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spk05: Ladies and gentlemen, welcome to the Intricorps Fourth Quarter 2020 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Ms. Leigh Salvo. Ma'am, please go ahead.
spk04: Thank you, operator. Before we begin, I would like to preface our remarks with the customary safe harbor statement. Today's conference call contains certain forward-looking statements. These statements are based on the current estimates and assumptions of Intercons management and are subject to uncertainty and changes in circumstances. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Actual results may vary materially from the expectations contained in today's call. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factor section of our most recent annual and quarterly reports on Form 10-K and Form 10-Q, respectively, with the SEC. With that, I would now like to turn the call over to CEO Scott Longbaugh. Scott Longbaugh Thank you, Lee.
spk01: Good afternoon. I'd like to start by thanking our employees, partners, and suppliers that have stuck through us through a very difficult time. Despite the many challenges of 2020, our teams rallied together to support our mission to improve, extend, and save lives by advancing innovative micro-medical technologies through joint development and manufacturing partnerships. I'm confident this unwavering commitment will continue. I would also like to welcome Intercon's new CFO, Ellen Skipka, who joins me on today's call. Ellen brings a unique skill set that blends engineering with extensive financial experience. We are sure she will be a strong financial steward to our team as we continue to expand and advance our global footprint in micro-medical technology. On the call today, I'd like to start by briefly highlighting our financial and operation progress in each of the primary medical markets, as well as our priorities for 2021. Ellen will then cover our financial results in more detail, then we'll open it up for questions. In many ways, 2020 was transformational for Intracon. We kept our focus on the priorities we established earlier in the year, priorities that we believed would best enable us to leverage our core strengths into diversified, high-growth medical markets. And we see 2021 as a year of ongoing progress and execution. Key accomplishments in 2020 included the acquisition of Emerald Medical Services, or EMS, which expanded our market opportunity in surgical navigation and provided us with immediate access to a technology platform serving new high-growth medical end markets with complex interventional catheters. We also bolstered and diversified our leadership team with the addition of a new board member and several key executives with rich sector-specific experience in their respective fields. With advancements in our business also came organizational changes that enable us to better and more quickly pursue attractive development opportunities and key partnerships. We also kept a keen eye on our expenses and balance sheet in order to navigate through the unprecedented landscape of 2020 in order to maintain our solid financial footing. We also closely managed the resources needed to ensure we could emerge in a position of strength in the current and new medical markets. As a sign of our evolution, as well as our renewed commitment to our vision, we recently completed an extensive rebranding effort that incorporated an enhanced website for the publication of our environmental, social, and governance policies that are critical in demonstrating the corporate responsibility to our employees and our shareholders. These policies are included in a new corporate responsibility section of our website. Turning to our fourth quarter financial performance, as we noted on our last call, we were encouraged by the momentum we saw as we exited the third quarter, and that remained relatively consistent throughout the remainder of the year. Total revenues increased approximately 9% year-over-year to $30.3 million, and sequentially revenues grew 11%, exceeding our initial expectations. We also continued to outperform in our medical market, which included the contribution of EMS and the strong quarter-on-quarter growth in our diabetes business, despite the ongoing impact of COVID. Generally in line with our expectations, we recognize business-wide improvement combined with further financial strength. We have continued to emphasize our cost control efforts, coupled with the significant restructuring actions taken over the first half of the year, And as a result, we have delivered approximately $1.1 