital		Accumulated Other Comprehensive Income			Accumulated Deficit			Total
		Shares	Amount
Balances at December 31, 2017		17,291,209	$	17	$	225,122	$	1,795		$	(177,021	)	$	49,913
Exercise of common stock options		44,418	—		103		—			—			103
Stock based compensation		—	—		323		—			—			323
Foreign currency translation		—	—		—		(386		)	—			(386		)
Net loss		—	—		—		—			(8,134		)	(8,134		)
Balances at March 31, 2018		17,335,627	$	17	$	225,548	$	1,409		$	(185,155	)	$	41,819

 See accompanying notes to the condensed consolidated financial statements.

3

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands)  (unaudited)
	Three Months Ended March 31,
	2018			2017
Cash flows from operating activities:
Net loss	$	(8,134	)	$	(8,217	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	2,358			2,399
Amortization of deferred financing costs	58			172
Non-cash interest expense	92			284
Change in inventory reserve	102			80
Stock based compensation	323			110
Foreign currency exchange on short-term intercompany loans	(403		)	(236		)
Changes in operating assets and liabilities:
Accounts receivable	62			658
Inventory	(1,206		)	514
Prepaid expenses and other assets	(210		)	(131		)
Accounts payable and accrued expenses	272			916
Net cash used in operating activities	(6,686		)	(3,451		)
Cash flows from investing activities:
Purchases of property and equipment	(1,173		)	(253		)
Purchase of intangibles and other assets	(120		)	(177		)
Net cash used in investing activities	(1,293		)	(430		)
Cash flows from financing activities:
Proceeds from exercise of stock options	103			21
Payments of deferred financing costs	(353		)	—
Payment of debt	—			(7,000		)
Net cash used in financing activities	(250		)	(6,979		)
Effect of exchange rate changes on cash	68			53
Net decrease in cash, cash equivalents and restricted cash	(8,161		)	(10,807		)
Cash, cash equivalents and restricted cash at beginning of year	31,418			20,041
Cash, cash equivalents and restricted cash at end of period	$	23,257		$	9,234
Supplemental disclosure of cash flow information:
Cash paid for interest	$	889		$	1,057
Cash paid for income taxes	14			18

See accompanying notes to the condensed consolidated financial statements.

4

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements

(In thousands, except for share data)

(1) Organization and Business Description

Apollo Endosurgery, Inc. is a Delaware corporation with both domestic and foreign wholly-owned subsidiaries. Throughout these Notes "Apollo" and the "Company" refer to Apollo Endosurgery, Inc. and its consolidated subsidiaries.

Apollo is a medical technology company primarily focused on the design, development, and commercialization of innovative medical devices. The Company's products are used by general surgeons, bariatric surgeons and gastroenterologists in a variety of settings to provide interventional therapy to patients who suffer from obesity and the many co-morbidities associated with obesity as well as various other gastrointestinal conditions.

The Company's core products include the Orbera® Intragastric Balloon System, the OverStitch™ Endoscopic Suturing System (together the "Endo-bariatric" products) and the Lap-Band® Adjustable Gastric Banding System ("Surgical" products). In the U.S., the Company also offers Orbera® Coach, an aftercare program. All devices are regulated by the United States Food and Drug Administration (the "FDA") or an equivalent regulatory body outside the U.S. The Company's products are sold throughout the world with direct sales markets in the U.S., Europe, Australia, Brazil and Canada. The Company also has a manufacturing facility located in Costa Rica.

(2) Significant Accounting Policies

(a)   Basis of Presentation

The Company prepared its interim condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"). They do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements include the Company's accounts and the accounts of its wholly-owned subsidiaries. The Company has eliminated all intercompany balances and transactions.

The Company has made estimates and judgments affecting the amounts reported in its condensed consolidated financial statements and the accompanying notes. The actual results that the Company experiences may differ materially from the Company's estimates. The accounting estimates that require the Company's most significant, difficult and subjective judgments include revenue recognition, useful lives of intangible assets and long-lived assets, valuation of inventory, allowance for doubtful accounts, stock compensation, and deferred tax asset valuation.

(b)   Unaudited Interim Results

In management's opinion, the unaudited financial information for the interim periods presented includes all adjustments necessary for a fair presentation of the results of operations, financial position, and cash flows. All adjustments are of a normal recurring nature unless otherwise disclosed. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. This interim information should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017. Certain reclassifications of prior period amounts have been made to conform to the current presentation.

(c)    Revenue Recognition

The Company's principal source of revenue is from the sale of its products. Revenue is recognized when control of the promised goods is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in an exchange for those goods. Generally, these conditions are met under the Company's agreements with most customers upon product shipment.  This includes sales to distributors, who sell the products to their customers, take title to the products and assume all risks of ownership at the time of shipment.  Our distributors are obligated to pay within specified terms regardless of when, if ever, they sell the products.

Customers and distributors generally have the right to return or exchange products purchased from the Company for up to thirty days from the date of product shipment. At the end of each period, the Company determines the extent to which its revenues need to be reduced to account for expected returns and exchanges. Certain customers may receive volume rebates or discounts, which are accounted for as

5

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements (Continued)

(In thousands, except for share data)

variable consideration.  We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. 

We record deferred revenues when cash payments are received or due in advance of the transfer of goods. 

The Company accounts for taxes collected from customers and remitted to governmental authorities on a net basis. Accordingly, such amounts are excluded from revenues.  Amounts billed to customers related to shipping and handling are included in revenues. Shipping and handling costs related to revenue producing activities are included in cost of sales.

(d)    Recent Accounting Pronouncements

On January 1, 2018, the Company adopted the provisions of ASU 2014-09, Revenue from Contracts with Customers ("ASC 606"), which requires an entity to recognize revenue when it transfers control of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The Company adopted this new standard using the modified retrospective method and applied this method only to contracts that were not completed as of January 1, 2018. Prior periods were not retrospectively adjusted. There was no material impact on the Company's financial statement upon adoption of the new revenue recognition standard.

In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02") which requires a lessee to recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term which will require companies to recognize most leases on the balance sheet, thereby increasing reported assets and liabilities. ASU 2016-02 will be effective for the Company on January 1, 2019. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) to simplify the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. ASU 2017-04 will be effective for the Company for annual and interim reporting in fiscal years beginning after December 15, 2019.

(3) Concentrations

Consolidated financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash, cash equivalents, restricted cash, and accounts receivable. At March 31, 2018, the Company's cash, cash equivalents and restricted cash are held in deposit accounts at three different banks totaling $23,257. The Company has not experienced any losses in such accounts, and management does not believe the Company is exposed to any significant credit risk. Management further believes that the concentration of credit risk in the Company's accounts receivable is substantially mitigated by the Company's evaluation process, relatively short collection terms, and the high level of creditworthiness of its customers. The Company continually evaluates the status of each of its customers, but generally requires no collateral.

(4) Inventory

Inventory consists of the following as of:

	March 31, 2018			December 31, 2017
	(unaudited)
Raw materials	$	5,649		$	4,937
Work in progress	401			493
Finished goods	11,529			10,947
Less inventory reserve	(2,136		)	(2,034		)
Total inventory, net	$	15,443		$	14,343

The Company recorded an inventory impairment charge of $102 and $80 for the three months ended March 31, 2018 and 2017, respectively. Finished goods included $379 of consigned inventory at March 31, 2018.

6

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements (Continued)

(In thousands, except for share data)

(5) Accrued Expenses

Accrued expenses consist of the following:

	March 31, 2018		December 31, 2017
	(unaudited)
Accrued employee compensation and expenses	$	3,442	$	4,243
Accrued professional service fees	492		522
Accrued returns and rebates	402		438
Accrued insurance and taxes	736		527
Other	1,770		1,770
Total accrued expenses	$	6,842	$	7,500

(6) Long-Term Debt

Long-term debt consists of the following as of:

	March 31, 2018			December 31, 2017
	(unaudited)
Senior secured credit facility	$	32,000		$	32,000
Payment-in-kind interest	2,254			2,223
Discount on long-term debt	(473		)	(534		)
Deferred financing costs	(663		)	(368		)
Long-term debt	$	33,118		$	33,321

On February 28, 2018, the Company entered into a Sixth Amendment to the Credit Agreement with its lender, Athyrium Opportunities II Acquisition LP ("Athyrium") which removed the minimum quarterly revenue requirement and increased the maximum debt-to-revenue ratio to 0.54 from 0.49 with the maximum debt-to-revenue ratio declining gradually each quarter over the remaining term of the facility.

As of March 31, 2018, the Company was in compliance with the financial covenants.

(7) Stock Based Compensation

In June 2017, the 2017 Equity Incentive Plan (the "2017 Plan") was approved by the Company's stockholders and replaced the Company's 2016 Equity Incentive Plan (the "2016 Plan"), which was the successor to the 2006 Stock Option Plan ("the 2006 Plan")(collectively with the 2016 Plan, the "Prior Plans"). Grants will no longer be made under the Prior Plans, but the awards that remain outstanding will continue to be governed by the terms of the applicable Prior Plan and the applicable award agreement.

A summary of the stock option activity under the Company's 2017 Plan and Prior Plans (collectively, the "Equity Plans") as of March 31, 2018 is presented below.

	Options		Weighted Average Exercise Price	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Options outstanding, December 31, 2017	1,390,428		$4.64	7.0 years	$2,432
Options granted	580,901		$6.58
Options exercised	(44,418	)	$2.32
Options forfeited	(20,410	)	$4.35
Options vested and expected to vest, March 31, 2018	1,906,501		$5.29	7.7 years	$2,888
Options exercisable	715,925		$3.60	5.0 years	$2,149

Shares subject to awards granted under the 2017 Plan which expire, are repurchased, or are canceled or forfeited will again become available for issuance under the 2017 Plan. The shares available will not be reduced by awards settled in cash or by shares

7

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements (Continued)

(In thousands, except for share data)

withheld to satisfy tax withholding obligations. Only the net number of shares issued upon the exercise of options by means of a net exercise will be deducted from the shares available under the 2017 Plan.

The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Three Months Ended March 31, 2018		Three Months Ended March 31, 2017
Risk free interest rate	2.7	%	2.1	%
Expected dividend yield	—	%	—	%
Estimated volatility	63.2	%	63.9	%
Expected life	5.8 years		6.0 years

Additional information regarding options is as follows:

	Three Months Ended March 31, 2018		Three Months Ended March 31, 2017
Weighted-average grant date fair value of options granted during the period	$	3.86	$	6.99
Aggregate intrinsic value of options exercised during the period	$	170	$	93

The total compensation cost recognized for stock-based awards was $323 for the three months ended March 31, 2018 and $110 for the three months ended March 31, 2017.

The aggregate intrinsic value in the table above represents the total pre-tax value of the options shown, calculated as the difference between the Company’s closing stock price on March 31, 2018 and the exercise prices of the options shown, multiplied by the number of in-the money options. This is the aggregate amount that would have been received by the option holders if they had all exercised their options on March 31, 2018 and sold the shares thereby received at the closing price of the Company’s stock on that date. This amount changes based on the closing price of the Company’s stock.

The Company has 248,500 options outstanding to purchase common shares that vest upon the Company's achievement of certain revenue targets for calendar year 2018. Achievement of the performance targets deemed probable are included in total stock compensation expense.

Unrecognized compensation expense related to unvested options was approximately $4,041 at March 31, 2018, with a remaining amortization period of 3.2 years.

A summary of the restricted stock unit activity under the Company's Equity Plans as of March 31, 2018 is presented below.

	Units		Weighted Average Grant Date Fair Value	Aggregate Intrinsic Value
Unvested units, December 31, 2017	61,198		$5.60	$343
Restricted stock units granted	58,863		$6.58
Restricted stock units forfeited	(894	)	$6.50
Unvested units, March 31, 2018	119,167		$6.08	$747

Unrecognized compensation expense related to unvested restricted stock units was approximately $621 at March 31, 2018, with a remaining amortization period of 3.2 years.

(8) Income Taxes

The provision for income taxes for the three months ended March 31, 2018 and 2017 includes both domestic and foreign income taxes at applicable statutory rates. The provision primarily consists of foreign income taxes.

The Company has established a valuation allowance equal to the total net domestic deferred tax asset due to uncertainties regarding the realization of deferred tax assets based on the Company's lack of earnings history.

As of March 31, 2018, the Company has no unrecognized tax benefits or accrued interest or penalties associated with uncertain tax positions.

8

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements (Continued)

(In thousands, except for share data)

As of March 31, 2018, the Company has not completed its accounting for the tax effects of the Tax Cut and Jobs Act but has made reasonable estimates of the effects on the remeasurement of its deferred tax assets and liabilities as well as its transition tax liability. The Company will continue to make and refine its calculations as additional analysis is completed. No revisions were recorded during the three months ended March 31, 2018.

(9) Net Loss Per Share

The basic and diluted net loss per common share presented in the condensed consolidated statements of operations and comprehensive loss is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Potentially dilutive shares, which include warrants for the purchase of common stock, restricted stock units, and options outstanding under the Company's equity incentive plans, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

Potentially dilutive securities not included in the calculation of diluted net loss per share attributable to common stockholders because to do so would be anti-dilutive are as follows (in common stock equivalent shares on a weighted-average basis):

	Three Months Ended March 31,
	2018	2017
Warrants for common stock	251,891	252,021
Common stock options	1,525,688	1,146,196
Restricted stock units	80,579	—
	1,858,158	1,398,217

(10) Liquidity and Capital Resources

The Company has experienced operating losses since inception and occasional debt covenant violations and has an accumulated deficit of $185,155 as of March 31, 2018. To date, the Company has funded its operating losses and acquisitions through equity offerings and the issuance of debt instruments. The Company's ability to fund future operations will depend upon its level of future operating cash flow and its ability to access additional funding through either equity offerings, issuances of debt instruments or both.

In December 2017, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission ("SEC"), which permits the offering, issuance and sale by it of up to $50,000 of its common stock. In December 2017, the Company also entered into a sales agreement with Cantor Fitzgerald & Co. for the sale and issuance of shares of its common stock of up to $16,000 from time to time in an "at-the-market" program. During the three months ended March 31, 2018, the Company has not sold any shares of common stock under this registration statement.

In February 2015, the Company entered into the Credit Agreement that requires the Company to meet minimum revenue requirements and other covenants each quarter and provides a cure provision in the event this requirement is not met. In February 2018, the Company entered into a Sixth Amendment to the Credit Agreement that removed the minimum quarterly revenue requirement and increased the maximum debt-to-revenue ratio to 0.54 from 0.49 with the maximum debt-to-revenue ratio declining gradually each quarter over the remaining term of the facility. If the Company is not able to meet its ongoing quarterly covenant requirements or utilize the remaining cure provision right, the repayment of the Credit Facility could be accelerated at the lender's discretion. The Company believes it has sufficient liquidity and sources of liquidity to meet its cash requirements for at least the next twelve months.

(11) Fair Value Measurements

The carrying amounts of the Company's financial instruments, which primarily include cash, cash equivalents, and restricted cash, accounts receivable, accounts payable and accrued expenses, approximate their fair values due to their short maturities. The fair value of the Company's long-term debt is estimated by management to approximate $32,144 at March 31, 2018. Management's estimates are based on comparisons of the characteristics of the Company's obligations, comparable ranges of interest rates on recently issued debt, and maturity. Such valuation inputs are considered a Level 3 measurement in the fair value valuation hierarchy. 

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

9

APOLLO ENDOSURGERY, INC. AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements (Continued)

(In thousands, except for share data)

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

(12) Segment and Geographic Information

Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company globally manages the business within one reportable segment. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. The Company’s products are principally sold in the U.S. No other countries are individually significant.

Product sales by product group and geographic market, based on the location of the customer, whether the U.S. or outside the U.S. ("OUS") for the periods shown were as follows:

	Three Months Ended March 31, 2018										Three Months Ended March 31, 2017
	(unaudited)
	U.S.			OUS			Total Revenues		% Total Revenues		U.S.			OUS			Total Revenues		% Total Revenues
Endo-bariatric	$	4,108		$	6,188		$	10,296	65.4	%	$	3,496		$	3,838		$	7,334	50.5	%
Surgical	2,938			2,266			5,204		33.1	%	4,097			2,923			7,020		48.4	%
Other	233			10			243		1.5	%	157			6			163		1.1	%
Total revenues	$	7,279		$	8,464		$	15,743	100.0	%	$	7,750		$	6,767		$	14,517	100.0	%
% Total revenues	46.2		%	53.8		%					53.4		%	46.6		%

Total distributor sales were 19.7% and 18.8% of total OUS revenues for the three months ended March 31, 2018 and 2017, respectively. The largest individual country outside the U.S. was 7.7% and 7.8% of total revenues for the three months ended March 31, 2018 and 2017, respectively.

The following table represents property and equipment, net based on the physical geographic location of the asset:

	March 31, 2018		December 31, 2017
	(unaudited)
United States	$	3,085	$	2,855
Costa Rica	3,538		3,748
Other	256		282
Total property and equipment, net	$	6,879	$	6,885

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This quarterly report (“ Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances 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. Given these risks, uncertainties and other important factors, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report.

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Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes, and our Annual Report on Form 10-K for the year ended December 31, 2017 filed on March 1, 2018 with the Securities and Exchange Commission ("SEC"). “Apollo,” Lap-Band®, Orbera®, OverStitch™, the Apollo logo and other trademarks, service marks and trade names of Apollo are registered and unregistered marks of Apollo Endosurgery, Inc. in the United States and other jurisdictions.

