LeMaitre Vascular, Inc.

Welcome to Delamate Vascular Q4 2020 Financial Resource Conference Call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Mr. J.G. Pellegrino, Chief Financial Officer of Delamate Vascular. Please go ahead, sir.

Thank you, Linda. Good afternoon, and thank you for joining us on our Q4 2020 Conference Call. With me on today's call are our Chairman and CEO, George Lamate, and our President, Dave Roberts. Before we begin, I'll read our safe harbor statement. Today, we'll make some forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, the accuracy of which is subject to risks and uncertainties. Wherever possible, we will try to identify those forward-looking statements by using words such as believe, expect, anticipate, pursue, forecast, and similar expressions. Our forward-looking statements are based on our estimates and assumptions as of today, February 25th. and should not be relied upon as representing our estimates or views on any subsequent date. Please refer to the cautionary statement regarding forward-looking information and the risk factors in our most recent 10-K and subsequent SEC filings, including disclosure of the factors that cause results to differ materially from those expressed or implied. During this call, we will discuss non-GAAP financial measures, which include EBITDA and organic sales growth. A reconciliation of gaps and non-gap measures discussed in this call is contained in the associated press release and is available in the investor relations section of our website, www.lomate.com. I'll now turn the call over to George Lomate.

Thanks, JJ. On today's call, I'd like to review a few topics. COVID's impact on our employees. COVID's impact on our company. Our Q4 2020 sales and profits. our 10th straight year of annual dividend increases, and our recent branding change. Surges in COVID infection rates in November, December, and January correlated with our experience at LeMay. When I last spoke with you in October, we knew of 12 employees who had contracted the virus. That number has increased to 32 now, 8% of our employees, with 31 having fully recovered and one still recovering. Indeed, during this recent surge, we began to discourage nonessential employees from on-campus work as an additional way to reduce the spread. As of February 15th, though, our employees are once again being told that on-campus work is voluntary and not discouraged. We've also deployed distance-sensing wristwatches in 100% of our buildings worldwide, where we require masks and physical distancing. Because vaccine administration may not be fully implemented until the summer or fall, We expect that COVID and the measures we've implemented to mitigate its spread will remain with us for some time. With regard to COVID's impact on the company, this recent wave was likely impactful on our sales, though there was no real way to calculate the exact financial effects. Looking at a basket of our peers, however, we saw a 2% decline in their organic sales growth in Q4 2020. Perhaps this is a general proxy for the impact of COVID on peripheral vascular sales. And one would expect that the current declines in COVID, as well as increasing vaccine rates, will start to positively impact hospital-based businesses. Though I have found it hard to predict much of anything in the COVID era. Indeed, the guidance we're giving you today is limited to the current quarter, similar to the short guidance we provided at the start of both Q3 2020 and Q4 2020. As for our financial results, we posted record sales at $37.5 million in Q4 2020, up 24% versus the year-ago quarter. Geographically, sales were up 35% in the Americas, 12% in Asia-Pac, and 9% in Europe. The company's reported sales growth was driven largely by the autographed acquisition, while the organic growth came from aggressive valvetone pricing and embolectomy catheters. More channel loading than normal probably also took place in December 2020 due to various year-end sales rep contests. The Q3 Zenasure approval in Japan contributed some sales growth in Q4, and we've increased our expectations around this launch. Record sales in Q4 and light operating expenses combined to produce strong bottom-line results. We generated $9.5 million of operating income in Q4, EBITDA of $11.9 million, and EPS of 34 cents a share. Just 94% growth in quarterly profitability allowed us to pay down our long-term debt by $21.5 million and increase our quarterly dividend by 16% to 11 cents per share. With 10 straight years of dividend increases, we believe we are now positioned to enter the various 10-year dividend achiever indices. Finally, you may notice that our corporate logo has changed. By dropping the word vascular from our name, and eliminating our tagline, we've tightened our branding to just its pure essence and have also left the door open to more work in spaces adjacent to vascular surgery, perhaps cardiac surgery or interventional radiology. In some ways, we had already made this move years ago by choosing our ticker LMAT and our website, lomate.com. With that, I'll turn the call over to JJ. Thanks, George.