million in profit during the quarter, up from $644,000 of profit in the third quarter. I'd like to take a few minutes to dive into some detail on our progress in several of the key medical markets we're currently focused. Beginning with our diabetes business, Sales Demectronics Diabetes Group represented 59% of the total revenue in the fourth quarter. In the fourth quarter, we saw an impressive 22% quarter-over-quarter improvement as new patient momentum continued to increase due to the launch of the MiniMed 780G system in international markets and the MiniMed 770G system launch in the U.S. Following FDA approval for the MiniMed 770G, this system has received positive feedback from patients as they utilize smartphone connectivity features. The MiniMed 780G insulin pump system continues geographic expansion and now launched across 26 countries. In the US, the 780G system has been submitted to the FDA for approval. While this market continues to experience some COVID headwinds, we remain optimistic about the contributions of these insulin pump systems to the growth of our business in 2021. Next, turning to surgical navigation in the interventional catheter market, which in a very short period of time has already proven to be key growth drivers for Intracon. The integration of EMS continued at a faster pace than we originally expected, contributing $3.4 million in the fourth quarter and $7.4 million since the acquisition. This better-than-anticipated revenue contribution in 2020 was driven by Medtronic's launch of the chocolate bloom catheter in Japan, which is manufactured by EMS. Accordingly, the greater revenue level required us to take a $400,000 charge in the fourth quarter related to an earn-out provision in the EMS purchase agreement. We anticipate further approvals of the chocolate in other global regions during 2021 and believe it will continue to be one of our primary growth drivers this year. Going forward, we are confident that we can leverage EMS's strong reputation with Medtronic's cardiac and vascular group and Intracon's core technologies and financial stability to secure other business opportunities in this market. Lastly, our medical-coil business demand continued to be strong. However, due to capacity constraints, revenue for the fourth quarter was $1.1 million. We are working through these constraints and anticipate improved capacity in 2021 first quarter. Turning to the hearing health market, in the fourth quarter, we delivered growth of approximately 5% compared to the prior year period. The primary driver for this market was our legacy OEM business. On the third quarter call, we noted that access to the audiologist increased as the quarter progressed, and this trend continued throughout the fourth quarter. On the topic of the pending OTC regulation, our discussions with potential partners continue to progress well. We remain optimistic about the opportunity and are closely tracking our investments as we await official draft guidance. To that end, we are preparing to move forward with a few select pilots over the next couple quarters with partners to leverage our hearing health technology platform, including hardware, firmware, and software. It's early in the process, but the pilots aim to gauge end market interest, required post-sale engagement, and price considerations. We look forward to providing updates on the future calls. As previously disclosed, last year we elected to postpone our self-fitting software clinical trial until such time we can ensure the health and safety of trial patients. We have begun working on safety measures and adapt our clinical protocol to be COVID safe. While there are a number of moving parts, we maintain our goal of completing the trial in the third quarter of 2021. As we look out into the coming year, I'd like to highlight some of our key operational goals and activities. First and foremost, we view 2021 as a year of continued execution. We have a significant opportunity to drive growth in key markets, specifically diabetes, surgical navigation, and interventional. In 2021, we plan to continue to seek opportunities to diversify our customer base, add valuable partners, and pursue new high-end growth end markets that can best leverage our core competencies in micromedical technology. In addition to organic growth, we plan to selectively explore new inorganic opportunities and are putting a team in place to best identify and pursue those initiatives. With that, I will now turn the call over to Ellen to provide more detail on our financial results for the fourth quarter in the full year of 2020. Ellen?