Overview 

We are a medical technology company primarily focused on the design, development and commercialization of innovative medical devices. We develop and distribute devices for minimally invasive surgical and non-surgical bariatric and gastrointestinal procedures that are used by general surgeons, bariatric surgeons and gastroenterologists in a variety of settings to provide interventional therapy to patients who suffer from obesity and many co-morbidities associated with obesity as well as various other gastrointestinal conditions.

Our three core products are the Orbera Intragastric Balloon System, the OverStitch Endoscopic Suturing System, and The Lap-Band Adjustable Gastric Banding System. Our strategic focus and the majority of our future revenue growth is expected to come from our Endo-bariatric product portfolio, which consists of the Orbera and OverStitch flexible endoscopy systems. Prior to 2017, the majority of our revenues came from Surgical product sales, which is comprised of the Lap-Band System and accessory products.

We have sales distribution offices in England, Australia, Italy, and Brazil that oversee regional sales and distribution activities outside the U.S., a products manufacturing facility in Costa Rica and a device analysis lab in California. All other activities are managed and operated from facilities in Austin, Texas.

Financial Operations Overview 

Revenues

Our principal source of revenues has come from and is expected to continue to come from sales of our Endo-bariatric products and our Surgical products. In our direct markets, product sales are made to end customers. In other markets, we sell our products to distributors who resell our products to end customers. Revenues between periods will be impacted by several factors, including physician procedures and therapy preferences, patient procedures and therapy preferences, other market trends, the stability of the average sales price we realize on products and changes in foreign exchange rates used to translate foreign currency denominated sales into U.S. dollars. In the U.S., we also offer Orbera^® Coach, an online portal subscription that helps facilitate aftercare for Orbera patients.

Cost of Sales

Prior to June 2016, our inventory was purchased from third-party suppliers, and our cost of sales consisted of this purchase price for inventory plus excess and obsolete inventory charges, royalties, shipping, inspection and related costs incurred in making our products available for sale or use. Since June 2016, we began product manufacturing activity and cost of sales now also includes raw materials, labor, and manufacturing overhead for some of our products. We also continue to purchase some of our products. Raw materials used in our manufacturing activity are generally not subject to substantial commodity price volatility, and most of our manufacturing costs are incurred in U.S. dollars. Manufacturing overhead is a significant portion of our cost of sales. Cost of sales could vary as a percentage of revenue between periods as a result of manufacturing rates and the degree to which manufacturing overhead is allocated to production during the period. Cost of sales for the products we now manufacture may be higher than the costs incurred when we acquired inventory from third parties in the past. Additionally, we expect our gross margin will continue to be impacted by the shift in revenue mix from the declining but higher gross margin Surgical products to lower gross margin but high-growth Endo-bariatric products. Over the next two years, we expect gross margin to improve as we complete certain identified Endo-bariatric gross margin improvement projects and improve capacity utilization of our manufacturing facility. Comparability of cost of sales between periods could also be affected by inventory valuation allowances related to obsolete or excess inventory.

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 advertising, industry events and other promotional activities.

General and Administrative Expense

General and administrative expense primarily consists of salaries, benefits and other related costs, including stock based compensation, for personnel employed in corporate management, finance, legal, compliance, information technology and human resource

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departments. General and administrative expense also includes facilities cost, legal fees, insurance, audit fees, bad debt expense and costs related to the development and protection of 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 dependent on the activity in the period associated with our various product development and clinical obligations.

Intangible Amortization

Definite-lived intangible assets primarily consist of customer relationships, product technology, trade names, patents and trademarks. Intangible assets are amortized over the asset's estimated useful life.

Critical Accounting Policies and Estimates 

Our management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which management has prepared in accordance with existing U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue and expenses during the reporting periods. Management evaluates estimates and judgments on an ongoing basis. Estimates relate to aspects of our revenue recognition, useful lives with respect to intangible and long-lived assets, inventory valuation, stock compensation, deferred tax asset valuation, long-lived asset and goodwill impairment, and allowances for doubtful accounts. We base our estimates on historical experience and on various other factors that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

The critical accounting policies addressed below reflect our most significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

Our principal source of revenues is from the sale of our products to hospitals, physician practices and distributors. We utilize a network of employee sales representatives in the U.S. and a combination of employee sales representatives, independent agents and distributors in markets OUS. The Company adopted the provisions of ASU 2014-09, Revenue from Contracts with Customers on January 1, 2018 as discussed in Note 2(c). Revenue is recognized when control of the promised goods is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in an exchange for those goods. Generally, these conditions are met upon product shipment. Customers generally have the right to return or exchange products purchased from us for up to thirty days from the date of product shipment. Distributors, who resell the products to their customers, take title to products and assume all risks of ownership at the time of shipment and are obligated to pay within specified terms regardless of when, if ever, they sell their products. At the end of each period, we determine the extent to which our revenues need to be reduced to account for expected rebates, returns and exchanges. We classify any shipping and handling cost billed to customers as revenue and the related expenses as cost of sales.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are at the invoiced amount less an allowance for doubtful accounts. On a regular basis, we evaluate accounts receivable and estimate an allowance for doubtful accounts, as needed, based on various factors such as customers' current credit conditions, length of time past due and the general economy as a whole. We write off receivables against the allowance when they are determined to be uncollectible.

Inventory

Inventory is stated at the lower of cost or market, net of any allowance for unsalable inventory. Charges for excess and obsolete inventory are based on specific identification of excess and obsolete inventory items and an analysis of inventory items approaching expiration date. We evaluate the carrying value of inventory in relation to the estimated forecast of product demand. A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. When quantities on hand exceed estimated sales forecasts, we record estimated excess and obsolescence charges to cost of sales. Our inventories are stated using the weighted average cost approach, which approximates actual costs.

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Intangible and Long-lived Assets

Definite-lived intangible assets consist of customer relationships, product technology, trade names, patents and trademarks which are amortized over their estimated useful lives.

Long-lived assets, including definite-lived intangible assets, are monitored and reviewed for impairment whenever events or circumstances indicate that the carrying value of any such asset may not be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset and its eventual disposal. The estimate of undiscounted cash flows is based upon, among other things, certain assumptions about expected future operating performance. Our estimates of undiscounted cash flows may differ from actual cash flows. If the sum of the undiscounted cash flows is less than the carrying value of the asset, an impairment charge is recognized, measured as the amount by which the carrying value exceeds the fair value of the asset.

Income Taxes

We account for deferred income taxes using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. Temporary differences are then measured using the enacted tax rates and laws. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more-likely than-not to be realized. Determining the appropriate amount of valuation allowance requires management to exercise judgment about future operations.

In the ordinary course of business, there are many transactions for which the ultimate tax outcome is uncertain. We regularly assess uncertain tax positions in each of the tax jurisdictions in which we have operations and account for the related consolidated financial statement implications. The amount of unrecognized tax benefits is adjusted when information becomes available or when an event occurs indicating a change is appropriate. We include interest and penalties related to our uncertain tax positions as part of income tax expense.

Results of Operations

Comparison of the Three Months Ended March 31, 2018 and 2017

	Three Months Ended March 31, 2018					Three Months Ended March 31, 2017
	Dollars			% of Revenues		Dollars			% of Revenues
Revenues	$	15,743		100.0	%	$	14,517		100.0	%
Cost of sales	6,553			41.6	%	5,096			35.1	%
Gross margin	9,190			58.4	%	9,421			64.9	%
Operating expenses:
Sales and marketing	9,245			58.7	%	8,274			57.0	%
General and administrative	3,319			21.1	%	4,187			28.8	%
Research and development	2,456			15.6	%	1,957			13.5	%
Amortization of intangible assets	1,802			11.4	%	1,814			12.5	%
Total operating expenses	16,822			106.9	%	16,232			111.8	%
Loss from operations	(7,632		)	(48.5	)%	(6,811		)	(46.9	)%
Interest expense, net	960			6.1	%	1,481			10.2	%
Other income	(516		)	(3.3	)%	(125		)	(0.9	)%
Net loss before income taxes	(8,076		)	(51.3	)%	(8,167		)	(56.3	)%
Income tax expense	58			0.4	%	50			0.3	%
Net loss	$	(8,134	)	(51.7	)%	$	(8,217	)	(56.6	)%

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Revenues

Product sales by product group and geographic market for the periods shown were as follows:

	Three Months Ended March 31, 2018								Three Months Ended March 31, 2017								% Increase / (Decrease)
	U.S.			OUS			Total Revenues		U.S.			OUS			Total Revenues		U.S.		OUS		Total Revenues
Endo-bariatric	4,108			6,188			10,296		3,496			3,838			7,334		17.5	%	61.2	%	40.4	%
Surgical	2,938			2,266			5,204		4,097			2,923			7,020		(28.3	)%	(22.5	)%	(25.9	)%
Other	233			10			243		157			6			163		48.4	%	66.7	%	49.1	%
Total revenues	$	7,279		$	8,464		$	15,743	$	7,750		$	6,767		$	14,517	(6.1	)%	25.1	%	8.4	%
% Total revenues	46.2		%	53.8		%			53.4		%	46.6		%

Total revenues in the first quarter of 2018 were $15.7 million, compared to $14.5 million in the first quarter 2017, an increase of 8.4%. Foreign currency fluctuations increased total revenues $0.6 million.

Total Endo-bariatric product sales increased 40.4% to $10.3 million in the first quarter of 2018 compared to $7.3 million in the first quarter of 2017. OUS Endo-bariatric product sales increased 61.2% or $2.4 million due to increases in OverStitch product sales as well as higher average selling prices and increased unit sales resulting from the Orbera365™ product introduction in Europe, which began in the fourth quarter of 2017. U.S. Endo-bariatric product sales increased 17.5%, or $0.6 million in the first quarter of 2018 compared to the same quarter of 2017 primarily due to higher volume and average selling prices of our OverStitch products. Consolidated Endo-bariatric product sales comprised 65.4% of total revenues in the first quarter of 2018 compared to 50.5% in the same period of 2017.

    Total Surgical product sales decreased $1.8 million, or 25.9% in the first quarter 2018 compared to the first quarter of 2017 due to reductions in gastric banding procedures being performed. Total OUS Surgical sales decreased $0.6 million, or 22.5% to $2.3 million in the first quarter of 2018 compared to $2.9 million for the first quarter of 2017. U.S. Surgical product sales decreased $1.2 million, or 28.3% to $2.9 million for the first quarter of 2018 compared to $4.1 million for the first quarter of 2017.

Cost of Sales

Costs of product sales for the periods shown were as follows:

	Three Months Ended March 31, 2018				Three Months Ended March 31, 2017
	Dollars		% Total Revenues		Dollars		% Total Revenues
Materials, labor and purchased goods	$	4,513	28.7	%	$	3,484	24.0	%
Overhead	1,270		8.1	%	971		6.7	%
Change in inventory reserve	102		0.6	%	80		0.5	%
Other indirect costs	668		4.2	%	561		3.9	%
Total cost of sales	$	6,553	41.6	%	$	5,096	35.1	%

Gross Margin

Gross margin for the first quarter of 2018 was 58.4%, compared to 64.9% for the first quarter of 2017 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.

Operating Expenses

Sales and Marketing Expense. Sales and marketing expense increased $1.0 million due to expansion of our OUS sales and marketing organization, higher sales incentive compensation, and increased Orbera direct to consumer program spend in the U.S.

General and Administrative Expense. General and administrative expense decreased $0.9 million due to lower legal and accounting costs in the first quarter of 2018 when compared to the first quarter of 2017 when the Company incurred costs associated with initial regulatory filings and corporate governance activities required of a new public company. 

Research and Development Expense. Research and development expense increased $0.5 million due to higher clinical trial activities in connection with the Orbera post-approval study, the MERIT-Trial, and the AGA (American Gastroenterological Association) registry.

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Loss from Operations.

Loss from operations for the three months ended March 31, 2018 and 2017 was $7.6 million and $6.8 million, respectively.

Other Expenses

Interest Expense. Interest expense for the first quarter of 2018 decreased $0.5 million when compared to the first quarter of 2017 due to lower interest charges as a result of a $7.0 million principal payment in March 2017.

Other Income. Other income primarily consists of realized and unrealized foreign exchange gains and losses. The increase in other income of $0.4 million for the three months ended March 31, 2018, compared to the same period in 2017 was primarily caused by the movement in exchange rates on short-term intercompany loans denominated in U.S. dollars payable by Apollo’s foreign subsidiaries.

Liquidity and Capital Resources

We have experienced operating losses since inception and occasional debt covenant violations and have an accumulated deficit of $185.2 million as of March 31, 2018. To date, we have funded our operating losses and acquisitions through equity offerings and the issuance of debt instruments. Our ability to fund future operations will depend upon our level of future operating cash flow and our ability to access additional funding through either equity offerings, issuances of debt instruments or both. We believe we have sufficient liquidity and sources of liquidity to meet our cash requirements for at least the next twelve months.

In December 2017, we filed a shelf registration statement on Form S-3 with the SEC, which permits the offering, issuance and sale by us of up to $50.0 million of our common stock. In December 2017, we also entered into a sales agreement with Cantor Fitzgerald & Co. for the sale and issuance of shares of our common stock of up to $16.0 million from time to time in an "at-the-market" program. During the three months ended March 31, 2018, we have not sold any shares of common stock under this registration statement.

Senior Secured Credit Facility

In February 2015, we entered into the Credit Agreement to borrow $50.0 million which is due in February 2020. The facility bears interest at 10.5% annually including 3.5% payment-in-kind during the first year. An additional 2% of the outstanding amount will be due upon prepayment or repayment of the loan in full. We used the proceeds of this facility to refinance existing indebtedness incurred as part of our acquisition of the obesity intervention division of Allergan, Inc. in December 2013. This facility includes covenants and terms that place certain restrictions on our ability to incur additional indebtedness, incur additional liens, make investments, effect mergers, declare or pay dividends, sell assets, engage in transactions with affiliates or make capital expenditures. The facility also includes financial covenants including minimum consolidated quarterly revenue, and a consolidated debt to revenue ratio. We have not been in compliance with financial covenants in the past and received waivers or amendments from the lender in respect of these covenants. If we are not able to maintain compliance with our ongoing financial covenants or are otherwise unable to negotiate a waiver or amendment to the covenant requirements, the repayment of the facility could be accelerated at the lender's discretion.

In February 2018, we entered into a Sixth Amendment to the Credit Agreement which removed the minimum quarterly revenue requirement and increased the maximum debt-to-revenue ratio to 0.54 from 0.49 with the maximum debt-to-revenue ratio declining gradually each quarter over the remaining term of the facility.

Cash Flows

The following table provides information regarding our cash flows:

	Three Months Ended March 31,
		2018			2017
Net cash used in operating activities		$	(6,686	)	$	(3,451	)
Net cash used in investing activities		(1,293		)	(430		)
Net cash used in financing activities		(250		)	(6,979		)
Effect of exchange rate changes on cash		68			53
Net change in cash, cash equivalents and restricted cash		$	(8,161	)	$	(10,807	)

Operating Activities

Cash used in operating activities of $6.7 million for the three months ended March 31, 2018 was primarily the result of a net loss of $8.1 million net of non-cash charges of $2.5 million primarily related to depreciation, amortization, foreign currency on intercompany loans and stock based compensation. Additionally, cash used by operating assets and liabilities of $1.1 million related to working capital changes primarily due to an increase in inventory purchases.

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Cash used in operating activities of $3.5 million for the three months ended March 31, 2017 was primarily the result of a net loss of $8.2 million net of non-cash charges of $2.8 million primarily related to depreciation, amortization, and non-cash interest expense. Additionally, cash provided by operating assets and liabilities of $2.0 million related to working capital changes primarily associated with inventory as we reduced our levels of inventory built up in previous periods to mitigate supply risks as we scaled our manufacturing capability.

Investing Activities

Cash used for investing activities increased $0.9 million to $1.3 million for the three months ended March 31, 2018 primarily due to equipment purchases related to our product development and gross margin improvement activities. Cash used for investing activities of $0.4 million for the three months ended March 31, 2017 related to purchases of equipment for our manufacturing facility and ongoing investments in our intellectual property portfolio.

Financing Activities

Cash used in financing activities of $0.3 million for the three months ended March 31, 2018 related to the debt issuance costs associated with an amendment to our senior secured credit facility. Cash used in financing activities of $7.0 million for the three months ended March 31, 2017 related to repayment of $7.0 million principal on the senior secured credit facility.

Future Funding Requirements

As of March 31, 2018, we had cash, cash equivalents and restricted cash balances totaling $23.3 million. We believe our existing cash and cash equivalents and product revenues will be sufficient to meet our liquidity and capital requirements for at least the next twelve months.

In December 2017, we filed a shelf registration statement to sell up to $50.0 million of our common stock and entered into a sales agreement that allows us to sell up to $16.0 million of our common stock at a future date.

Any future capital requirements will depend on many factors including the market acceptance of our products, the cost of our research and development activities, the cost and timing of additional regulatory clearances or approvals, the cost and timing of identified gross margin improvement projects, the cost and timing of clinical programs, the ability to maintain covenant compliance of our current lending facility, and the costs of establishing additional sales, marketing, distribution and manufacturing capabilities. 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 the SEC and accordingly, no such arrangements are likely to have a current or future effect on our financial position.

Recent Accounting Pronouncements

See Note 2(d) to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report for a discussion of recently enacted accounting pronouncements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This item has been omitted as we qualify as a smaller reporting company as defined by Rule 12b-2 of the Exchange Act.