Thanks, George. I'd like to say a few words about our gross margin, operating expenses, autographed results, debt pay down, European regulatory status, and close with our Q1 financial guidance. Gross margin in Q4 was 65%, down 1% from 66% in Q4 2019. The decrease was driven largely by autographed purchase price accounting, as well as lower margins in our cardiocell and embolectomy catheter businesses. We do expect our gross margin to increase to 66.7% in Q1 2021 as autographed accounting normalizes and price increases are implemented. Operating expenses in Q4 were $14.9 million, down 1% versus Q4 2019. Selling and marketing expenses were down 21% year-over-year, driven by fewer reps and less travel. This decline was offset by a 21% increase in G&A expenses, largely due to autographed amortization, as well as a 15% increase in R&D expenses driven by MDG and CE mark initiatives. They began releasing hiring requisitions in the latter part of the year as we started to unwind COVID-related cost cutting. We will remain cautious on this front, however, as we try to match additional resources with sales. As of today, we now have 86 sales reps, with the increase coming largely in the U.S. as a natural complement to the autographed acquisition. At the end of Q4, we had 386 employees, down from 454 a year earlier. The newly acquired autographed product line continues to perform above expectations and generated a $5.5 million in Q4 revenue and $1.2 million of net income. after interest expense and taxes, which equates to $0.06 per share. In addition, we raised autograph selling prices on January 1st. We ended Q4 2020 with $27 million in cash, a decrease of $7.4 million versus Q3 2020. The decrease was driven largely by the repayment of $21.5 million in debt. Excluding this debt repayment, cash increased by $14.1 million this quarter In relation to our European CE mark, due to the abrupt exit by our fire-notified body from CE marking, we needed six CE marks. In Q3 2020, we engaged two new notified bodies to accelerate the CE marking process, and in February, one of these notified bodies, STS, issued a CE mark for lifespan as well as an Annex II certificate. We now expect STS will issue three additional CE marks by May 2021, for our Flex-L carotid chunks, Pruitt F3 carotid chunks, and anastoclips. We continue to pursue the other two CE marks for Xenosure and AlbaGraft in the hopes that they will issue by May 2021. Devices representing 99% of Q4 2020 sales in EMEA are currently available to EMEA hospitals via valid CE marks, temporary country-specific derogations, or sufficient CE mark inventory. In Q4 2020, EMEA sales accounted for 29% of worldwide sales and 26% of our gross profit. Separately, we were audited by another one of our notified bodies, TUV Sood, in Q4 2020 as part of the Zenasure Album Graph CE marketing process, and that audit remains open. 20% of the audit's findings have been resolved, and we continue to collaborate with TUV Sood with the goal of resolving the remaining findings. Issuance of CE marks for Zenasur and Albograft depend on a successful audit closure. Together, Zenasur and Albograft accounted for 22% of EMEA sales in Q4 2020. Retention of other CE marks previously issued by TUV might also depend on a successful audit closure, and they represent 42% of EMEA sales. If any of the CE marks referred to above are not reissued, or if the Q4 2022 open audit is not successfully closed, then we could lose our ability to sell some of our devices. We believe, however, that we can partially mitigate the impact of these potential issues through a combination of supplementary inventory production, additional or extended derogations, and engaging new notified bodies. Turning to guidance, at the midpoint, our Q1-21 sales guidance, $33.8 million to $36.8 million, represents an increase of 16% versus Q1-2020. And our Q1 operating income guidance of $6.8 million to $8.8 million represents an increase of 79%. At the midpoint, our Q1-2021 EPS guidance of $0.24 a share to $0.31 a share represents an increase of 78%. Before I turn it over to the operator for any questions, I'd like to welcome Matt Bichon and Brett Fishman from KeyBank. Matt and Brett recently initiated coverage on One8, and we look forward to working with them in the future. With that, I'll turn it back over to the operator.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Again, ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your telephone. Your first question comes from Rick Wise from Stuple. Your line is open.