spk03: Thank you, Scott. It is a pleasure to join such a great company with incredible people and a history of innovation and excellence. As Scott mentioned in his prepared remarks, we have a number of growth opportunities ahead of us, and I very much look forward to delivering finance partnerships that will allow us to exceed those goals. Now turning to our financial results. For the 2020 fourth quarter, we reported net revenue of $30.3 million, an increase of 9.4% over the prior year period. This increase was primarily due to our medical and hearing health legacy OEM product line. Core business revenues in our medical market for the quarter were $23.9 million, a 12.2% increase year-over-year, and represented 79% of the total revenue, which is slightly more than the prior year due to our EMS acquisition. Again, this increase was largely driven by the $3.4 million revenue contribution from EMS, which the company acquired in May of 2020. In our Hearing Health business, the total revenue in the fourth quarter was $5.1 million, up 4.8% over the prior year fourth quarter. We did see upside due in part to renewed access to audiologists and solid orders from our indirect to end consumer customers. More specifically within Hearing Health, indirect to end consumer revenue was $1.5 million, direct to end consumer revenue through our Hearing Health Express business was approximately $900,000, and legacy OEM revenue was $2.6 million. Fourth quarter gross margins were 25.7% compared with 26.9% in the prior year comparable period. The lower margin was primarily due to product mix. Operating expenses for the fourth quarter were $6.8 million compared to $6.7 million in the prior period. The slight increase was due to approximately $500,000 in EMS operating expenses and a $400,000 expense related to an increase in fair value of the EMS earn-out liability, partially offset by cost reduction initiatives implemented in 2020 second quarter. We posted a net income attributable to shareholders of $1.1 million, or 12 cents per diluted share, versus a net loss attributable to shareholders of $768,000, or 8 cents per diluted share, for the 2019 fourth quarter. For the full year ended December 31, 2020, Intercon reported a revenue of $102.8 million, a decrease of 9.4% compared to $113 million for the year ended December 31, 2019. Gross margins were 25.5% compared with 27.3% in 2019. The decrease was primarily due to pandemic-driven volume reduction and shifts in product mix partially offset by cost reduction initiatives I noted earlier. Operating expenses were $29.3 million compared to $33 million in the prior year. The change in operating expenses year-over-year was due to cost reduction initiatives partially offset by $1.5 million in EMS operating expenses, $660,000 of expense-related increases in the fair value of the EMS earn-out liability, and approximately $800,000 in costs associated with the CEO transition agreement signed in June of 2020. Net loss attributed to shareholders was $2.5 million or $0.28 per diluted share versus $3.8 million or $0.43 per diluted share in 2019. Lastly, our combined cash and investment balance as of December 31st, 2020, was approximately $33.5 million, up $3.2 million from the prior quarter. We entered 2021 focused on our underlying mission to be the leading joint developed manufacturer in micro-medical technology. We are very encouraged by the momentum exiting Q4. This confidence stems from our overall outperformance in nearly every business category. our progress identifying and securing new partnerships, and early contributions we are seeing as a result of the EMS acquisition. However, due to the continued uncertainties with new COVID variances and continuing high number of COVID cases, we will not be issuing full year 21 financial guidance at this time. In short, we are maintaining a cautiously optimistic outlook, but we want to reiterate that the COVID-19 pandemic poses a risk of uncertainty to our operating results. We expect steady growth throughout the year with the first quarter revenues slightly lower than Q4 2020 as COVID variants have provided some degree of headwind. We also expect some acceleration in the second half of 2021 as COVID related impacts begin to diminish and as our customers see a return to normal operations and gain commercial traction. We are confident that once the vaccine becomes more widely distributed and employment protocols can resume normal operation Intracon is poised to benefit from the true commercial potential of the products we support. We anticipate second half upside in our diabetes market stemming from broader expansion of Medtronic's MiniMed 770G and further growth in our interventional market from additional approvals of Medtronic's chocolate balloon catheter. Additionally, we are optimistically preparing for the opportunity that still exists in the hearing health market as regulation moves forward and consumers are offered an over-the-counter option. In the meantime, we will continue to manage our operations in line with the appropriate guidelines with non-production support off-site and all mandatory protocols in place on-site to protect our employees. With that, Scott and I would now like to open the call for questions. Operator?
spk05: Thank you. As a reminder, to ask a question, you will need to press star then the number one on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the hash P. Your first question comes from the line of Mr. John Black from Stifel. Your line is now open. You may ask your question.
spk00: Thanks. Good afternoon. Ellen, welcome, and Scott, I hope all is well. I've got a small handful, maybe three or four, and then I'll get back in queue. But, you know, the REVs were up a good amount, 3Q to 4Q. Gross margins were down just a bit sequentially. And I know you're not giving guidance, but is there a high-level discussion on the revenue and gross margin relationship? You know, in the past, it was thought that gross margin expansion, if you would, would be directly tied to the revenue growth. I know there's moving parts and mix shift, especially now with EMS. But can you talk to you if one is going to lead to the other, if there's an update on that dynamic?