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report, our management (with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO)) conducted an evaluation pursuant to Rule 13a-15 promulgated under the Exchange Act, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the CEO and CFO concluded that as of the end of the period covered by this Quarterly Report such disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as such item is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last quarter covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitation on Effectiveness of Controls

Our management, including our principal executive and principal financial officers, does not expect that our disclosure controls and procedures or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by individuals’ acts, by collusion of two or more people, or by management overriding the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

From time to time, we are involved in legal proceedings. The results of such legal proceedings and claims cannot be predicted with certainty, and regardless of the outcome, legal proceedings could have an adverse impact on our business because of defense and settlement costs, diversion of resources and other factors.

ITEM 1A.  RISK FACTORS

We have identified the following additional risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. Investors should carefully consider the risks described below before making an investment decision. Our business faces significant risks and the risks described below may not be the only risks we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. If any of these risks occur, our business, results of operations or financial condition could suffer, the market price of our common stock could decline and you could lose all or part of your investment in our common stock.

We have marked with an asterisk (*) those risks described below that reflect substantive changes from, or additions to, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2017.

Risks Related to Our Business

We have incurred significant operating losses since inception and may not be able to achieve profitability.

We have incurred net losses since our inception in 2005. For the years ended December 31, 2017 and 2016, we had net losses of $27.3 million and $41.2 million, respectively, and for the three months ended March 31, 2018 we had a net loss of $8.1 million. As of March 31, 2018, we had an accumulated deficit of $185.2 million. To date, we have funded our operations primarily through equity offerings, the issuance of debt instruments, and from sales of our products. We have devoted substantially all of our resources to the acquisition of products, the research and development of products, sales and marketing activities and clinical and regulatory initiatives to obtain approvals for our products. Our ability to generate sufficient revenue from our existing products, and to transition to profitability and generate consistent positive cash flows is uncertain. We may need to raise additional funds in the future, and such funds may not be available on a timely basis, or at all. We expect that our operating expenses may increase as we continue to build our commercial infrastructure, develop, enhance and commercialize our products and incur additional costs associated with being a public company. As a result, we may incur operating losses for the foreseeable future and may never achieve profitability.

Our long-term growth depends on our ability to successfully develop the Endo-Bariatric market and successfully commercialize our Endo-Bariatric products.

It is important to our business that we continue to build a market for Endo-bariatric procedures within the bariatric market. The bariatric market is traditionally a surgical market. Our Endo-bariatric products offer non-surgical and less-invasive weight loss solutions and technology that enable new options for physicians treating their patients who suffer from obesity. However, this is a new market and developing this market is expensive and time-consuming and may not be successful due to a variety of factors including lack of physician adoption, patient demand, or both. Even if we are successful in developing additional products in the Endo-bariatric market, the success of any new product offering or enhancement to an existing product will depend on several factors, including our ability to:

• properly identify and anticipate physician and patient needs;

• effectively train physicians on how to use our products and achieve good patient outcomes;

• effectively communicate with patients and educate them on the benefits of Endo-Bariatric procedures;

• influence procedure adoption in a timely manner;

• develop clinical data that demonstrate the safety and efficacy of the procedures that use our products;

• obtain the necessary regulatory clearances or approvals for new products or product enhancements;

• be FDA - compliant with marketing of new devices or modified products;

• receive adequate coverage and reimbursement for procedures performed with our products; and

• successfully train the sales and marketing team to effectively support our market development efforts.

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If we are unsuccessful in developing and commercializing the Endo-Bariatric market, our ability to increase our revenue will be impaired.

Adverse U.S. and international economic conditions may reduce consumer demand for our products, causing our sales and profitability to suffer.

Adverse economic conditions in the U.S. and international markets may negatively affect our revenues and operating results. Our Endo-bariatric products, such as the Orbera managed weight loss system, have limited reimbursement, and in most cases are not reimbursable by governmental or other health care plans and instead are partially or wholly paid for directly by patients. The gastric banding procedure that uses our Lap-Band system is generally covered by most insurance programs that cover bariatric procedures, however, a gastric banding procedure is an elective procedure and may also require significant copay and other out of pocket expenses by the patient. Sales of our products may be negatively affected by adverse economic conditions impacting consumer spending, including among others, increased taxation, higher unemployment, lower consumer confidence in the economy, higher consumer debt levels, lower availability of consumer credit, higher interest rates and hardships relating to declines in the housing and stock markets which have historically caused consumers to reassess their spending choices and reduce their likelihood to pursue elective surgical procedures. Any reduced consumer demand due to adverse economic or market conditions could have a material adverse effect on our business, cause sales and profitability to suffer, reduce operating cash flow and result in a decline in the price of our common stock. Adverse economic and market conditions could also have a negative impact on our business by negatively affecting the parties with whom we do business, including among others, our business partners, creditors, third-party contractors and suppliers, causing them to fail to meet their obligations to us.

Our future growth depends on physician adoption and recommendation of procedures utilizing our products.

Our ability to sell our products depends on the willingness of our physician customers to adopt our products and to recommend corresponding procedures to their patients. Physicians may not adopt our products unless they determine that they have the necessary skills to use our products and based on their own experience, clinical data, communications from regulatory authorities and published peer-reviewed research that our products provide a safe and effective treatment option. Even if we are able to raise favorable awareness among physicians, physicians may be hesitant to change their medical treatment practices and may be hesitant to recommend procedures that utilize our products for a variety of reasons, including:

• existing preferences for competitor products or with alternative medical procedures and a general reluctance to change to or use new products or procedures;

• lack of experience with our products;

• time and skill commitment that may be necessary to gain familiarity with a new product or new treatment;

• a perception that our products are unproven, unsafe, ineffective or experimental;

• reluctance for a related hospital or healthcare facility to approve the introduction of a new product or procedure;

• a preference for an alternative procedure that may afford a physician or a related hospital or healthcare facility greater remuneration;

• development of new weight loss treatment options, including pharmacological treatments, that are less costly, less invasive, or more effective.

Our future growth depends on patient awareness of and demand for procedures that use our products.

The procedures that utilize our products are generally elective in nature and demand for our products is driven significantly by patient awareness and preference for the procedures that use our products. We educate patients about our products and related procedures through various forms of media. However, the general media, social media and other forms of media outside of our control as well as competing organizations may distribute information that presents our products and related procedures as being unproven, unsafe, ineffective or experimental or otherwise is unfavorable to our products and related procedures. If patient awareness and preference for procedures is not sufficient or is not positive, our future growth will be impaired. In addition, our future growth will be impacted by the level of patient satisfaction achieved from procedures that use our products. If patients who undergo treatment using our product are not satisfied with their results, our reputation and that of our products may suffer. Even if we are able to raise favorable awareness among patients, patients may be hesitant to proceed with a medical treatment for various reasons including:

• perception that our products are unproven or experimental;

• reluctance to undergo a medical procedure;

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• reluctance of a prospective patient to commit to long term lifestyle changes;

• previous long term failure with other weight loss programs;

• out of pocket cost for an elective procedure; and

• alternative weight loss treatments that are perceived to be more effective or less expensive.

We may not be able to successfully introduce new products to the market in a timely manner.

Our future financial performance will depend in part on our ability to develop and manufacture new products or to acquire new products in a cost-effective manner, to introduce these products to the market on a timely basis and to achieve market acceptance of these products. Factors which may result in delays of new product introductions include capital constraints, research and development delays, lack of personnel with sufficient experience or competence, delays in acquiring regulatory approvals or clearances or delays in closing acquisition transactions. Future product introductions may fail to achieve expected levels of market acceptance including physician adoption, patient awareness or both. Factors impacting the level of market acceptance include the timeliness of our product introductions, the effectiveness of medical education efforts, the effectiveness of patient awareness and educational activities, successful product pricing strategies, available financial and technological resources for product promotion and development, the ability to show clinical benefit from future products and the availability of coverage and reimbursement for procedures that use future products.

If we are unable to manage and maintain our direct sales and marketing organizations, we may not be able to generate anticipated revenue.

Our operating results are directly dependent upon the sales and marketing efforts of our employees. If our direct sales representatives fail to adequately promote, market and sell our products, our sales may suffer. In order to generate our anticipated sales, we will need to maintain a qualified and well trained direct sales organization. As a result, our future success will depend largely on our ability to hire, train, retain and motivate skilled sales managers and direct sales representatives. Because of the competition for their services, we cannot assure you we will be able to hire and retain direct sales representatives on favorable or commercially reasonable terms, if at all. Failure to hire or retain qualified sales representatives would prevent us from expanding our business and generating sales. Additionally, new hires require training and take time before they achieve full productivity. If we fail to train new hires adequately, new hires may not become as productive as may be necessary to maintain or increase our sales and we may not be able to effectively commercialize our products, which would adversely affect our business, results of operations and financial condition.

Our long-term growth and our cash flows depend on the ability to stabilize revenue from the sale of our surgical products.

Our surgical products consist of the Lap-Band System and related laparoscopic accessories. In the past, a significant portion of our revenue has come from our surgical products. Revenue from the surgical product portfolio has been decreasing due to a shift in procedure mix to bariatric stapling procedures such as sleeve gastrectomy or gastric bypass procedures. It is important to our long-term growth to stabilize revenue from our surgical product business so that the decline of our surgical products business does not offset growth from other parts of our business.     

There can be no assurance that we will be able to stabilize the declining revenue for our surgical products. Our surgical product revenue in 2017 was $27.6 million, compared with $32.3 million in 2016.

We are dependent on certain suppliers and supply disruptions could materially adversely affect our business and future growth.

If the supply of materials from our suppliers were to be interrupted, replacement or alternative sources might not be readily obtainable. In particular, the products which together comprise our OverStitch Endoscopic Suturing System are sourced from a variety of suppliers and these suppliers further depend on many component providers. As OverStitch sales increase, we have experienced times of temporary supply disruption for a variety of reasons and this has caused delays in our fulfillment of customer orders. However, if such a condition were to persist, our business could suffer as our reputation with customers could be damaged and eventually could lead to reduced future demand for our products. An inability to continue to source materials or components from any of our suppliers could be due to reasons outside of our direct control, such as regulatory actions or requirements affecting the supplier, adverse financial or other strategic developments experienced by a supplier, labor disputes or shortages at the supplier and unexpected demands or quality issues.

If we are required to replace a vendor, a new or supplemental filing with applicable regulatory authorities may be required before the product could be sold with a material or component supplied by a new supplier. The regulatory approval process may take a substantial period of time and we cannot assure investors that we would be able to obtain the necessary regulatory approval for a new material to be used in products on a timely basis, if at all. This could create supply disruptions that would materially adversely affect our business. For example, in instances where we are changing our supplier of a key component of a product, we will need to ensure that we have sufficient supply of the component while the change is reviewed by regulatory authorities.

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We are dependent on warehouses and service providers in the U.S., Brazil, Australia and the Netherlands for product logistics, order fulfillment and distribution support that are owned and operated by third parties. Our ability to supply products to our customers in a timely manner and at acceptable commercial terms could be disrupted or continue to be disrupted by factors such as fire, earthquake or any other natural disaster, work stoppages or information technology system failures that occur at these third party warehouse and service providers.

It is difficult to forecast future performance, which may cause operational delays or inefficiency.

We create internal operational forecasts to determine requirements for components and materials used in the manufacture of our products and to make production plans. Our limited operating history and commercial experience may make it difficult for us to accurately predict future production requirements. If we forecast inaccurately, this may cause us to have shortfalls or backorders that may negatively impact our reputation with customers and cause them to seek alternative products, or could lead us to have excessive inventory, scrap or similar operational and financial inefficiency that could harm our business.

We compete or may compete in the future against other companies, some of which have longer operating histories, more established products and greater resources, which may prevent us from achieving significant market penetration or improved operating results.

Our industry is highly competitive, subject to change and significantly affected by new product introductions and activities of other industry participants. Many of the companies developing or marketing bariatric surgical products are large divisions of publicly-traded companies including the Ethicon division of Johnson & Johnson and the Covidien division of Medtronic PLC. In addition, there are several other publicly-traded or privately-held companies with whom we compete depending on the market, including Obalon Therapeutics, Inc., ReShape Lifesciences, Inc., Spatz Laboratories, Cousin BioTech and Medical Innovation Development (Midband).

These companies may enjoy several competitive advantages, including:

• greater financial and human capital resources;

• significantly greater name recognition;

• established relationships with physicians, referring physicians, customers and third-party payors;

• additional lines of products, and the ability to offer rebates or bundle products to offer greater discounts or incentives to gain a competitive advantage; and

• established sales, marketing and worldwide distribution networks.

If another company successfully develops an approach for the treatment of obesity that is less invasive or more effective than our current product offerings, including pharmacological treatment options, sales of our products would be significantly and adversely affected.

We may be unable to manage our growth effectively.

Our integration of the obesity intervention business of Allergan has provided, and our future growth may create, challenges to our organization. From the acquisition date of December 2, 2013, to December 31, 2017, the number of our employees increased from 50 to 213. In the future, should we grow, we expect to incrementally hire and train new personnel and implement appropriate financial and managerial controls, systems and procedures in order to effectively manage our growth. As a public company, we may need to further expand our financial and potentially other resources to support our public company reporting and related obligations. If we fail to manage these challenges effectively, our business could be harmed.

We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to maintain adequate product liability insurance.

Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices and drug products. This risk exists even if a device or product is approved or cleared for commercial sale by the FDA and manufactured in facilities regulated by the FDA, or an applicable foreign regulatory authority. Our products and product candidates are designed to affect important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with our products or our product candidates could result in patient injury or death. The medical device industry has historically been subject to extensive litigation over product liability claims, and we cannot offer any assurance that we will not face product liability suits. We may be subject to product liability claims if our products cause, or merely appear to or are alleged to have caused, patient injury or death. In addition, an injury that is caused by the activities of our suppliers, such as those who provide us with components and raw materials, may be the basis for a claim against it. Product liability claims may be brought against us by consumers, health care providers or others selling or otherwise coming into contact with our products or product candidates, among others. If we cannot successfully defend ourself against

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product liability claims, we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:

• litigation costs;

• distraction of management’s attention from our primary business;

• the inability to commercialize our products or, if approved or cleared, our product candidates;

• decreased demand for our products or, if approved or cleared, product candidates;

• impairment of our business reputation;

• product recall or withdrawal from the market;

• withdrawal of clinical trial participants;

• substantial monetary awards to patients or other claimants; or

• loss of revenue.

While we may attempt to manage our product liability exposure by proactively recalling or withdrawing from the market any defective products, any recall or market withdrawal of our products may delay the supply of those products to our customers and may impact our reputation. We can provide no assurance that we will be successful in initiating appropriate market recall or market withdrawal efforts that may be required in the future or that these efforts will have the intended effect of preventing product malfunctions and the accompanying product liability that may result. Such recalls and withdrawals may also be used by our competitors to harm our reputation for safety or be perceived by patients as a safety risk when considering the use of our products, either of which could have an adverse effect on our business.

In addition, although we maintain product liability and clinical study liability insurance that we believe is appropriate, this insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, financial condition and results of operations.

The misuse or off-label use of our products may harm our image in the marketplace, result in injuries that lead to product liability suits or result in costly investigations and sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.

The products we currently market have been approved or cleared by the FDA for specific indications. We train our marketing and direct sales force to not promote our products for uses outside of the FDA-approved or cleared indications for use, known as "off-label uses." We cannot, however, prevent a physician from using our products off-label, when in the physician's independent professional medical judgment he or she deems it appropriate. There may be increased risk of injury to patients if physicians attempt to use our products off-label. Furthermore, the use of our products for indications other than those approved or cleared by the FDA or any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.

Physicians may also misuse our products or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our products are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. Product liability claims could divert management's attention from our core business, be expensive to defend, and result in sizable damage awards against us that may not be covered by insurance. In addition, if the FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or we could be subject to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations. Any of these events could significantly harm our business and results of operations and cause our stock price to decline.

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If our facilities or the facility of a supplier become inoperable, we will be unable to continue to research, develop, manufacture and commercialize our products and, as a result, our business will be harmed.

We do not have redundant facilities. We perform substantially all of our manufacturing in a single location in Costa Rica. Our manufacturing facility and equipment would be costly to replace and would require substantial lead time to repair or replace. The manufacturing facility may be harmed or rendered inoperable by natural or man-made disasters, including, but not limited to, flooding, fire, earthquakes, volcanic activity and power outages, which may render it difficult or impossible for us to perform our research, development, manufacturing and commercialization activities for some period of time. The inability to perform those activities, combined with our limited inventory of reserve raw materials and finished product, may result in the inability to continue manufacturing our products during such periods and the loss of customers or harm to our reputation. Although we possess insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and this insurance may not continue to be available to us on acceptable terms, or at all.

*If we experience significant disruptions in our and/or our third-party service providers' information technology systems, our business may be adversely affected.

We depend on information technology systems for the efficient functioning of our business, including but not limited to accounting, data storage, compliance, sales operations and inventory management. A number of information technology systems in use to support our business operations are owned and/or operated by third-party service providers over whom we have no or very limited control, and upon whom we have to rely to maintain business continuity procedures and adequate security controls to ensure high availability of their information technology systems and to protect our proprietary information. While we will attempt to mitigate interruptions, they could still occur and disrupt our operations, including our ability to timely ship and track product orders, project inventory requirements, manage our supply chain and otherwise adequately service our customers. In the event we experience significant disruptions to our information technology systems, we may not be able to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our results of operations and cash flows.