Good afternoon, everybody, and great to see an encouraging quarter in the middle of all the complications of COVID. Let me just a couple things to start with. I'm sort of trying to ask every company, you know, what are you seeing now? I'm sorry, George, to ask about sort of weekly trends, monthly trends. But do you feel like, you know, after I'm guessing a weaker December, weaker January than you might have hoped for three months ago, do you feel like things have bottomed and they're starting to – look better or can you frame it at all? Just where are we now and what do we think?

Yeah. Okay. Okay. Rick, I think I'm going to give 90% of what you want. I think I won't dig into January or February, but I think I'm going to get you where you want to go here. Let me, we've done this once or twice, but let me read out to you the organic growth rates of this company from every month starting in April. And I know it's a lot of data, but it might be kind of fun for you to see where we've been, what our trip was. And I would come around to say, I sort of think Q3 was sort of like Q4 was sort of like what we think maybe Q1 might be like. And I would come back to that. But here are your numbers, and maybe you can do a better job making sense out of them because I certainly can't. So starting in April, minus 38, minus 28 for May. I'm going to just go now. Minus 4, minus 7, zero in August, minus 1, plus 2, minus 3, and plus 9 in December. And those are all your COVID months that are on record at our company.

Well, it's obviously an encouraging December. Thank you for that clear detail. Artographed. Obviously, you know, you've got the January 1 price hike. And I'm not trying to be picky. I'm just curious. You did $5.4 million, I think, if I've got it right, in the third quarter, and roughly the same amount in the fourth quarter. What do we make of that? Is that just, you know, a lot of moving pieces? I assume now we would start to see sequential growth, all things equal, as we proceed through 21. Is that the right way to think about it?

Yeah, Rick, it's Dave. I mean, we're not going to guide very far into 21. We did, you know, see Q4 increase over Q3 from 5.4 to 5.5. You know, I think the bottom line result has been a nice, pleasant surprise. We beat the guidance we had provided. I think we provided $0.05 a share and we came in at $0.06. Remember, in the back half of 2020, the autographed sales reps We're not getting commission on any other Lemaitre product, and Lemaitre sales reps were not getting commission on Artograph products. So that was a big change on January 1st. And then the other thing that changed on January 1st was obviously this price increase. So, you know, I'm not really here to, you know, tell you exactly what's going to happen throughout 2021 because, again, You know, we don't really guide specifically on product lines, but I can say we feel quite good about 2021. Obviously, you know, we're bullish with the price increase. We think much of that can stick. And so we think, you know, we are optimistic about where Artograph goes in the future.

That's great, Dave. And maybe two last ones from me. OpEx obviously impressively I don't know what the right words are, under control or contained. And I appreciate that, like so many businesses, travel has a lot to do with that. But how do we think about, you know, OPEX going forward just directionally? I mean, can you take more cost out of business? Is that not the right way to think about it? Should we assume that as things recover through the year, the percentage of sales, that's going to go up? Again, if you could just help us Frame it a little bit. That'd be awesome.

Yeah, sure. This is JJ. So as you recall, we did some headcount reductions back in February. And then again, as COVID came through in April and really reduced OpEx as a result, total headcount is 386 now versus 454 or 455 a year ago, Q4, Q4. And so obviously we still have a ways to go here, I think, in terms of hiring back. And so I think really the question is, you know, how do we get back? How quickly do we get back? And where is that? Your sales rep count is at 80 at the end of the quarter. I think we said 85 or 86 currently. We were at 112 in Q419. So you've got a ways to go there. We want to be measured with that. We want to match that with access to hospitals. and sales recovery and all that kind of good stuff. And then in terms of non-sales folks, I think, you know, there's clearly areas where during times of a crisis you cut back and people do more work, and we don't want that to be happening ad infinitum. And so we've begun to release, for a while now, we've begun to release a lot of positions in areas that are sort of, you know, support positions, you've got to get it done type of positions, and we'll continue to do that. So I think the trend, the direction for you is, You know, these guys are going to hire back towards some number. I guess the recent high watermark, you would think it was the 455, but don't think of us jumping to that, you know, right off the bat. Think of us doing this at a measured pace throughout all the areas of the company to try and balance sales recovery with workload, with where we need to be in two, three, four months.