spk01: Thanks. Yeah, John, thank you for the question, and good to talk to you. So we've long talked about the fact that as we drive revenue, we will see that fall through on the margin. And I don't think this quarter, while there's a little bit of a disconnect there, changes that overall thought process from our level. We've made a couple additional investments in the fourth quarter. We had a little bit of a mixed shift in the fourth quarter last But overall, we're very confident as we drive the top line, we will see margin improvements. So nothing changes from that perspective.
spk00: Okay, great. And then, you know, Eleanor, Scott, just your thoughts on Medtronic's robust pipeline, you know, your partner's robust pipeline. And, Ellen, you talked a little bit about some expectations just directly on revenues throughout 2021. Does that assume any approvals from your partner? You know, does it assume U.S. 780G or Zeus being a contributor there or no, and that's more thought of as a 2022 event? And then I've got one and a half more questions.
spk01: Yeah, good questions. Look, I'm sure you got a chance to look at Medtronic's results from the other day, and they were very optimistic about both the 780 and the 770 internationally and posting insulin pump starts with market share gains, which is fantastic, clearly, for us. If you look at the feedback that they're getting on the 770, I think that speaks volumes to where they believe that business can go. In addition to those pump systems taking hold and addressing some of the consumer delights, it does also help that they can get out and begin to engage patients in a way that they couldn't over the last couple of quarters due to COVID. So I think just kind of that natural COVID cloud lift along with the additional functionality and technology in these new systems bode well for us in 2021. And then as we look towards kind of the back half of the year, we will be doing some additional steps as part of the manufacturing process, more focused on packaging and labeling that will provide a small lift for us on this business as well.
spk00: Great, great. I'll sort of bundle my last question. So the quick one is the COIL commentary on capacity constraints, are those, you know, quote, unquote, loss revenues or more just a push into maybe 1Q or 2Q21? And then, you know, the bigger question, it's great to hear about some of the pilots, Scott, that you mentioned on the hearing side of the business. Are there any more details you can provide, you know, the size of these pilots, the types of partners? Are they leveraging your back office, if you would, on the DTC support side? And will these be revenue-generating events for your DTC division? Thanks, guys.
spk01: Yep. Great. I'll start with the first question, some of the capacity constraints we had on the COIL side. This is more push revenue that you'll see us pick up in the first and most likely more in the second quarter. of 2021, we worked through some of those. In terms of the pilots, this is a progression, John, of what we've been talking about. We've been preparing ourselves for this OTC market. We've had a lot of discussions with a number of different potential partners, and we're now getting to the point where we're preparing for pilots. These pilots, though, I will tell you, are more to garner information on the market than they will be notable revenue drivers in 2021. We mentioned that we want to test the end market. We want to understand what that post-sale engagement is going to require. And our partners are trying to identify the right price points. So I think if you look at the pilots in 2021, I would think of more of them in terms of development, channel development, that will lead us to – gather information so when we look to scale when the OTC regulation is finally passed, we're in a position to do that. In terms of what we're going to offer, it depends on the pilot, frankly. So clearly our hardware and software and firmware will be in each of the pilots, but in a few of them I anticipate we will have our back office supporting these pilots as well. and primarily because it's really the only way you can do it in a pre-OTC market. That's great, Colin. Thanks, guys. Thanks, John.
spk05: Thank you. Again, if anyone would like to ask a question, you may need to press star, then the number one on your touchstone telephone. Next question comes from the line of Andrew DeSilva from D Riley Securities. Your line is now open. You may ask your question.
spk02: Yeah, good afternoon. Thanks for taking my questions, and Ellen, pleasure to meet you. Just to get started, I just have a couple quick bookkeeping questions. If somebody could just let me know what stock-based comp, depreciation, amortization, cash flow from operations, and capex were for the full year. And while that's getting pulled for the period, I'm just curious, for the first quarter of 2021, should we model in any one-time expenses, either related to recruiter fees or other unusual earnouts or one-time events like that?