*The ability to protect our or our third-party service providers' information systems and electronic transmissions of sensitive and/or proprietary data from data corruption, cyber-based attacks, security breaches or privacy violations is critical to the success of our business.

We rely on information technology networks and systems, including the Internet, to securely process, transmit and store electronic information, including personal information of our customers and prospective product end-users. A security breach of this infrastructure, including physical or electronic break-ins, computer viruses, malware attacks by hackers and similar breaches, may cause all or portions of our or our third-party providers' systems to be unavailable, create system disruptions or shutdowns, and lead to erasure of critical data and software or unauthorized disclosure of confidential information. We invest in security technology to protect our data against risks of data security breaches and cyber-attacks, and we have implemented solutions, processes, and procedures to help mitigate these risks at various locations, such as encryption, virus protection, security firewalls and information security and privacy policies.

Nonetheless, our or our third-party service providers' information technology and infrastructure are subject to attacks by hackers and may be breached due to inadequacy of the protective measures undertaken, employee errors or omissions, malfeasance or other disruptions. The age of our or our third-party providers' information technology systems, as well as the level of protection and business continuity or disaster recovery capability, varies significantly by application software and third-party service provider, and there can be no guarantee that any such measures, to the extent they are in place, will be effective. In addition, a security breach or privacy violation that leads to disclosure of consumer information (including personally identifiable information, protected health information, or personal data of European Union residents) could harm our reputation, compel us to comply with disparate state and foreign breach notification laws and otherwise subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue. If we or our third-party providers are unable to prevent security breaches or privacy violations or implement satisfactory remedial measures, our operations could be disrupted, we may be subject to additional legal claims or proceedings, or we may suffer loss of reputation, financial loss and other regulatory penalties, which could have a material adverse impact on our business, financial condition and results of operations. Hackers and other cyber criminals are using increasingly sophisticated and constantly evolving techniques, and we may need to expend substantial additional resources to continue to protect against potential security breaches or to address problems caused by such attacks or any breach of our safeguards. In addition, a data security breach could distract management or other key personnel from performing their primary operational duties, impair our ability to transact business with our customers, lose access to critical data or systems, or compromise confidential information including trade secrets and other intellectual property, any of which may harm our competitive position, require us to allocate more resources to improved security technologies, or otherwise adversely affect our business.

In addition, the interpretation and application of consumer and data protection laws in the United States, Europe and elsewhere are often uncertain, contradictory and in flux. For example, the new EU General Data Protection Regulation ("GDPR") that will become effective on May 25, 2018 imposes significant obligations on many U.S. companies, including us, to protect the personal information of European citizens. GDPR may be interpreted and applied in a manner that is inconsistent with our data practices and that our practices will be found to be non-compliant with this regulation. If so, this could result in government-imposed fines or orders requiring that we change

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our data practices, which could have a material adverse effect on our business. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.     

Fluctuations in insurance costs and availability could adversely affect our profitability or our risk management profile.

We hold a number of insurance policies, including product liability insurance, directors’ and officers’ liability insurance, general liability insurance, property insurance and workers’ compensation insurance. If the costs of maintaining adequate insurance coverage increase significantly in the future, our operating results could be materially adversely affected. Likewise, if any of our current insurance coverage should become unavailable to us or become economically impractical, we would be required to operate our business without indemnity from commercial insurance providers. If we operate our business without insurance, we could be responsible for paying claims or judgments against us that would have otherwise been covered by insurance, which could adversely affect our results of operations or financial condition.

Our ability to maintain our competitive position depends on our ability to attract and retain highly qualified personnel.

We believe that our continued success depends to a significant extent upon our efforts and ability to retain highly qualified personnel. All of our officers and other employees are at-will employees, and therefore may terminate employment with us at any time with no advance notice. The replacement of any of our key personnel likely would involve significant time and costs and may significantly delay or prevent the achievement of our business objectives and would harm our business.

Many of our employees have become or will soon become vested in a substantial amount of stock or number of stock options. Our employees may be more likely to leave the Company if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or if the exercise prices of the options that they hold are significantly below the market price of our common stock. Further, our employees’ ability to exercise those options and sell their stock in a public market may result in a higher than normal turnover rate. We do not carry any “key person” insurance policies.

Risks Related to Regulatory Review and Approval of Our Products

Our products are subject to extensive regulation by the FDA, including the requirement to obtain premarket approval and the requirement to report adverse events and violations of the FDC Act that could present significant risk of injury to patients. Even though we have received FDA approval of our PMA applications and 510(k) clearances to commercially market our products, we will continue to be subject to extensive FDA regulatory oversight.

Our products are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals on a timely basis, if at all. In particular, the FDA permits commercial distribution of a new medical device only after the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or is the subject of an approved premarket approval application, or PMA unless the device is specifically exempt from those requirements. The FDA will clear marketing of a lower risk medical device through the 510(k) process if the manufacturer demonstrates that the new product is substantially equivalent to other 510(k) cleared products. High risk devices deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require the approval of a PMA. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. Of our products, Lap-Band and Orbera are class III products and have been approved through the FDA's PMA process and our OverStitch products are class II and have been cleared through the 510(k) process. In addition, although FDA has granted PMA approval for our class III products, holding those approvals in good standing requires ongoing compliance with FDA reporting requirements and conditions of approval including the completion of lengthy and expensive post market approval studies. Despite the time, effort and cost required to obtain approval, there can be no assurance that we will be able to meet all FDA requirements to maintain our PMA approvals or that circumstances outside of our control may cause the FDA to withdraw our PMA approvals.

Our failure to comply with U.S. federal, state and foreign governmental regulations could lead to the issuance of warning letters or untitled letters, the imposition of injunctions, suspensions or loss of regulatory clearance or approvals, product recalls, termination of distribution, product seizures or civil penalties. In the most extreme cases, criminal sanctions or closure of our manufacturing facility are possible.

Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent and, to the extent we market and sell our products internationally, we may be subject to rigorous international regulation in the future. In these circumstances, we would rely significantly on our foreign independent distributors to comply with the varying regulations, and any failures on their part could result in restrictions on the sale of our products in foreign countries.

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If we fail to comply with U.S. federal and state healthcare fraud and abuse or data privacy and security laws and regulations, we could be subject to penalties, including, but not limited to, administrative, civil and criminal penalties, damages, fines, disgorgement, exclusion from participation in governmental healthcare programs and the curtailment of our operations, any of which could adversely impact our reputation and business operations.

Our industry is subject to numerous U.S. federal and state healthcare laws and regulations, including, but not limited to, anti-kickback, false claims, privacy and transparency laws and regulations. Our relationships with healthcare providers and entities, including but not limited to, physicians, hospitals, ambulatory surgery centers, group purchasing organizations and our international distributors are subject to scrutiny under these laws. Violations of these laws or regulations can subject us to penalties, including, but not limited to, administrative, civil and criminal penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in federal and state healthcare programs, including the Medicare, Medicaid and Veterans Administration health programs and the curtailment of our operations. Healthcare fraud and abuse regulations are complex and subject to evolving interpretations and enforcement discretion, and even minor irregularities can potentially give rise to claims that a statute or regulation has been violated. The laws that may affect our ability to operate include, but are not limited to:

• the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in cash or in kind, in exchange for or to induce either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid; the FCA, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent; knowingly making using, or causing to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government; or knowingly making, using, or causing to be made or used, a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal government;

• the civil monetary penalties statute, which imposes penalties against any person or entity who, among other things, is determined to have presented or caused to be presented, a claim to a federal healthcare program that the person knows, or should know, is for an item or service that was not provided as claimed or is false or fraudulent;

• the federal Health Insurance Portability and Accountability Act of 1996, (“HIPAA”), and the federal Health Information Technology for Economic and Clinical Health Act of 2009 ("HITECH"), each as amended, and their implementing regulations, which impose requirements upon certain entities relating to the privacy, security, and transmission of health information;

• the Federal Trade Commission Act and similar laws regulating advertisement and consumer protections;

• the federal Foreign Corrupt Practices Act, which prohibits corrupt payments, gifts or transfers of value to foreign officials; and

• foreign or U.S. state law equivalents of each of the above federal laws

While we do not submit claims for reimbursement to payors and our customers make the ultimate decision on how to submit claims, from time-to-time, we may be asked for reimbursement guidance by our customers. Failure to comply with any of these laws, or any action against us for alleged violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our reputation, business, results of operations and financial condition.

We have entered into consulting agreements with physicians, including some who influence the ordering and use of our products. While we believe these transactions were structured to comply with all applicable laws, including state and federal anti-kickback laws, to the extent applicable, should the government take the position that these transactions are prohibited arrangements that must be restructured or discontinued, we could be subject to significant penalties. The medical device industry’s relationship with physicians is under increasing scrutiny by the OIG, the DOJ, state attorneys general, and other foreign and domestic government agencies. Our failure to comply with laws, rules and regulations governing our relationships with physicians, or an investigation into our compliance by the OIG, DOJ, state attorneys general and other government agencies could significantly harm our business.

To enforce compliance with the healthcare regulatory laws, federal and state enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time and resource consuming and can divert management’s attention from the business. Additionally, as a result of these investigations, healthcare providers and entities may have to agree to onerous additional compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.

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In certain cases, actions to pursue claims under the FCA may be brought by private individuals on behalf of the government. These lawsuits are known as “qui tam” actions and the individuals bringing such suits, sometimes known as “relators” or, more commonly, “whistleblowers” may share in any amounts paid by the entity to the government in fines or settlement. For example, in March 2017, we were informed by the Department of Justice that we were a subject in a federal False Claims Act investigation. The government’s investigation concerned whether there had been a violation of the False Claims Act, 31 U.S.C. § 3729 et. seq. related to our marketing of the Lap-Band System, including the web-based physician locator provided on our website Lap-Band.com. We cooperated fully with the investigation, and on August 21, 2017, we were notified by the Department of Justice that we were no longer a subject in such investigation.

In addition, there has been a recent trend of increased federal and state regulation of payments and transfers of value provided to healthcare professionals or entities. The Affordable Care Act’s provision commonly referred to as the federal Physician Payment Sunshine Act, as well as similar state and foreign laws, impose obligations on medical device manufacturers to annually report certain payments and other transfers of value provided, directly or indirectly, to certain physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their family members. Failure to comply with any of these state, federal, or foreign transparency and disclosure requirements could subject us to significant fines and penalties. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance and reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may fail to comply fully with one or more of these requirements.

Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

Most of these laws apply to not only the actions taken by us, but also actions taken by our distributors. We have limited knowledge and control over the business practices of our distributors, and we may face regulatory action against us as a result of their actions which could have a material adverse effect on our reputation, business, results of operations and financial condition.

In addition, the scope and enforcement of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal or state regulatory authorities might challenge our current or future activities under these laws. Any such challenge could have a material adverse effect on our reputation, business, results of operations and financial condition. Any state or federal regulatory review of the Company, regardless of the outcome, would be costly and time-consuming. Additionally, we cannot predict the impact of any changes in these laws, whether or not retroactive.

Healthcare cost containment pressures and legislative or administrative reforms resulting in restrictive reimbursement practices of third-party payors could decrease the demand for our products, the prices that customers are willing to pay and the number of procedures performed using our products, which could have an adverse effect on our business.

All third-party payors, whether governmental or commercial, whether inside the United States or outside, are developing increasingly sophisticated methods of controlling healthcare costs. These cost-control methods include prospective payment systems, bundled payment models, capitated arrangements, group purchasing, benefit redesign, pre-authorization processes and requirements for second opinions prior to major surgery. These cost-control methods also potentially limit the amount that healthcare providers may be willing to pay for our products. Therefore, coverage or reimbursement for medical devices may decrease in the future.

Federal and state governments in the United States and outside the United State may enact legislation to modify the healthcare system which may result in increased government price controls, additional regulatory mandates and other measures designed to constrain medical costs. These reform measures may limit the amounts that federal and state governments will pay for healthcare products and services, and also indirectly affect the amounts that private payors are willing to pay. These changes could result in reduced demand for our products and may adversely affect our operating results.

Further, from time to time, typically on an annual basis, payment amounts are updated and revised by third-party payors. In cases where the cost of certain of our products are recovered by the healthcare provider as part of the payment for performing a procedure and not separately reimbursed or paid directly by the patient, these updates could directly impact the demand for our products. We cannot predict how pending and future healthcare legislation will impact our business, and any changes in coverage and reimbursement that further restricts coverage of our products or lowers reimbursement for procedures using our products could materially affect our business.

Modifications to our marketed products may require new 510(k) clearances or PMA approvals, or may require us to cease marketing or recall the modified products until clearances or approvals are obtained.

Modifications to our products may require new regulatory approvals or clearances, including 510(k) clearances or premarket approvals, or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use, so that no new 510(k) clearance is necessary. However, the FDA can review a manufacturer's

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decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required. We have made modifications to our products in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing our products as modified, which could require us to redesign our products and harm our operating results. In these circumstances, we may be subject to significant enforcement actions.

If a manufacturer determines that a modification to an FDA-cleared device could significantly affect its safety or efficacy, or would constitute a major change in its intended use, then the manufacturer must file for a new 510(k) clearance or possibly a premarket approval application. Where we determine that modifications to our products require a new 510(k) clearance or premarket approval application, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. For those products sold in the European Union, we must notify our E.U. Notified Body, if significant changes are made to the products or if there are substantial changes to our quality assurance systems affecting those products. Obtaining clearances and approvals can be a time consuming process, and delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.

For our class III devices, new PMAs or PMA supplements are required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device's indication for use, manufacturing process, labeling and design. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel. There is no guarantee that the FDA will grant PMA approval of our future products and failure to obtain necessary approvals for our future products would adversely affect our ability to grow our business. Delays in receipt or failure to receive approvals, the loss of previously received approvals, or the failure to comply with existing or future regulatory requirements could reduce our sales, profitability and future growth prospects.

If our products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.

Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device were to recur. As of August 5, 2015 (date of the Orbera system PMA approval), any Adverse Event related to the Orbera system reported from any region in the world must be assessed for MDR reportability to the FDA. As required per the FDA Code of Federal Regulations (21 CFR) section 803.3, we have established procedures and processes for documentation and evaluation of all complaints relative to reportability requirements. As with all device manufacturers, we have 30 days from "becoming aware" of an incident to submit to FDA a MDR for an event that reasonably suggests that a device has or may have caused or contributed to the incident. As part of this assessment Apollo conducts a complaint investigation of each reported Adverse Event. In the event that an investigation is inconclusive (i.e., the investigation cannot confirm whether or not an Apollo product was a cause of an Adverse Event), Apollo’s policy and practice is to default in favor of reporting events to the FDA. If we fail to report these events to the FDA within the required timeframes, or at all, FDA could take enforcement action against us. Any such adverse event involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.

The FDA may issue safety alerts in response to its review of reported Adverse Events. For instance in February 2017, the FDA issued an update to alert health care providers of reported adverse events of liquid-filled intragastric balloons including several dozen incidents of balloon over-inflation and, separately, a set of reports of acute pancreatitis. In August 2017, the FDA issued an update to alert health care providers of five reports of unanticipated deaths that occurred since 2016 in patients with liquid-filled intragastric balloon system used to treat obesity. Future safety alerts or other communication from FDA may subject us to adverse publicity that could harm our business.

Our international operations must comply with local laws and regulations that present certain legal and operating risks, which could adversely impact our business, results of operations and financial condition.

We currently operate in the U.S., Canada, Brazil, Costa Rica, Australia and key European markets and our products are approved for sale in over 80 different countries; our activities are subject to U.S. and foreign governmental trade, import and export and customs regulations and laws. Compliance with these regulations and laws is costly and exposes us to penalties for non-compliance.

Other laws and regulations that can significantly impact us include various anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, as well as export control laws and economic sanctions laws. Any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant costs and disruption of business associated with an internal and/or government investigation, criminal, civil and administrative penalties, including imprisonment of individuals, fines

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and penalties, denial of export privileges, seizure of shipments, restrictions on certain business activities and exclusion or debarment from government contracting.

Our international operations present the same risks as presented by our United States operations plus unique risks inherent in operating in foreign jurisdictions. These unique risks include:

• foreign regulatory approval which could result in delays leading to possible insufficient inventory levels;

• foreign currency exchange rate fluctuations;

• reliance on sales people and distributors;

• pricing pressure that we may experience internationally;

• competitive disadvantage to competitors who have more established business and customer relationships in a given market;

• reduced or varied intellectual property rights available in some countries;

• economic instability of certain countries;

• the imposition of additional U.S. and foreign governmental controls, regulations and laws;

• changes in duties and tariffs, license obligations, importation requirements and other non-tariff barriers to trade;

• scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on the Company; and

• laws and business practices favoring local companies.

If we experience any of these events, our business, results of operations and financial condition may be harmed.

If we or our suppliers fail to comply with ongoing FDA or foreign regulatory authority requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.

Any product for which we obtain approval or clearance, and the manufacturing processes, reporting requirements, post-market clinical data and promotional activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and other domestic and foreign regulatory bodies. In particular, we and our third-party suppliers are required to comply with the Quality System Requirements (“QSR”). The QSR covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections by the FDA. If we, or our manufacturers, fail to adhere to QSR requirements in the United States or experience delays in obtaining necessary regulatory approvals or clearances, this could delay production of our products and lead to fines, difficulties in obtaining regulatory approvals or clearances, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition or results of operations.