Right. Just last for me, always, it wouldn't be a lame call if we didn't ask about M&A. or maybe the question is what's Dave been up to lately? But, George, you called out cardiac surgery and interventional cardiology very specifically, and, you know, the name, the refining of the company's name, so to speak. Should we expect that, you know, whether it's one or three or ten over the next year or three, it's going to be, these adjacent spaces or, let's say, more aggressively building up these adjacent spaces? Is that the priority now?

Okay, great question. Yeah, big thing, name change, right? So those are the adjacent spaces that we've actually already gotten into. I think maybe that's the message here is that we're already Lemaitre and not Lemaitre-Vasker. We bought CardioCell, as you remember. We bought Cardi-L. Both of those two names should give you some hints. And so I think we're already in the spaces. I don't necessarily think it means we're preferentially going to be acquiring there. I think autographed as our largest acquisition was a really nice play, and it was really peripheral vascular. And that, you watch people's actions, not their words. That was our last big action in June of 2020. So I'd say not necessarily, but you want to be open to it. And we're already there. And I would say I'm going to swag here. I think on our website, There's some PowerPoint slides that say something like 10% of our sales are already used by cardiac surgeons and some interventional radiology as well. So I think we're already there, and it's a recognition that we're already there. Dave might have a different take on this since it's an acquisition-related question.

Yeah, no, I would echo, George, what you said. We're already in cardiac surgery with the cardiac patches, and, of course, we have launched a cardiac allograft several months ago. On the interventional side, I think the message there is that there are 14,000 vascular surgeons in the world and half of them use our products, but 75% of their procedures in the U.S., let's say, are now endovascular or interventional. And so as we think about if the center of the fairway is open vascular surgery and open dialysis access, then maybe a little bit to the left is cardiac surgery. And a little bit to the right is sticking with our core customer, but with an interventional or endovascular product line to be able to leverage the relationships we already have. And, of course, we already do offer a handful of interventional devices, over-the-wire embolectomy catheters. We've got a valvulatone that's over the wire. We've got radiotape tape, some other products. So I think we're just trying to build off a little bit there to what we've already started building.

Thanks a lot to everybody. Thanks, Rick.

Hey, George, Dave, JJ, this is Brett Fishman on today for Matt. Appreciate the kind introduction and we're happy to be joining the calls. If I could just try one question on the 2021 outlook and then maybe one or two follow-ups on other topics. So I know you're not providing full year guidance today, but could you discuss directionally how you're thinking about a potential revenue progression for 2021 in a base case scenario? and what you would maybe want to see before potentially being able to provide full year at some point in 2-2 or 3-2?

Yeah, sure, Brett. Thanks very much and welcome. So I think for the full year, I mean, you can kind of read the tea leaves from what we've already said even briefly on this call, which is expense-wise you can expect an increase. And the question is how much, how fast. On the top line, I guess more specifically to what you're asking about, If you think of an organic sort of growth rate that you think is appropriate off of our 2020 answer, and if you frame that by thinking maybe organically, historically, we're about a 6% to 8% organic growth company. Well, what should it be based on what we just went through? And maybe if you start to normalize through 21, you can come up with sort of an organic answer that you think feels right. And then layer on top of that some effects. because FX has moved a lot, I think, and if it stays, it'll add a decent chunk to the top line number throughout the year. And so if you think of $45 million or so of our sales or whatever the number is, $40 million, go to our queue and look up the segment geographies and apply an FX change to that, and you can add some of that. And then you've got autographed for a full year. piece number three, and you didn't have autographed for a full year last year. You acquired it essentially mid-year. And so I think those are the three chunks that you might think about to try and understand where we might think we're going this year in terms of revenue. I think you asked a second question at the end of that, and I didn't get it.

Oh, just if there would be some signs in the macro that you'd like to see before, you know, maybe being able to provide a full year guide maybe next quarter.

Will we give full year guidance next quarter? Is that what you're asking?

Or just what you would like to see to be able to do that?