spk01: Nothing significant or material, Andy, that I would factor into your first quarter modeling. In terms of some of the housekeeping items, depreciation and amortization for the quarter, was $1.3 million. Stock-based comp, $338,000. Cash flow from operations was $4.4 million. And fixed asset purchases, $771,000. OK, perfect. Thank you for that.
spk02: And I have a few diabetes-related questions and a couple of hearing aid ones as well. Just as it relates to the manufacturing facility that you effectively finished but were waiting for quality and certification process to finish, could you give us an update on really where that stands? And are you now having the automated sensory assembly operating yet?
spk01: Yes, we do have the first system up and running. We're still working through some of the efficiencies on that system, but it is up and running and producing parts.
spk02: Okay. Okay, great. And it was good to see the uptick in the diabetes sales. Obviously, you highlighted the 770 and 780 launches with Medtronic. I'm curious, as you think about the Zeus CGM sensor, It's still in the approval process. How do you see Zeus changing dynamics as it relates to 780G, specifically related to your business?
spk01: Yeah, I think that's a very good question. While we're very excited about the 780G and the 770G and the functionality with Bluetooth and to handhelds, one of the areas that that continues to be a gripe is the number of calibrations that's required on the current systems. And the Zeus platform addresses that. So moving away from multiple calibrations a day and pricking the finger to a solution that requires a one-time at the beginning of use calibration. And I think that customer delight is something that's going to go a long way in Medtronic earning back the market share that's eroded over the last couple of years, and clearly being the sole provider and manufacturer of record of that continuous glucose transmitter, that puts us in a very strong position as they work through the approval process.
spk02: Okay, that's good to hear. And since you just referenced the transmitter, you just stimulated one other thought with the diabetes side. As it relates to 670G business, are you seeing a transmitter renewal? Basically, they went past the two-year point and patients are starting to order at least a second transmitter at this point. Does that have any sort of benefit for you during the quarter? It was just somewhat materially above what we were looking for.
spk01: Andy, it's hard for us to get down to that level of detail. You know, really all that information resides with the customer. We're in a position to meet the demands, the volume demands that they require. And so it's hard for me to comment specifically on, you know, what those replacement GST volumes look like.
spk02: Okay. Okay, and just last question for me is on the hearing health side. You were referencing some of your pilots utilizing the back office for the DTC capabilities before the OTC regulations are in place. Could you just Talk about how that all works in your view once the OT3 regulations are in place. Is that something we should expect to be curtailed away and, you know, you're going to go back to kind of your core focus where you're not really providing any of that back-end support? Or is that going to be part of the business going forward? And really why I'm interested in that is obviously because you're going to pursue the soft-fitting approach and that seemed very applicable if you were going to maintain the back office for a significant period of time.
spk01: Yeah, absolutely, and clearly that self-fitting software is a critical element to providing the ecosystem of care that's going to be required for this channel. As it relates to the back office, it's going to be an important part of our business going forward, and it's going to be an important part of our business. I think it's going to take on a number of different forms, Our ability to ship N equals 1 is very important, and there's a number of partners that are going to want us to have that capability to be able to send product in a box directly to an end consumer. They're also going to want us to be able, in some instances, to provide support if necessary. And so I think it's important that we continue to be able to offer that to our customers, as we're going through this period of time of letting the market really define what it's ultimately going to look like. So I think we're in a really good position. Those are our skill sets as part of the hearing help acquisition, and we've been able to do that and run it at a very low-cost basis.
spk02: Okay, perfect. Thank you very much for your time. Congrats on the progress in the fourth quarter, and good luck going forward.
spk01: Thanks, Andy. Have a good day.
spk05: Thank you. I am showing no further questions at this time. I would now like to turn the conference back to Scott, sir.
spk01: Great. Thank you, everybody, for joining us on the call today. We look forward to continue updating on our progress throughout 2021. Be safe and have a great evening.
spk05: Ladies and gentlemen, this concludes today's conference. Thank you for participation and have a wonderful day. You may all disconnect.
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