In addition, the FDA audits compliance with the QSR through periodic announced and unannounced inspections of manufacturing and other facilities. The failure by the Company or one of our suppliers to comply with applicable statutes and regulations administered by the FDA, or the failure to timely and adequately respond to any adverse inspection observations or product safety issues, could result in any of the following enforcement actions:

• untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;

• unanticipated expenditures to address or defend such actions;

• customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;

• operating restrictions, partial suspension or total shutdown of production;

• refusing or delaying our requests for regulatory approvals or clearances of new products or modified products;

• withdrawing PMA approvals that have already been granted;

• refusal to grant export approval for our products; or

• criminal prosecution.

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Any of these sanctions could have a material adverse effect on our reputation, business, results of operations and financial condition. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in a failure to produce our products on a timely basis and in the required quantities, if at all.

Our products and operations are required to comply with standards set by foreign regulatory bodies, and those standards, types of evaluation and scope of review differ among foreign regulatory bodies. If we fail to comply with any of these standards adequately or if changes to our manufacturing or supply practices require additional regulatory approval, a foreign regulatory body may take adverse actions or cause delays within their jurisdiction similar to those within the power of the FDA. Any such action or circumstance may harm our reputation and business, and could have an adverse effect on our business, results of operations and financial condition.

Our products may in the future be subject to product recalls that could harm our reputation, business and financial results.

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.

U.S. legislative or FDA regulatory reforms may make it more difficult and costly for us to obtain regulatory approval of our product candidates and to manufacture, market and distribute our products after approval is obtained.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of future products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.

For example, in December 2016, the 21st Century Cures Act was enacted into law. The Act includes many provisions that impact the regulation of medical devices. For example, the Act includes provisions regarding, among other things:

• expediting the development and prioritizing FDA review of “breakthrough” technologies

• expanding the scope of diseases/conditions eligible for a humanitarian device exemption

• encouraging FDA to rely more on real-world evidence to demonstrate device safety and effectiveness

• emphasizing the least burdensome standard for device reviews

Moreover, the policies of a new administration and future federal election outcomes could result in significant legislative and regulatory reforms impacting the FDA’s regulation of our products. Any change in the laws or regulations that govern the clearance and approval processes relating to our current and future products could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products. Significant delays in receiving clearance or approval, or the failure to receive clearance or approval for our new products would have an adverse effect on our ability to expand our business.

If the third parties on which we rely to conduct our clinical trials and to assist us with post market studies do not perform as contractually required or expected, we may not be able to maintain regulatory approval for our products.

We often must rely on third parties, such as medical institutions, clinical investigators, contract research organizations and contract laboratories to conduct our clinical trials and provide data or prepare deliverables for our PMA post market studies required to keep our PMA approvals in good standing. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to applicable clinical protocols or regulatory requirements or for other reasons, our clinical

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activities or clinical trials may be extended, delayed, suspended or terminated, and we may be at risk of losing our regulatory approvals, which could harm our business.

Our operations involve the use of hazardous and toxic materials, and we must comply with environmental laws and regulations, which can be expensive, and may affect our business and operating results.

We are subject to a variety of federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to hazardous materials. Liability under environmental laws can be joint and several and without regard to comparative fault, and environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could harm our business. Although we believe that our activities conform in all material respects with environmental laws, there can be no assurance that violations of environmental and health and safety laws will not occur in the future as a result of human error, accident, equipment failure or other causes. The failure to comply with past, present or future laws could result in the imposition of fines, third-party property damage and personal injury claims, investigation and remediation costs, the suspension of production or a cessation of operations. We also expect that our operations will be affected by other new environmental and health and safety laws on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws, they will likely result in additional costs, and may require us to change how we manufacture our products, which could have a material adverse effect on our business.

Failure to comply with the United States Foreign Corrupt Practices Act and similar laws associated with any activities outside the United States could subject us to penalties and other adverse consequences.

We are subject to the United States Foreign Corrupt Practices Act (“FCPA”) and other anti-bribery legislation around the world. The FCPA generally prohibits covered entities and their intermediaries from engaging in bribery or making other prohibited payments, offers or promises to foreign officials for the purpose of obtaining or retaining business or other advantages. In addition, the FCPA imposes recordkeeping and internal controls requirements on publicly traded corporations and their foreign affiliates. We may face significant risks if we fail to comply with the FCPA and other similar foreign antibribery laws. Although we have implemented safeguards and training, including company policies requiring our employees, distributors, consultants and agents to comply with the FCPA and similar laws, our international operations nonetheless present a risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents, or distributors, because these parties are not always subject to our control. Any violation of the FCPA and related policies could result in severe criminal or civil sanctions, which could have a material and adverse effect on our reputation, business, operating results and financial condition.

Risks Related to Our Intellectual Property

Intellectual property rights may not provide adequate protection, which may permit third parties to compete against us more effectively.

Our success depends significantly on our ability to protect our proprietary rights to the technologies and inventions used in, or embodied by, our products. To protect our proprietary technology, we rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, as well as nondisclosure, confidentiality and other contractual restrictions in our consulting and employment agreements. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage.

Patents

The process of applying for patent protection itself is time consuming and expensive and we cannot assure investors that all of our patent applications will issue as patents or that, if issued, they will issue in a form that will be advantageous to us. The rights granted to us under our patents, including prospective rights sought in our pending patent applications, may not be meaningful or provide us with any commercial advantage and they could be opposed, contested or circumvented by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings.

We own numerous issued patents and pending patent applications that relate to our products, as well as individual components of our products. If any of our patents are challenged, invalidated or legally circumvented by third parties, and if we do not own other enforceable patents protecting our products, competitors could market products and use processes that are substantially similar to, or superior to, ours, and our business will suffer. In addition, the patents we own may not be sufficient in scope or strength to provide us with any meaningful protection or commercial advantage, and competitors may be able to design around our patents or develop products that provide outcomes comparable to ours without infringing on our intellectual property rights. We may also determine from time to time to discontinue the payment of maintenance fees, if we determine that certain patents are not material to our business.

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. On September 16, 2011, the Leahy-Smith America Invents Act (“the Leahy-Smith Act”) was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art, may affect patent litigation and switch the U.S. patent system from a “first-to-invent” system to a “first-to-file” system. Under a “first-to-file” system, assuming the other requirements for patentability are met,

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the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. The U.S. Patent and Trademark Office (“USPTO”) developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first-to-file provisions, became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition. In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and applications.

We may be subject to a third-party preissuance submission of prior art to the USPTO, or become involved in opposition, derivation, reexamination, inter partes review, post-grant review, or other patent office proceedings or litigation, in the U.S. or elsewhere, challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to the Company, or result in our inability to manufacture or commercialize products without infringing third-party patent rights.

Moreover, the USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In addition, periodic maintenance fees on issued patents often must be paid to the USPTO and foreign patent agencies over the lifetime of the patent. While an unintentional lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents and patent applications covering our products or procedures, we may not be able to stop a competitor from marketing products that are the same as or similar to our products, which would have a material adverse effect on our business.

Furthermore, we do not have patent rights in certain foreign countries in which a market may exist in the future, and the laws of many foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. Thus, we may not be able to stop a competitor from marketing and selling in foreign countries products that are the same as or similar to our products.

Trademarks

We rely on our trademarks as one means to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. Our trademark applications may not be approved, however. For example, we have pending Lap-Band trademark registration actions in Canada, Guatemala, and Thailand where the distinctiveness of the Lap-Band trademark has been challenged and where trademark registration may not be granted or maintained. In other jurisdictions, such as Costa Rica, Croatia, Iceland, Norway, Singapore, Switzerland, and Turkey, trademark applications were refused on distinctiveness grounds. Third parties may oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing new brands. Our competitors may infringe our trademarks and we may not have adequate resources to enforce our trademarks.

Trade Secrets and Know-How

We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors, former employees or current employees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be effective.

Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property is not adequately protected so as to protect our market against competitors’ products and methods, our competitive position could be adversely affected, as could our business.

We may in the future be a party to patent and other intellectual property litigation and administrative proceedings that could be costly and could interfere with our ability to sell our products.

The medical device industry has been characterized by frequent and extensive intellectual property litigation. Additionally, the bariatric market is extremely competitive. Our competitors or other patent holders may assert that our products and the methods we employ

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are covered by their patents. If our products or methods are found to infringe, we could be prevented from manufacturing or marketing our products. In the event that we become involved in such a dispute, we may incur significant costs and expenses and may need to devote resources to resolving any claims, which would reduce the cash we have available for operations and may be distracting to management. We do not know whether our competitors or potential competitors have applied for, will apply for, or will obtain patents that will prevent, limit or interfere with our ability to make, use, sell, import or export our products.

Competing products may also be sold in other countries in which our patent coverage might not exist or be as strong. If we lose a foreign patent lawsuit, alleging our infringement of a competitor’s patents, we could be prevented from marketing our products in one or more foreign countries. We may also initiate litigation against third parties to protect our own intellectual property. Most of our intellectual property has not been tested in litigation. If we initiate litigation to protect our rights, we run the risk of having our patents invalidated, which would undermine our competitive position.

Litigation related to infringement and other intellectual property claims, with or without merit, is unpredictable, can be expensive and time-consuming and can divert management’s attention from our core business. If we lose this kind of litigation, a court could require us to pay substantial damages, treble damages and attorneys’ fees, and prohibit us from using technologies essential to our products, any of which would have a material adverse effect on our business, results of operations and financial condition. If relevant patents are upheld as valid and enforceable and we are found to infringe, we could be prevented from selling our products unless we can obtain licenses to use technology or ideas covered by such patents. We do not know whether any necessary licenses would be available to us on satisfactory terms, if at all. If we cannot obtain these licenses, we could be forced to design around those patents at additional cost or abandon our products altogether. As a result, our ability to grow our business and compete in the market may be harmed.

We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of our competitors or are in breach of non-competition or non-solicitation agreements with our competitors.

Many of our employees were previously employed at other medical device companies, including our competitors or potential competitors. We could in the future be subject to claims that we or our employees have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of these former employers or competitors. In addition, we have been and may in the future be subject to claims that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or features that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An inability to incorporate technologies or features that are important or essential to our products would have a material adverse effect on our business, and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or personnel. Any litigation or the threat thereof may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our products, which could have an adverse effect on our business, results of operations and financial condition.

Risks Related to Our Capital Requirements and Finances

We may need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce, eliminate or abandon our commercialization efforts or product development programs.

Our ability to continue as a going concern may require us to obtain additional financing to fund our operations. We may need to raise substantial additional capital to:

• expand the commercialization of our products;

• fund our operations and clinical studies;

• continue our research and development activities;

• support and expand ongoing manufacturing activities;

• defend, in litigation or otherwise, any claims that our products infringe on third-party patents or other intellectual property rights;

• enforce our patent and other intellectual property rights;

• address legal or enforcement actions by the FDA or other governmental agencies and remediate underlying problems;

• commercialize our new products in development, if any such products receive regulatory clearance or approval for commercial sale; and

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• acquire companies or products and in-license products or intellectual property.

We believe that our existing cash and cash equivalents, revenue, proceeds from recent sales of common stock and available debt and equity financing arrangements will be sufficient to meet our capital requirements and fund our operations at least through the next twelve months. However, we have based these estimates on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect. Any future funding requirements will depend on many factors, including:

• market acceptance of our products;

• the scope, rate of progress and cost of our clinical studies;

• the cost of our research and development activities;

• the cost of filing and prosecuting patent applications and defending and enforcing our patent or other intellectual property rights;

• the cost of defending, in litigation or otherwise, any claims that our product infringes third-party patents or other intellectual property rights;

• the cost of defending, in litigation or otherwise, products liability claims;

• the cost and timing of additional regulatory clearances or approvals;

• the cost and timing of establishing additional sales, marketing and distribution capabilities;

• the scope, rate of progress and cost to expand ongoing manufacturing activities;

• costs associated with any product recall that may occur;

• the effect of competing technological and market developments;

• the extent to which we acquire or invest in products, technologies and businesses; and

• the costs of operating as a public company.

If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, or delay, reduce the scope of or eliminate some or all of our development programs.

We cannot be certain that additional funding will be available on acceptable terms, if at all. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could harm our operating results.

Our outstanding debt financing arrangements contain restrictive covenants that may limit our operating flexibility.

Our outstanding debt facility is collateralized by substantially all of our assets and contains customary financial and operating covenants limiting our ability to transfer or dispose of assets, merge with or acquire other companies, make investments, pay dividends, incur additional indebtedness and liens and conduct transactions with affiliates. We therefore may not be able to engage in any of the foregoing transactions until our current debt obligations are paid in full or we obtain the consent of the lenders. We cannot assure you that we will be able to generate sufficient cash flows or revenue to meet the financial covenants or pay the principal and interest on our debt. Furthermore, we cannot assure you that future working capital, borrowings or equity financing will be available to repay or refinance any such debt.

Risks Related to Ownership of Our Common Stock

Our stock price may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid.

The market price of our common stock could be subject to significant fluctuations. Market prices for securities of early-stage medical device, pharmaceutical and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:

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• a slowdown in the medical device industry or the general economy;

• inability to obtain adequate supply of the components for any of our products, or inability to do so at acceptable prices;

• performance of third parties on whom the we may rely, including for the manufacture of the components for our products, including their ability to comply with regulatory requirements;

• the results of our current and any future clinical trials of our devices;

• unanticipated or serious safety concerns related to the use of any of our products;

• the entry into, or termination of, key agreements, including key commercial partner agreements;

• the initiation of, material developments in or conclusion of litigation to enforce or defend any of our intellectual property rights or defend against the intellectual property rights of others;

• announcements by us, our commercial partners or our competitors of new products or product enhancements, clinical progress or the lack thereof, significant contracts, commercial relationships or capital commitments;

• competition from existing technologies and products or new technologies and products that may emerge;

• the loss of key employees;

• changes in estimates or recommendations by securities analysts, if any, who may cover our common stock;

• general and industry-specific economic conditions that may affect our research and development expenditures;

• the low trading volume and the high proportion of shares held by affiliates;

• changes in the structure of health care payment systems; and

• period-to-period fluctuations in our financial results.

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock.

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.

We will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.

We will continue to incur significant legal, accounting and other expenses including costs associated with public company reporting requirements. We will also incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as new rules implemented by the SEC and The Nasdaq Stock Market LLC. Our executive officers and other personnel will need to devote substantial time to these rules and regulations. These rules and regulations are expected to increase our legal and financial compliance costs and to make some other activities more time consuming and costly. These rules and regulations may also make it difficult and expensive for us to obtain directors’ and officers’ liability insurance. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers of the Company, which may adversely affect investor confidence and could cause our business or stock price to suffer.

Anti-takeover provisions in our charter documents and under Delaware General Corporate Law could make an acquisition of the Company more difficult and may prevent attempts by our stockholders to replace or remove Company management.

Provisions in our certificate of incorporation and bylaws may delay or prevent an acquisition or a change in management. In addition, because we are incorporated in Delaware, it is governed by the provisions of Section 203 of the Delaware General Corporate Law, which prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Although we believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.

We do not anticipate that we will pay any cash dividends in the foreseeable future.

The current expectation is that we will retain future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be your sole source of gain, if any, for the foreseeable future. In addition, our ability

34

to pay dividends is limited by covenants in our credit agreement. Additionally, we are a holding company, and our ability to pay dividends will be dependent upon our subsidiaries’ ability to make distributions, which may be restricted by covenants in our credit agreement or any future contractual obligations.

Future sales and issuances of our common stock or other securities may result in significant dilution or could cause the price of our common stock to decline.

We cannot predict what effect, if any, sales of our shares in the public market or the availability of shares for sale will have on the market price of our common stock. However, if certain of our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline. In addition, shares of common stock that are subject to outstanding options will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

We also expect that additional capital may be needed in the future to continue our planned operations. To raise capital, we may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.

The ownership of our common stock is currently highly concentrated, and may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline.

As of March 31, 2018, our executive officers, directors, holders of 5% or more of our common stock and their respective affiliates beneficially owned a majority of our outstanding capital stock. As a result, this group of stockholders has the ability to control us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents or approval of any merger, sale of assets or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders. The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.

The limited public float and trading volume for our common stock may have an adverse impact and cause significant fluctuation of market price.

Our common stock is held by a relatively small number of stockholders. Our officers, directors, and members of management acquire stock or have the potential to own stock through previously granted equity awards. Consequently, our common stock has a relatively small float and low average daily trading volume, which could affect a stockholder’s ability to sell our stock or the price at which it can be sold. In addition, future sales of substantial amounts of our common stock in the public market by those larger stockholders, or the perception that these sales could occur, may adversely impact the market price of the stock and our stock could be difficult for a stockholder to liquidate.

There can be no assurance that an active trading market for our common stock will be sustained in the future. The lack of an active trading market may make it more difficult for you to sell our shares and could lead to our share price being depressed or more volatile.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

35

ITEM 6. EXHIBITS

	Incorporated by Reference
Exhibit No.	Exhibit Description	Schedule / Form	File Number	Exhibit	Filing Date
3.1	Amended and Restated Certificate of Incorporation	Form 8-K	001-35706	3.1	June 13, 2017
3.2	Amended and Restated Bylaws	Form 8-K	001-35706	3.2	June 13, 2017
10.1+*	2018 Bonus Plan
10.2+*	John Molesphini Offer Letter
10.3	Sixth Amendment to Credit Agreement with Athyrium dated February 28, 2018	Form 10-K		10.2	March 1, 2018
31.1 *	Certification of Chief Executive Officer pursuant to Exchange Act Rule, 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *	Certification of Chief Financial Officer pursuant to Exchange Act Rule, 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1# *	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2# *	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

 ____________

+ Management contract or compensation plan or arrangement

36

*    Filed herewith

#     In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

37

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 3, 2018.