Yeah. I mean, so it's kind of like reading the tea leaves here. It was kind of challenging enough to talk about Q1. Not all of our peers are obviously giving guidance. even quarterly guidance. And so if you go down the list, you'll probably find a bunch of them that aren't. It might be unique that we are not entirely sure, but it's certainly not ubiquitous with everyone. So I would say there's still a ton of uncertainty. You tell me where those COVID graphs are going and that'll help a lot. And so I think when things start to settle down, maybe George rattled through the organic growth rates for the last X months. You know, maybe if we start seeing some normalcy in those monthly organic growth rates, maybe after you get a group of those that feel like they're starting to normalize, you know, then you start thinking that you can be more predictable in terms of the longer-term outlook. Until then, I guess I would say I wouldn't want to lead you guys astray, and we'll give you guys that we think is rational and fair and visible, but we don't want to go beyond that.

All right. That's definitely fair. Fair enough. And then... Turning back to the dialysis end market, you know, ArteGraft was relatively in line with our model, at least. But did you see an impact from the increased mortality signal that was in that patient population, given the commentary from Fresenius on its call? And if not, is that a headwind that we should be considering for 21?

So, Brett, this is Dave. Good to hear your voice on this call. I'm not so sure we saw that. I mean, one of the – One of the advantages of a bowl-line graph, a dialysis access graph that we acquired, is that unlike a fistula, which gets implanted into a patient or gets created in a patient, that takes a certain amount of time to mature, and many of them don't mature. And so I think maybe there's, with respect to biologic graphs, there could be maybe a little bit more of an uptake during COVID than there otherwise would be. And so, you know, I would say, no, I do recognize that having end-stage renal disease is certainly a comorbidity and a risk factor for COVID. But I would say in terms of treatment modality, I think that the open surgery biologic graft is something that you can implant and use right away, and I think devices like that are really important sort of at a premium as we go through the pandemic.

All right, and then last one from me, and thanks for that, caller. Do you guys have any thoughts on the recent unfavorable outcome from Dr. Dickinson's recent FDA panel around BTK indication for its DCB? And more broadly, are you seeing any other new technology in the BTK procedure space that we should be paying attention to? And thanks very much for taking the questions.

Yeah. I mean, we didn't follow it that closely. We knew that they were having the panel. But, you know, I think the high-level message that I continue to take away when I see various companies, well-heeled companies, taking a run at below the knee is, is that when you get below the knee, your arterial vasculature bifurcates and trifurcates. You get into small diameters and low flows. It gets pretty difficult for devices to work down there. Really what the body wants is your own tissue doing its job. And that's, I think, part of the reason valvulatomes have worked so well for so long. We're on our eighth generation of valvulatomes. And one of the key attributes to all the generations we've developed is to make them smaller so they work more further down the leg and into the foot, into the pedal arteries. And so, you know, I have no doubt companies will continue to take a run with, you know, drug-coated balloons and at the rectum and this and that. But so far, I think the technology is not exactly there. And that's part of the reason the valvulotome continues to be the number one product Lamey's.

all right thanks thanks very much that's that's all for me appreciate it thanks brett your next question comes from mike patisky from barrington research your line is open hey good evening guys uh congratulations on on a terrific uh year i wouldn't have believed the dollar in earnings was possible if you'd asked me uh 11 12 months ago so fantastic job all right so uh george i was wondering if you could talk about i'm assuming at this point uh you probably actually have a decent sense of what your pricing tailwind for the year is in terms of your product portfolio is that would that be accurate I mean like I mean are we you know two to three percent positive tailwind as we look at 21 or do you not really have that completely dialed in at this point well I think I won't dig out so far into 21 but I can give you some hard numbers which is where I think we have up on the website on the corporate presentation for the year

we installed a 5% price hike. And I would say going into 2021, you could find it on any price list in any American hospital. We've put together another pretty serious price hike, which probably, largely speaking, is a continuation of that.

Okay. So if I'm thinking about the tailwind across your portfolio, I could be actually thinking closer to 5%.