APOLLO ENDOSURGERY, INC.

/s/ Todd Newton

Todd Newton

Chief Executive Officer

(Principal Executive Officer)

/s/ Stefanie Cavanaugh

Stefanie Cavanaugh

Chief Financial Officer, Treasurer and Secretary

(Principal Financial Officer)

38

EX-10.1

Apollo Endosurgery 2018 Bonus Plan

PURPOSE OF THE PLAN

The Apollo Endosurgery Bonus Plan (the “Plan”) is designed to reward eligible employees for their contributions toward the successful accomplishment of specific financial and strategic business objectives, and individual performance.

PERFORMANCE

Bonuses under the Plan will be determined based on both corporate performance and individual performance in relation to pre-established objectives.

Corporate Performance

Corporate performance will be measured based on financial objectives approved by the board of directors. The annual plan will specify threshold level(s) of financial performance that the Company has to achieve in order to fund any cash incentive.

Individual Performance

Individual performance will be measured based on the achievement of objectives and goals prepared by each participant and his or her manager and documented on an Individual Performance Plan. Objectives and goals are established at the beginning of each Plan Year, but may be modified throughout the Plan Year as necessary or appropriate, with management approval. Objectives and goals will be expressed as specific, quantifiable measures of performance in relation to key operating decisions for the

participant’s department.

BONUS POOL CALCULATION AND ALLOCATIONS

The Plan will have two separately funded pools - a Corporate pool (the “Corporate Component”) and Individual pool (the “Individual Component”).

The bonus pools will have the following levels of achievement defined below:

• Individual Threshold - minimum Company financial performance required before any individual component portion of an employee’s bonus may be paid. When Company performance is at or above this threshold, individual performance component is funded based on performance rating system.

• Corporate Component Threshold - minimum Company financial performance required before any corporate component pool will be funded.

• Target - financial performance required before the corporate component is eligible to be funded at 100%.

The key financial or operational targets of the Company form the corporate component, which is reviewed and set annually.

There will be no bonus pool for either the Corporate or Individual Components, and bonuses will not be paid, unless the Company achieves a board approved threshold level of financial performance for the plan year. Any exceptions to this are at the board’s sole discretion.

At Target, corporate performance component of the bonus is funded at 100% and individual rating will determine final personal bonus amount.

A multiplier will be applied for performance between the Corporate Threshold and Target to determine the percentage of the bonus pool that will be funded, as well as performance that is above Target. The minimum funding for The Corporate Component bonus pool is 55% and there is no maximum funding limit for over

achieving target.

Performance Driver for 2018: Revenues

• Threshold financial performance in order to fund any Individual Component: Consolidated Revenue of $65 million.

• Threshold financial performance in order to fund any Corporate Component: Consolidated Revenue of $70 million, and that Endo product sales have increased by at least 20% over 2017. The table below demonstrates the funding of the Corporate Component and application of the 2018 multiplier:

Financial Performance for Corporate Component Funding

Threshold    $70 million

Target        pro-forma revenue of $80.5 million

Multiplier    3x

At Threshold    55% of target bonus is funded

At Target    100% of target bonus is funded

Above Target    100% + (excess % above target x 3)

BONUS POOL ADJUSTMENTS AND DIFFERENTIATION BY DEPARTMENT

The bonus pool may be allocated to the business units/function level by the Company’s Chief Executive Officer based on such matters as he may determine to be appropriate, including but not limited to operating income results vs. budget, performance in relation to pre-established objectives and other financial results. For example, a business unit that exceeds its goals may receive a greater share of the total bonus pool than a business unit that under performs, provided that 2018 Endo product sales have increased by at least 20% over 2017 product sales.

At the end of the Plan Year, the Company’s Chief Executive Officer may recommend adjustments to the bonus pool to the board of directors after consideration of key operating results. When calculating corporate performance for purposes of this Plan, the board of directors has the discretion to consider such matters as it determines to be appropriate, including any or all of the following:

• Extraordinary financial or corporate transactions that may occur during the plan year

• Effects of accounting changes

• Expenses for productivity initiatives

• Other non-operating items

• Integration activities or expense

• Performance in relation to pre-established objectives

• Any other items of significant income or expense which are determined to be appropriate adjustments

Individual Bonus Calculation

Target bonus awards will be expressed as a percentage of the employee’s eligible earnings for the Plan Year. Eligible earnings are defined as regular earnings paid during the year, holiday, vacation, and personal leave time. The target percentages will vary by position level. A participant’s actual bonus award may vary above or below the targeted level based on corporate performance, the overall performance of his or her business unit relative to the overall performance of the Company, and the participant’s performance in relation to his or her pre-determined individual objectives.

Position Level	Corporate Component Percentage	Individual Component Percentage
CEO	100%	Board Discretion
C-Level and VPs	80%	20%
Directors, GMs, and Sr. Managers,	50%	50%
Managers and Professional Level (Exempt)	25%	75%
Hourly	0%	100%

EX-10.2

1120 S. Capital of TX Hwy, Bldg. 1, Ste. 300

Austin, Texas 78746

USA Phone: 512.279.5100

FAX: 512.279.5105

March 5, 2018

John Molesphini 111 Indigo Run CV Austin, TX 78738

Dear John:

Apollo Endosurgery, Inc. ("Apollo" or the "Company") is extremely pleased to provide an offer of full-time employment with our company in the position of Executive Vice President, Operations. We expect that your employment with the Company will start on or about Monday, April 2, 2018, subject to your acceptance of the terms of this offer letter.

As the Executive Vice President, Operations, you will report to Apollo's CEO. You will be responsible for working in adherence to Apollo's quality systems including completing new hire training within 30 days of employment and additional training within the timelines and standards of Apollo's training policies. Your responsibilities may be adjusted by your supervisor from time to time.

As a full-time Apollo employee, you will receive the following compensation and benefits, which the Company may modify from time to time, in its discretion:

• Salary: Upon employment, you will receive a starting salary of $11,833.33 per pay period (before applicable withholding and taxes) as your base salary to be paid on the Company's regular paydays on a semi-monthly basis (24 pay cycles per year and pay dates are typically on/about the 15th and last work day of the month). As an exempt salaried employee, you will not be eligible for overtime premiums.

• Annual Bonus: Effective upon your hire date, you will be eligible to participate in Apollo's Corporate Bonus Plan ("Corporate Bonus"). Your incentive target will be 35% of your base salary earnings for the plan year, payable in accordance with the Company's standard policies and practices. You must remain actively employed through the bonus payment date in order to maintain Corporate Bonus payment eligibility for the previous fiscal year. Corporate Bonus achievement will be based upon mutually agreed milestones and other relevant criteria; however, the decision of whether or not such criteria have been met will be at the sole discretion of management. Please note that the determination to pay annual bonuses each year is solely within the discretion of the Board of Directors of the Company. No bonus is guaranteed.

• Employee Stock Option: You will be granted an Incentive Stock Option to purchase shares of Company Common Stock equivalent in value to $250,000 ,(calculated based on the most current Black Sholes Value), subject to Board of Director approval. The granting of these options will be governed by the Company's 2017 Equity Incentive Plan and an option agreement, which the Company will provide you upon request or when you receive your grant. These documents will govern and control your options and any stock issued upon exercise of your options. You should look to these documents for a complete description of the option's terms, but, to summarize, the exercise price of your options will be equal to the fair market value per share of Company's Common Stock on the date of grant, as determined by the Company's Board of Directors, and your options, after the initial vesting of 25% of the shares subject to the option at the one year anniversary of the date of your employment, will vest thereafter in equal monthly installments over thirty-six (36) months, based on continued employment.

• Vacation: You will be eligible for the Company's vacation plan which provides that you accumulate five (5) hours of vacation per pay period. Per the company's policies, you will be

entitled to ten (10) days of sick time per calendar year, which will not carry over to the next calendar year, prorated based on date of hire.

• Health Care Plan and Other Benefits: You will be entitled to participate in the Company's health care plan and all of the other Company standard benefits on the first of the month following your start date, subject to the terms and conditions of such plans.

• COBRA: Should you have a lapse in health benefits from the time you leave your current employer until the date your Apollo health benefits are effective, the Company will reimburse you for the cost of continuing your coverage during that time period.

• Indemnification: When your employment commencing with the Company and upon approval of the board of directors, you will receive a separate indemnification agreement to enter into as an executive of the Company.

• Change in Control Agreement: When your employment commences and pending board of director approval, the Company will provide you with a Change in Control agreement that will offer the equivalent benefit in terms of length of severance and equity acceleration as other Company executives.

• Travel and Other Expenses: You will be entitled to reimbursement by the Company for all reasonable travel, lodging, and other expenses actually incurred in connection with the performance of your duties, against receipts or other appropriate written evidence of such expenditures as required by the appropriate United States Internal Revenue Service regulations and our Company's standard policies and practices.

The Company requires all job candidates to complete a standard background/reference check and to undergo screening for the presence of illegal drugs as a condition for employment. This offer is contingent upon satisfactory completion of both requirements. In the event that employment commences prior to the Company's receipt of any such screening reports, it is the understanding of the employee and the Company that the employee will be immediately discharged in the event of an unsatisfactory result.

As a Company employee, you will be expected to abide by the Company's policies and procedures. As a condition of employment, you will be required to execute and comply with the Company's enclosed standard Invention, Confidential Information and Non-Competition Agreement.

For purposes of federal immigration laws, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided within 3 business days of the effective date of your employment, or your employment relationship with the Company will be terminated.

Your employment relationship with Apollo will be what is called "at will." That is, even after accepting this employment offer, you will have the right to quit at any time, and the Company will have the right to end your employment relationship with the Company for any reason, with or without cause, or for no reason. Of course we hope everything works out for the best, but the Company wants to make sure that you understand that nothing in this letter or in any Company policy or statement (including any other written or verbal statements made to you during negotiations about working at Apollo) is intended to or does create anything but an at will employment relationship. Only the Company's Board of Directors may modify your at-will employment status, or guarantee that you will be employed for a specific period of time. Such modification must be in writing, approved by the Board of Directors, and signed by an authorized Company representative.

You agree that you will not use in the performance of your duties, nor disclose to any Apollo employee, any confidential information or trade secrets of any former employer or other person which would violate your legal obligations to those parties. Performance of your duties at Apollo will only require information and knowledge which is generally known and used by persons with training and experience comparable to your own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by Apollo. You agree that you will not bring onto Company premises any unpublished documents or property belonging to any former employer or other person to whom you have an obligation of confidentiality. You hereby represent that you have disclosed to the Company any contract you have signed that may restrict your activities on behalf of the Company.

The terms and conditions of the offer reflected will remain open until the earlier of the execution of this letter and the Invention, Confidential Information and Non-Competition Agreement or until the close of business on Wednesday, March 7, 2018, unless revoked before then by the Company. Upon execution, this letter, together with the Invention, Confidential Information and Non-Competition Agreement, contains the entire agreement among the parties relating to your proposed employment with the Company and supersedes any previous agreements, including consulting agreements, communications or offers of any kind, written or verbal, between the parties. Changes in your employment terms, other than those changes expressly reserved to the Company's discretion in this letter, require a written modification signed by an authorized Company representative.

John, we have enjoyed speaking with you about this opportunity, and we are excited to invite you to join the Apollo team! We believe that you can make a significant contribution to the success of the Company, and we are eager to have you join us and help us to revolutionize surgery.

Sincerely,

/s/ Mary League

Mary League

Vice President, Human Resources

Accepted and agreed:

John Molesphini

Employee Name - printed

/s/ John Molesphini

Employee Name - Signature

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO RULE 13a-14(a) AND 15d-14(a) OF THE SECURITIES EXCHANGE ACT, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Todd Newton, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Apollo Endosurgery, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision; to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 3, 2018	By:	/s/ Todd Newton
		Todd Newton
		Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO RULE 13a-14(a) AND 15d-14(a) OF THE SECURITIES EXCHANGE ACT, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Stefanie Cavanaugh, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Apollo Endosurgery, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision; to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 3, 2018	By:	/s/ Stefanie Cavanaugh
		Stefanie Cavanaugh
		Chief Financial Officer
		(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Todd Newton, Chief Executive Officer of Apollo Endosurgery, Inc. (the “Company”), hereby certifies to the best of his knowledge that: 

(1) The Company’s Report on Form 10-Q for the period ended March 31, 2018, to which this Certification is attached as Exhibit 32.1 (the “Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 3, 2018	By:	/s/ Todd Newton
		Todd Newton
		Chief Executive Officer
		(Principal Executive Officer)

A signed original of this written statement required by Section 906 has been provided to Apollo Endosurgery, Inc. and will be retained by Apollo Endosurgery, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission, and is not to be incorporated by reference into any filing of Apollo Endosurgery, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Stefanie Cavanaugh, Chief Financial Officer of Apollo Endosurgery, Inc. (the “Company”), hereby certifies to the best of her knowledge that: 

(1) The Company’s Report on Form 10-Q for the period ended March 31, 2018, to which this Certification is attached as Exhibit 32.2 (the “Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 3, 2018	By:	/s/ Stefanie Cavanaugh
		Stefanie Cavanaugh
		Chief Financial Officer
		(Principal Financial Officer)

A signed original of this written statement required by Section 906 has been provided to Apollo Endosurgery, Inc. and will be retained by Apollo Endosurgery, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission, and is not to be incorporated by reference into any filing of Apollo Endosurgery, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2018	Apr. 30, 2018
Document and Entity Information [Abstract]
Entity Registrant Name	APOLLO ENDOSURGERY, INC.
Entity Central Index Key	0001251769
Document Type	10-Q
Document Period End Date	Mar. 31, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		17,509,449
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q1

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 22,341	$ 30,513
Accounts receivable, net of allowance for doubtful accounts of $483 and $452, respectively	11,860	11,729
Inventory, net	15,443	14,343
Prepaid expenses and other current assets	1,255	1,015
Total current assets	50,899	57,600
Restricted cash	916	905
Property and equipment, net of accumulated depreciation of $7,184 and $6,658, respectively	6,879	6,885
Goodwill	6,828	6,828
Intangible assets, net of accumulated amortization of $30,263 and $28,415, respectively	34,693	36,421
Other assets	404	422
Total assets	100,619	109,061
Current liabilities:
Accounts payable	18,840	18,327
Accrued expenses	6,842	7,500
Total current liabilities	25,682	25,827
Long-term debt	33,118	33,321
Total liabilities	58,800	59,148
Commitments and contingencies
Stockholders' equity:
Common stock; $0.001 par value; 100,000,000 shares authorized; 17,335,627 and 17,291,209 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively	17	17
Additional paid-in capital	225,548	225,122
Accumulated other comprehensive income	1,409	1,795
Accumulated deficit	(185,155)	(177,021)
Total stockholders' equity	41,819	49,913
Total liabilities and stockholders' equity	$ 100,619	$ 109,061

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Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Statement of Financial Position [Abstract]
Allowance for doubtful accounts	$ 483	$ 452
Accumulated depreciation	7,184	6,658
Accumulated amortization	$ 30,263	$ 28,415
Common stock, par value (USD per share)	$ 0.001	$ 0.001
Common stock, shares authorized (shares)	100,000,000	100,000,000
Common stock, shares issued (shares)	17,335,627	17,291,209
Common stock, shares outstanding (shares)	17,335,627	17,291,209

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Condensed Consolidated Statements of Operations and Comprehensive Loss - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Income Statement [Abstract]
Revenues	$ 15,743	$ 14,517
Cost of sales	6,553	5,096
Gross margin	9,190	9,421
Operating expenses:
Sales and marketing	9,245	8,274
General and administrative	3,319	4,187
Research and development	2,456	1,957
Amortization of intangible assets	1,802	1,814
Total operating expenses	16,822	16,232
Loss from operations	(7,632)	(6,811)
Other expenses:
Interest expense, net	960	1,481
Other income	(516)	(125)
Net loss before income taxes	(8,076)	(8,167)
Income tax expense	58	50
Net loss	(8,134)	(8,217)
Other comprehensive income (loss):
Foreign currency translation	(386)	142
Comprehensive loss	$ (8,520)	$ (8,075)
Net loss per share, basic and diluted (USD per share)	$ (0.47)	$ (0.77)
Shares used in computing net loss per share, basic and diluted (shares)	17,299,414	10,694,221

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Condensed Consolidated Statements of Changes in Stockholders’ Equity - 3 months ended Mar. 31, 2018 - USD ($) $ in Thousands	Total	Common Stock [Member]	Additional Paid-in Capital [Member]	Accumulated Other Comprehensive Income [Member]	Accumulated Deficit [Member]
Beginning balance, shares at Dec. 31, 2017	17,291,209	17,291,209
Beginning balance at Dec. 31, 2017	$ 49,913	$ 17	$ 225,122	$ 1,795	$ (177,021)
Exercise of common stock options, shares		44,418
Exercise of common stock options	103		103
Stock based compensation	323		323
Foreign currency translation	(386)			(386)
Net loss	$ (8,134)				(8,134)
Ending balance, shares at Mar. 31, 2018	17,335,627	17,335,627
Ending balance at Mar. 31, 2018	$ 41,819	$ 17	$ 225,548	$ 1,409	$ (185,155)

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Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Cash flows from operating activities:
Net loss	$ (8,134)	$ (8,217)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	2,358	2,399
Amortization of deferred financing costs	58	172
Non-cash interest expense	92	284
Change in inventory reserve	102	80
Stock based compensation	323	110
Foreign currency exchange on short-term intercompany loans	(403)	(236)
Changes in operating assets and liabilities:
Accounts receivable	62	658
Inventory	(1,206)	514
Prepaid expenses and other assets	(210)	(131)
Accounts payable and accrued expenses	272	916
Net cash used in operating activities	(6,686)	(3,451)
Cash flows from investing activities:
Purchases of property and equipment	(1,173)	(253)
Purchase of intangibles and other assets	(120)	(177)
Net cash used in investing activities	(1,293)	(430)
Cash flows from financing activities:
Proceeds from exercise of stock options	103	21
Payments of deferred financing costs	(353)	0
Payment of debt	0	(7,000)
Net cash used in financing activities	(250)	(6,979)
Effect of exchange rate changes on cash	68	53
Net decrease in cash, cash equivalents and restricted cash	(8,161)	(10,807)
Cash, cash equivalents and restricted cash at beginning of year	31,418	20,041
Cash, cash equivalents and restricted cash at end of period	23,257	9,234
Supplemental disclosure of cash flow information:
Cash paid for interest	889	1,057
Cash paid for income taxes	$ 14	$ 18

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Organization and Business Description

3 Months Ended

Mar. 31, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization and Business Description

Organization and Business Description

Apollo Endosurgery, Inc. is a Delaware corporation with both domestic and foreign wholly-owned subsidiaries. Throughout these Notes "Apollo" and the "Company" refer to Apollo Endosurgery, Inc. and its consolidated subsidiaries.

Apollo is a medical technology company primarily focused on the design, development, and commercialization of innovative medical devices. The Company's products are used by general surgeons, bariatric surgeons and gastroenterologists in a variety of settings to provide interventional therapy to patients who suffer from obesity and the many co-morbidities associated with obesity as well as various other gastrointestinal conditions.

The Company's core products include the Orbera® Intragastric Balloon System, the OverStitch™ Endoscopic Suturing System (together the "Endo-bariatric" products) and the Lap-Band® Adjustable Gastric Banding System ("Surgical" products). In the U.S., the Company also offers Orbera® Coach, an aftercare program. All devices are regulated by the United States Food and Drug Administration (the "FDA") or an equivalent regulatory body outside the U.S. The Company's products are sold throughout the world with direct sales markets in the U.S., Europe, Australia, Brazil and Canada. The Company also has a manufacturing facility located in Costa Rica.

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Significant Accounting Policies

3 Months Ended

Mar. 31, 2018

Accounting Policies [Abstract]

Significant Accounting Policies

Significant Accounting Policies

(a)   Basis of Presentation

The Company prepared its interim condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"). They do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements include the Company's accounts and the accounts of its wholly-owned subsidiaries. The Company has eliminated all intercompany balances and transactions.

The Company has made estimates and judgments affecting the amounts reported in its condensed consolidated financial statements and the accompanying notes. The actual results that the Company experiences may differ materially from the Company's estimates. The accounting estimates that require the Company's most significant, difficult and subjective judgments include revenue recognition, useful lives of intangible assets and long-lived assets, valuation of inventory, allowance for doubtful accounts, stock compensation, and deferred tax asset valuation.

(b)   Unaudited Interim Results

In management's opinion, the unaudited financial information for the interim periods presented includes all adjustments necessary for a fair presentation of the results of operations, financial position, and cash flows. All adjustments are of a normal recurring nature unless otherwise disclosed. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. This interim information should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017. Certain reclassifications of prior period amounts have been made to conform to the current presentation.

(c)    Revenue Recognition

The Company's principal source of revenue is from the sale of its products. Revenue is recognized when control of the promised goods is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in an exchange for those goods. Generally, these conditions are met under the Company's agreements with most customers upon product shipment.  This includes sales to distributors, who sell the products to their customers, take title to the products and assume all risks of ownership at the time of shipment.  Our distributors are obligated to pay within specified terms regardless of when, if ever, they sell the products.

Customers and distributors generally have the right to return or exchange products purchased from the Company for up to thirty days from the date of product shipment. At the end of each period, the Company determines the extent to which its revenues need to be reduced to account for expected returns and exchanges. Certain customers may receive volume rebates or discounts, which are accounted for as

variable consideration.  We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. 

We record deferred revenues when cash payments are received or due in advance of the transfer of goods. 

The Company accounts for taxes collected from customers and remitted to governmental authorities on a net basis. Accordingly, such amounts are excluded from revenues.  Amounts billed to customers related to shipping and handling are included in revenues. Shipping and handling costs related to revenue producing activities are included in cost of sales.

(d)    Recent Accounting Pronouncements

On January 1, 2018, the Company adopted the provisions of ASU 2014-09, Revenue from Contracts with Customers ("ASC 606"), which requires an entity to recognize revenue when it transfers control of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The Company adopted this new standard using the modified retrospective method and applied this method only to contracts that were not completed as of January 1, 2018. Prior periods were not retrospectively adjusted. There was no material impact on the Company's financial statement upon adoption of the new revenue recognition standard.

In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02") which requires a lessee to recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term which will require companies to recognize most leases on the balance sheet, thereby increasing reported assets and liabilities. ASU 2016-02 will be effective for the Company on January 1, 2019. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) to simplify the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. ASU 2017-04 will be effective for the Company for annual and interim reporting in fiscal years beginning after December 15, 2019.

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Concentrations	3 Months Ended
	Mar. 31, 2018
Risks and Uncertainties [Abstract]
Concentrations	ConcentrationsConsolidated financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash, cash equivalents, restricted cash, and accounts receivable. At March 31, 2018, the Company's cash, cash equivalents and restricted cash are held in deposit accounts at three different banks totaling $23,257. The Company has not experienced any losses in such accounts, and management does not believe the Company is exposed to any significant credit risk. Management further believes that the concentration of credit risk in the Company's accounts receivable is substantially mitigated by the Company's evaluation process, relatively short collection terms, and the high level of creditworthiness of its customers. The Company continually evaluates the status of each of its customers, but generally requires no collateral.

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Inventory

3 Months Ended

Mar. 31, 2018

Inventory Disclosure [Abstract]

Inventory

Inventory

Inventory consists of the following as of:

	March 31, 2018			December 31, 2017
	(unaudited)
Raw materials	$	5,649		$	4,937
Work in progress	401			493
Finished goods	11,529			10,947
Less inventory reserve	(2,136		)	(2,034		)
Total inventory, net	$	15,443		$	14,343

The Company recorded an inventory impairment charge of $102 and $80 for the three months ended March 31, 2018 and 2017, respectively. Finished goods included $379 of consigned inventory at March 31, 2018.

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Accrued Expenses

3 Months Ended

Mar. 31, 2018

Payables and Accruals [Abstract]

Accrued Expenses

Accrued ExpensesAccrued expenses consist of the following:

	March 31, 2018		December 31, 2017
	(unaudited)
Accrued employee compensation and expenses	$	3,442	$	4,243
Accrued professional service fees	492		522
Accrued returns and rebates	402		438
Accrued insurance and taxes	736		527
Other	1,770		1,770
Total accrued expenses	$	6,842	$	7,500

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Long-Term Debt

3 Months Ended

Mar. 31, 2018

Debt Disclosure [Abstract]

Long-Term Debt

Long-Term Debt

Long-term debt consists of the following as of:

	March 31, 2018			December 31, 2017
	(unaudited)
Senior secured credit facility	$	32,000		$	32,000
Payment-in-kind interest	2,254			2,223
Discount on long-term debt	(473		)	(534		)
Deferred financing costs	(663		)	(368		)
Long-term debt	$	33,118		$	33,321

On February 28, 2018, the Company entered into a Sixth Amendment to the Credit Agreement with its lender, Athyrium Opportunities II Acquisition LP ("Athyrium") which removed the minimum quarterly revenue requirement and increased the maximum debt-to-revenue ratio to 0.54 from 0.49 with the maximum debt-to-revenue ratio declining gradually each quarter over the remaining term of the facility.

As of March 31, 2018, the Company was in compliance with the financial covenants.

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Stock Based Compensation

3 Months Ended

Mar. 31, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock Based Compensation

Stock Based Compensation

In June 2017, the 2017 Equity Incentive Plan (the "2017 Plan") was approved by the Company's stockholders and replaced the Company's 2016 Equity Incentive Plan (the "2016 Plan"), which was the successor to the 2006 Stock Option Plan ("the 2006 Plan")(collectively with the 2016 Plan, the "Prior Plans"). Grants will no longer be made under the Prior Plans, but the awards that remain outstanding will continue to be governed by the terms of the applicable Prior Plan and the applicable award agreement.

A summary of the stock option activity under the Company's 2017 Plan and Prior Plans (collectively, the "Equity Plans") as of March 31, 2018 is presented below.

	Options		Weighted Average Exercise Price	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Options outstanding, December 31, 2017	1,390,428		$4.64	7.0 years	$2,432
Options granted	580,901		$6.58
Options exercised	(44,418	)	$2.32
Options forfeited	(20,410	)	$4.35
Options vested and expected to vest, March 31, 2018	1,906,501		$5.29	7.7 years	$2,888
Options exercisable	715,925		$3.60	5.0 years	$2,149

Shares subject to awards granted under the 2017 Plan which expire, are repurchased, or are canceled or forfeited will again become available for issuance under the 2017 Plan. The shares available will not be reduced by awards settled in cash or by shares

withheld to satisfy tax withholding obligations. Only the net number of shares issued upon the exercise of options by means of a net exercise will be deducted from the shares available under the 2017 Plan.

The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Three Months Ended March 31, 2018		Three Months Ended March 31, 2017
Risk free interest rate	2.7	%	2.1	%
Expected dividend yield	—	%	—	%
Estimated volatility	63.2	%	63.9	%
Expected life	5.8 years		6.0 years

Additional information regarding options is as follows:

	Three Months Ended March 31, 2018		Three Months Ended March 31, 2017
Weighted-average grant date fair value of options granted during the period	$	3.86	$	6.99
Aggregate intrinsic value of options exercised during the period	$	170	$	93

The total compensation cost recognized for stock-based awards was $323 for the three months ended March 31, 2018 and $110 for the three months ended March 31, 2017.

The aggregate intrinsic value in the table above represents the total pre-tax value of the options shown, calculated as the difference between the Company’s closing stock price on March 31, 2018 and the exercise prices of the options shown, multiplied by the number of in-the money options. This is the aggregate amount that would have been received by the option holders if they had all exercised their options on March 31, 2018 and sold the shares thereby received at the closing price of the Company’s stock on that date. This amount changes based on the closing price of the Company’s stock.

The Company has 248,500 options outstanding to purchase common shares that vest upon the Company's achievement of certain revenue targets for calendar year 2018. Achievement of the performance targets deemed probable are included in total stock compensation expense.

Unrecognized compensation expense related to unvested options was approximately $4,041 at March 31, 2018, with a remaining amortization period of 3.2 years.

A summary of the restricted stock unit activity under the Company's Equity Plans as of March 31, 2018 is presented below.

	Units		Weighted Average Grant Date Fair Value	Aggregate Intrinsic Value
Unvested units, December 31, 2017	61,198		$5.60	$343
Restricted stock units granted	58,863		$6.58
Restricted stock units forfeited	(894	)	$6.50
Unvested units, March 31, 2018	119,167		$6.08	$747

Unrecognized compensation expense related to unvested restricted stock units was approximately $621 at March 31, 2018, with a remaining amortization period of 3.2 years.

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Income Taxes

3 Months Ended

Mar. 31, 2018

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The provision for income taxes for the three months ended March 31, 2018 and 2017 includes both domestic and foreign income taxes at applicable statutory rates. The provision primarily consists of foreign income taxes.

The Company has established a valuation allowance equal to the total net domestic deferred tax asset due to uncertainties regarding the realization of deferred tax assets based on the Company's lack of earnings history.

As of March 31, 2018, the Company has no unrecognized tax benefits or accrued interest or penalties associated with uncertain tax positions.

As of March 31, 2018, the Company has not completed its accounting for the tax effects of the Tax Cut and Jobs Act but has made reasonable estimates of the effects on the remeasurement of its deferred tax assets and liabilities as well as its transition tax liability. The Company will continue to make and refine its calculations as additional analysis is completed. No revisions were recorded during the three months ended March 31, 2018.

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Net Loss Per Share

3 Months Ended

Mar. 31, 2018

Earnings Per Share [Abstract]

Net Loss Per Share

Net Loss Per Share

The basic and diluted net loss per common share presented in the condensed consolidated statements of operations and comprehensive loss is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Potentially dilutive shares, which include warrants for the purchase of common stock, restricted stock units, and options outstanding under the Company's equity incentive plans, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

Potentially dilutive securities not included in the calculation of diluted net loss per share attributable to common stockholders because to do so would be anti-dilutive are as follows (in common stock equivalent shares on a weighted-average basis):

	Three Months Ended March 31,
	2018	2017
Warrants for common stock	251,891	252,021
Common stock options	1,525,688	1,146,196
Restricted stock units	80,579	—
	1,858,158	1,398,217

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Liquidity and Capital Resources

3 Months Ended

Mar. 31, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Liquidity and Capital Resources

Liquidity and Capital Resources

The Company has experienced operating losses since inception and occasional debt covenant violations and has an accumulated deficit of $185,155 as of March 31, 2018. To date, the Company has funded its operating losses and acquisitions through equity offerings and the issuance of debt instruments. The Company's ability to fund future operations will depend upon its level of future operating cash flow and its ability to access additional funding through either equity offerings, issuances of debt instruments or both.

In December 2017, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission ("SEC"), which permits the offering, issuance and sale by it of up to $50,000 of its common stock. In December 2017, the Company also entered into a sales agreement with Cantor Fitzgerald & Co. for the sale and issuance of shares of its common stock of up to $16,000 from time to time in an "at-the-market" program. During the three months ended March 31, 2018, the Company has not sold any shares of common stock under this registration statement.

In February 2015, the Company entered into the Credit Agreement that requires the Company to meet minimum revenue requirements and other covenants each quarter and provides a cure provision in the event this requirement is not met. In February 2018, the Company entered into a Sixth Amendment to the Credit Agreement that removed the minimum quarterly revenue requirement and increased the maximum debt-to-revenue ratio to 0.54 from 0.49 with the maximum debt-to-revenue ratio declining gradually each quarter over the remaining term of the facility. If the Company is not able to meet its ongoing quarterly covenant requirements or utilize the remaining cure provision right, the repayment of the Credit Facility could be accelerated at the lender's discretion. The Company believes it has sufficient liquidity and sources of liquidity to meet its cash requirements for at least the next twelve months.

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Fair Value Measurements

3 Months Ended

Mar. 31, 2018

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

The carrying amounts of the Company's financial instruments, which primarily include cash, cash equivalents, and restricted cash, accounts receivable, accounts payable and accrued expenses, approximate their fair values due to their short maturities. The fair value of the Company's long-term debt is estimated by management to approximate $32,144 at March 31, 2018. Management's estimates are based on comparisons of the characteristics of the Company's obligations, comparable ranges of interest rates on recently issued debt, and maturity. Such valuation inputs are considered a Level 3 measurement in the fair value valuation hierarchy. 

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

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Segment and Geographic Information

3 Months Ended

Mar. 31, 2018

Segment Reporting [Abstract]

Segment and Geographic Information

Segment and Geographic Information

Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company globally manages the business within one reportable segment. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. The Company’s products are principally sold in the U.S. No other countries are individually significant.

Product sales by product group and geographic market, based on the location of the customer, whether the U.S. or outside the U.S. ("OUS") for the periods shown were as follows:

	Three Months Ended March 31, 2018										Three Months Ended March 31, 2017
	(unaudited)
	U.S.			OUS			Total Revenues		% Total Revenues		U.S.			OUS			Total Revenues		% Total Revenues
Endo-bariatric	$	4,108		$	6,188		$	10,296	65.4	%	$	3,496		$	3,838		$	7,334	50.5	%
Surgical	2,938			2,266			5,204		33.1	%	4,097			2,923			7,020		48.4	%
Other	233			10			243		1.5	%	157			6			163		1.1	%
Total revenues	$	7,279		$	8,464		$	15,743	100.0	%	$	7,750		$	6,767		$	14,517	100.0	%
% Total revenues	46.2		%	53.8		%					53.4		%	46.6		%

Total distributor sales were 19.7% and 18.8% of total OUS revenues for the three months ended March 31, 2018 and 2017, respectively. The largest individual country outside the U.S. was 7.7% and 7.8% of total revenues for the three months ended March 31, 2018 and 2017, respectively.

The following table represents property and equipment, net based on the physical geographic location of the asset:

	March 31, 2018		December 31, 2017
	(unaudited)
United States	$	3,085	$	2,855
Costa Rica	3,538		3,748
Other	256		282
Total property and equipment, net	$	6,879	$	6,885

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Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2018

Accounting Policies [Abstract]

Organization and Business Description

Organization and Business Description

Apollo Endosurgery, Inc. is a Delaware corporation with both domestic and foreign wholly-owned subsidiaries. Throughout these Notes "Apollo" and the "Company" refer to Apollo Endosurgery, Inc. and its consolidated subsidiaries.

Apollo is a medical technology company primarily focused on the design, development, and commercialization of innovative medical devices. The Company's products are used by general surgeons, bariatric surgeons and gastroenterologists in a variety of settings to provide interventional therapy to patients who suffer from obesity and the many co-morbidities associated with obesity as well as various other gastrointestinal conditions.

The Company's core products include the Orbera® Intragastric Balloon System, the OverStitch™ Endoscopic Suturing System (together the "Endo-bariatric" products) and the Lap-Band® Adjustable Gastric Banding System ("Surgical" products). In the U.S., the Company also offers Orbera® Coach, an aftercare program. All devices are regulated by the United States Food and Drug Administration (the "FDA") or an equivalent regulatory body outside the U.S. The Company's products are sold throughout the world with direct sales markets in the U.S., Europe, Australia, Brazil and Canada. The Company also has a manufacturing facility located in Costa Rica.

Revenue Recognition

 Revenue Recognition

The Company's principal source of revenue is from the sale of its products. Revenue is recognized when control of the promised goods is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in an exchange for those goods. Generally, these conditions are met under the Company's agreements with most customers upon product shipment.  This includes sales to distributors, who sell the products to their customers, take title to the products and assume all risks of ownership at the time of shipment.  Our distributors are obligated to pay within specified terms regardless of when, if ever, they sell the products.

Customers and distributors generally have the right to return or exchange products purchased from the Company for up to thirty days from the date of product shipment. At the end of each period, the Company determines the extent to which its revenues need to be reduced to account for expected returns and exchanges. Certain customers may receive volume rebates or discounts, which are accounted for as

variable consideration.  We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. 

We record deferred revenues when cash payments are received or due in advance of the transfer of goods. 

The Company accounts for taxes collected from customers and remitted to governmental authorities on a net basis. Accordingly, such amounts are excluded from revenues.  Amounts billed to customers related to shipping and handling are included in revenues. Shipping and handling costs related to revenue producing activities are included in cost of sales.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

On January 1, 2018, the Company adopted the provisions of ASU 2014-09, Revenue from Contracts with Customers ("ASC 606"), which requires an entity to recognize revenue when it transfers control of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The Company adopted this new standard using the modified retrospective method and applied this method only to contracts that were not completed as of January 1, 2018. Prior periods were not retrospectively adjusted. There was no material impact on the Company's financial statement upon adoption of the new revenue recognition standard.

In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02") which requires a lessee to recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term which will require companies to recognize most leases on the balance sheet, thereby increasing reported assets and liabilities. ASU 2016-02 will be effective for the Company on January 1, 2019. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) to simplify the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. ASU 2017-04 will be effective for the Company for annual and interim reporting in fiscal years beginning after December 15, 2019.

Net Loss Per Share

The basic and diluted net loss per common share presented in the condensed consolidated statements of operations and comprehensive loss is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Potentially dilutive shares, which include warrants for the purchase of common stock, restricted stock units, and options outstanding under the Company's equity incentive plans, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

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Inventory (Tables)

3 Months Ended

Mar. 31, 2018

Inventory Disclosure [Abstract]

Schedule of Inventory

Inventory consists of the following as of:

	March 31, 2018			December 31, 2017
	(unaudited)
Raw materials	$	5,649		$	4,937
Work in progress	401			493
Finished goods	11,529			10,947
Less inventory reserve	(2,136		)	(2,034		)
Total inventory, net	$	15,443		$	14,343

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Accrued Expenses (Tables)

3 Months Ended

Mar. 31, 2018

Payables and Accruals [Abstract]

Schedule of Accrued Expenses

Accrued expenses consist of the following:

	March 31, 2018		December 31, 2017
	(unaudited)
Accrued employee compensation and expenses	$	3,442	$	4,243
Accrued professional service fees	492		522
Accrued returns and rebates	402		438
Accrued insurance and taxes	736		527
Other	1,770		1,770
Total accrued expenses	$	6,842	$	7,500

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Long-Term Debt (Tables)

3 Months Ended

Mar. 31, 2018

Debt Disclosure [Abstract]

Schedule of Long-term Debt

Long-term debt consists of the following as of:

	March 31, 2018			December 31, 2017
	(unaudited)
Senior secured credit facility	$	32,000		$	32,000
Payment-in-kind interest	2,254			2,223
Discount on long-term debt	(473		)	(534		)
Deferred financing costs	(663		)	(368		)
Long-term debt	$	33,118		$	33,321

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Stock Based Compensation (Tables)

3 Months Ended

Mar. 31, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Stock Option Activity

A summary of the stock option activity under the Company's 2017 Plan and Prior Plans (collectively, the "Equity Plans") as of March 31, 2018 is presented below.

	Options		Weighted Average Exercise Price	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Options outstanding, December 31, 2017	1,390,428		$4.64	7.0 years	$2,432
Options granted	580,901		$6.58
Options exercised	(44,418	)	$2.32
Options forfeited	(20,410	)	$4.35
Options vested and expected to vest, March 31, 2018	1,906,501		$5.29	7.7 years	$2,888
Options exercisable	715,925		$3.60	5.0 years	$2,149

Schedule of Fair Value of Stock Options

The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Three Months Ended March 31, 2018		Three Months Ended March 31, 2017
Risk free interest rate	2.7	%	2.1	%
Expected dividend yield	—	%	—	%
Estimated volatility	63.2	%	63.9	%
Expected life	5.8 years		6.0 years

Schedule of Other Stock Option Information

Additional information regarding options is as follows:

	Three Months Ended March 31, 2018		Three Months Ended March 31, 2017
Weighted-average grant date fair value of options granted during the period	$	3.86	$	6.99
Aggregate intrinsic value of options exercised during the period	$	170	$	93

Schedule of Restricted Stock Unit Activity

A summary of the restricted stock unit activity under the Company's Equity Plans as of March 31, 2018 is presented below.

	Units		Weighted Average Grant Date Fair Value	Aggregate Intrinsic Value
Unvested units, December 31, 2017	61,198		$5.60	$343
Restricted stock units granted	58,863		$6.58
Restricted stock units forfeited	(894	)	$6.50
Unvested units, March 31, 2018	119,167		$6.08	$747

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Net Loss Per Share (Tables)

3 Months Ended

Mar. 31, 2018

Earnings Per Share [Abstract]

Schedule of Antidilutive Securities Excluded from Computation of Diluted Loss Per Share

Potentially dilutive securities not included in the calculation of diluted net loss per share attributable to common stockholders because to do so would be anti-dilutive are as follows (in common stock equivalent shares on a weighted-average basis):

	Three Months Ended March 31,
	2018	2017
Warrants for common stock	251,891	252,021
Common stock options	1,525,688	1,146,196
Restricted stock units	80,579	—
	1,858,158	1,398,217

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Segment and Geographic Information (Tables)

3 Months Ended

Mar. 31, 2018

Segment Reporting [Abstract]

Schedule of Product Sales by Product Group and Geographic Market

Product sales by product group and geographic market, based on the location of the customer, whether the U.S. or outside the U.S. ("OUS") for the periods shown were as follows:

	Three Months Ended March 31, 2018										Three Months Ended March 31, 2017
	(unaudited)
	U.S.			OUS			Total Revenues		% Total Revenues		U.S.			OUS			Total Revenues		% Total Revenues
Endo-bariatric	$	4,108		$	6,188		$	10,296	65.4	%	$	3,496		$	3,838		$	7,334	50.5	%
Surgical	2,938			2,266			5,204		33.1	%	4,097			2,923			7,020		48.4	%
Other	233			10			243		1.5	%	157			6			163		1.1	%
Total revenues	$	7,279		$	8,464		$	15,743	100.0	%	$	7,750		$	6,767		$	14,517	100.0	%
% Total revenues	46.2		%	53.8		%					53.4		%	46.6		%

Schedule of Long-Lived Assets by Geographic Area

The following table represents property and equipment, net based on the physical geographic location of the asset:

	March 31, 2018		December 31, 2017
	(unaudited)
United States	$	3,085	$	2,855
Costa Rica	3,538		3,748
Other	256		282
Total property and equipment, net	$	6,879	$	6,885

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Concentrations (Details) $ in Thousands	Mar. 31, 2018 USD ($) bank	Dec. 31, 2017 USD ($)	Mar. 31, 2017 USD ($)	Dec. 31, 2016 USD ($)
Risks and Uncertainties [Abstract]
Number of banks | bank	3
Cash and cash equivalents and restricted cash | $	$ 23,257	$ 31,418	$ 9,234	$ 20,041

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Inventory (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Dec. 31, 2017
Inventory Disclosure [Abstract]
Raw materials	$ 5,649		$ 4,937
Work in progress	401		493
Finished goods	11,529		10,947
Less inventory reserve	(2,136)		(2,034)
Total inventory, net	15,443		$ 14,343
Change in inventory reserve	102	$ 80
Consigned inventory	$ 379

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Accrued Expenses (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Payables and Accruals [Abstract]
Accrued employee compensation and expenses	$ 3,442	$ 4,243
Accrued professional service fees	492	522
Accrued returns and rebates	402	438
Accrued insurance and taxes	736	527
Other	1,770	1,770
Total accrued expenses	$ 6,842	$ 7,500

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Long-Term Debt (Schedule of Long-term Debt) (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Debt Instrument [Line Items]
Discount on long-term debt	$ (473)	$ (534)
Deferred financing costs	(663)	(368)
Long-term debt	33,118	33,321
Payment in Kind Interest [Member]
Debt Instrument [Line Items]
Long-term debt	2,254	2,223
Line of Credit [Member] | Secured Debt [Member] | Credit Facility [Member]
Debt Instrument [Line Items]
Long-term debt	$ 32,000	$ 32,000

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Long-Term Debt (Narrative) (Details)		12 Months Ended
	Feb. 28, 2018	Dec. 31, 2017
Secured Debt [Member] | Line of Credit [Member] | Credit Facility Sixth Amendment [Member]
Debt Instrument [Line Items]
Minimum debt to revenue ratio	0.54	0.49

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Stock Based Compensation (Stock Option Activity) (Details) - Stock Option [Member] - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2018	Dec. 31, 2017
Options
Options outstanding, beginning balance (in shares)		1,390,428
Options granted (in shares)	580,901
Options exercised (in shares)	(44,418)
Options forfeited (in shares)	(20,410)
Options vested and expected to vest (in shares)	1,906,501
Options exercisable (in shares)	715,925
Weighted Average Exercise Price
Weighted average exercise price, beginning balance (in USD per share)		$ 4.64
Options granted (in USD per share)	$ 6.58
Options exercised (in USD per share)	2.32
Options forfeited (in USD per share)	4.35
Options vested and expected to vest (in USD per share)	5.29
Options exercisable (in USD per share)	$ 3.60
Weighted Average Remaining Contractual Term
Weighted Average Remaining Contractual Term		7 years
Options vested and expected to vest, March 31, 2018	7 years 8 months 12 days
Options exercisable	5 years
Aggregate Intrinsic Value
Aggregate intrinsic value		$ 2,432
Options vested and expected to vest, March 31, 2018	$ 2,888
Options exercisable	$ 2,149

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Stock Based Compensation (Fair Value of Stock Options) (Details) - Stock Option [Member]	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Risk free interest rate	2.70%	2.10%
Expected dividend yield	0.00%	0.00%
Estimated volatility	63.20%	63.90%
Expected life	5 years 9 months 18 days	6 years

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Stock Based Compensation (Additional Information) (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017	Dec. 31, 2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock compensation cost	$ 323	$ 110
Unrecognized compensation expense related to unvested options	$ 4,041
Remaining amortization period, less then	3 years 2 months 12 days
Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Weighted-average grant date fair value of options granted during the period (USD per share)	$ 3.86	$ 6.99
Aggregate intrinsic value of options exercised during the period	$ 170	$ 93
Stock compensation cost	$ 323	$ 110
Options granted in period (in shares)			1,390,428
Performance Shares [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options granted in period (in shares)	248,500
Restricted stock units [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Remaining amortization period, less then	3 years 2 months 12 days
Unrecognized compensation expense related to unvested restricted stock units	$ 621

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Stock Based Compensation (Restricted Stock Units Activity) (Details) - Restricted stock units [Member] - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2018	Dec. 31, 2017
Number of Units
Unvested Units, December 31, 2017 (shares)	61,198
Restricted stock units granted (shares)	58,863
Restricted stock units forfeited (shares)	(894)
Unvested Units, March 31, 2018 (shares)	119,167
Weighted-Average Grant Date Fair Value
Unvested Units, December 31, 2017 (USD per share)	$ 5.60
Restricted stock units granted (USD per share)	6.58
Restricted stock units forfeited (USD per share)	6.50
Unvested Units, March 31, 2018 (USD per share)	$ 6.08
Aggregate Intrinsic Value
Aggregate Intrinsic Value	$ 747	$ 343

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Income Taxes (Details)	Mar. 31, 2018 USD ($)
Income Tax Disclosure [Abstract]
Unrecognized tax benefits	$ 0
Accrued interest	0
Tax penalties	$ 0

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Net Loss Per Share (Details) - shares	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of diluted loss per share	1,858,158	1,398,217
Warrants for common [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of diluted loss per share	251,891	252,021
Common stock options [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of diluted loss per share	1,525,688	1,146,196
Restricted stock units [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of diluted loss per share	80,579	0

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Liquidity and Capital Resources (Details) $ in Thousands		1 Months Ended	12 Months Ended
	Feb. 28, 2018	Dec. 31, 2017 USD ($)	Dec. 31, 2017 USD ($)	Mar. 31, 2018 USD ($)
Subsidiary, Sale of Stock [Line Items]
Accumulated deficit		$ (177,021)	$ (177,021)	$ (185,155)
Secured Debt [Member] | Credit Facility Sixth Amendment [Member] | Line of Credit [Member]
Subsidiary, Sale of Stock [Line Items]
Minimum debt to revenue ratio	0.54		0.49
Shelf Registration [Member]
Subsidiary, Sale of Stock [Line Items]
Authorized amount		16,000
Shelf Registration [Member] | Common Stock [Member]
Subsidiary, Sale of Stock [Line Items]
Authorized amount		$ 50,000

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Fair Value Measurements (Details) $ in Thousands	Mar. 31, 2018 USD ($)
Fair Value Disclosures [Abstract]
Fair value of long-term debt	$ 32,144

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Segment and Geographic Information (Segment Information) (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2018 USD ($) segment	Mar. 31, 2017 USD ($)
Segment Reporting [Abstract]
Number of reportable segments | segment	1
Revenue, Major Customer [Line Items]
Revenues	$ 15,743	$ 14,517
Segment Revenue [Member] | Product Risk [Member]
Revenue, Major Customer [Line Items]
Percentage of revenue or sales	100.00%	100.00%
United States [Member]
Revenue, Major Customer [Line Items]
Revenues	$ 7,279	$ 7,750
United States [Member] | Segment Revenue [Member] | Product Risk [Member]
Revenue, Major Customer [Line Items]
Percentage of revenue or sales	46.20%	53.40%
United States [Member] | Distributor Sales [Member] | Product Risk [Member]
Revenue, Major Customer [Line Items]
Percentage of revenue or sales	7.70%	7.80%
Other countries [Member]
Revenue, Major Customer [Line Items]
Revenues	$ 8,464	$ 6,767
Other countries [Member] | Segment Revenue [Member] | Product Risk [Member]
Revenue, Major Customer [Line Items]
Percentage of revenue or sales	53.80%	46.60%
Other countries [Member] | Distributor Sales [Member] | Product Risk [Member]
Revenue, Major Customer [Line Items]
Percentage of revenue or sales	19.70%	18.80%
Endo-Bariatric [Member]
Revenue, Major Customer [Line Items]
Revenues	$ 10,296	$ 7,334
Endo-Bariatric [Member] | Segment Revenue [Member] | Product Risk [Member]
Revenue, Major Customer [Line Items]
Percentage of revenue or sales	65.40%	50.50%
Endo-Bariatric [Member] | United States [Member]
Revenue, Major Customer [Line Items]
Revenues	$ 4,108	$ 3,496
Endo-Bariatric [Member] | Other countries [Member]
Revenue, Major Customer [Line Items]
Revenues	6,188	3,838
Surgical [Member]
Revenue, Major Customer [Line Items]
Revenues	$ 5,204	$ 7,020
Surgical [Member] | Segment Revenue [Member] | Product Risk [Member]
Revenue, Major Customer [Line Items]
Percentage of revenue or sales	33.10%	48.40%
Surgical [Member] | United States [Member]
Revenue, Major Customer [Line Items]
Revenues	$ 2,938	$ 4,097
Surgical [Member] | Other countries [Member]
Revenue, Major Customer [Line Items]
Revenues	2,266	2,923
Other [Member]
Revenue, Major Customer [Line Items]
Revenues	$ 243	$ 163
Other [Member] | Segment Revenue [Member] | Product Risk [Member]
Revenue, Major Customer [Line Items]
Percentage of revenue or sales	1.50%	1.10%
Other [Member] | United States [Member]
Revenue, Major Customer [Line Items]
Revenues	$ 233	$ 157
Other [Member] | Other countries [Member]
Revenue, Major Customer [Line Items]
Revenues	$ 10	$ 6

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Segment and Geographic Information (Long-Lived Assets by Geographic Area) (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Revenues from External Customers and Long-Lived Assets [Line Items]
Total property and equipment, net	$ 6,879	$ 6,885
United States [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Total property and equipment, net	3,085	2,855
Costa Rica [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Total property and equipment, net	3,538	3,748
Other countries [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Total property and equipment, net	$ 256	$ 282