I didn't say that. I said last year was 5%, and we put a healthy price increase together. And it varies by the product line. So there's, you know, some of them didn't grow and some of them did grow. But maybe a blended, you're looking backwards, a blended. And that number, that 5%, was a jump, a significant jump from the year before and two years before. So it was notable. I tried to call it out in the script here, talking about aggressive valvetone pricing. And so, you know, we continue to work on pricing here. It's just another way to pay the bills and to underscore our differentiated devices.

Absolutely. So speaking of Artograph, there's been a lot of, I think, talk around the fact that they're – and you guys called out that you raised price there as well. But there's a lot of talk that there's some meaningful opportunity in terms of Artograph. Can you just talk about – I mean, was it a double-digit price increase? I would love even just that level of detail.

Sure. You know, it's out there on Priceless, so it's around $300 a unit, so it is a little bit north of double digits. Okay, terrific.

Great. All right. Okay, so then in terms of just the products themselves, by you know sort of uh their growth rate by uh by product category valvitone xenoshore anything else to call out i mean do you can you quantify the the growth or or lack thereof of the key products sure maybe i go back into q4 you know we always say we're happy to give you the information that's already happened we're a little bit less excited about guiding forward but uh No, I was asking about Q4. I was asking about Q4, but if you want to give me the layout for 21, that's great, too.

Yeah. Mike, thanks a lot. It is a great question. Sorry to do that. Okay, so the good guys in Q4, valvatomes, were up 28%. Embolectomy catheters, 16%, maybe a little bit tied to COVID. There's some extra clotting that happens in your body that's COVID-related. The cardiac patches were up. 40% reported, but it was only 20% organic because we only, you know, we bought the product in October, middle of October of 2019. And then the Allograft product, the Chicago product, is up 11%. Those are the cadaver veins. So those, I'd say, were the good guys. And then the bad guys, we keep struggling with Trivex. It was down 50%. Bovine carotid patches were down 5%. and then so on and so forth. I think those are the major stories that I just gave you.

What about Xeno?

Okay, so bovine carotid patches are down 5%. Inside of that, Xeno was down 7%. Gotcha.

Can I just ask sort of a strategic question? So you've sort of taken, you know, a cautious approach on bringing back the sales reps. I think I remember, George, at one point last year, and if I'm wrong on this, please correct me, but I thought you had said, hey, we haven't abandoned any territories, even when you sort of cut it as deeply as you cut it. I guess my question is, you guys have done so well in a very, very difficult environment. Do you ever need to go back to 112s? like if you're covering all the territories, even if they're more thinly covered, do you really need to go back to 112? Are you getting sort of the incremental value from that cost?

Thanks. When we were going through all that in the spring and all this COVID stuff, I kept reminding my sales reps, hey, your boss is addicted to hiring sales reps because he thinks that that's me, that that's how we grow our business. So The short answer to the question is, of course, someday we'll be back at 112. No question in my mind. But it's just you want to be cautious. If you wanted us to throw out a number, we sort of think activity levels are sort of at like 60% of normal right now. And I'll go one step further. Oddly, and we just bumped into this, no one knew this last April, but oddly, because the reps can get into fewer hospitals and can do fewer things in each hospital they get into, oddly, they can cover a slightly larger geographic patch. And you hear the reps saying, yeah, I can handle another state because there's not enough to do in Massachusetts. So, yeah, give me Maine or give me New Hampshire and things like that. So we kind of bumped into that. But, you know, we're back at 86 as of today. We were only at 80 at year end. And so we're getting there. You know, our low watermark was 79, and our high watermark was 112 about a year and a half ago. And so, yeah, we'll get back there at some point. I think we don't want to race back there, but, you know, I guess I'd put it back to you a little bit is when is this whole thing going to open up, and are we thinking it's kind of like Q3 or Q4 when things are kind of normal? And then, you know, then we start going, I suppose. I'm not saying we'll get back there by then, but then we start saying, hey, we've got to hire a few more folks. Mike, this is JJ.

I'd add one more thing, which is, I think if you think about the docs and what they're doing now, they're probably still working on backlogs and trying to get into a normalized process. And they're not so much focused on new devices. And so maybe there's this window here as well where, you know, it's less likely that somebody's going to switch, particularly from highly differentiated devices into a different product. You know, and that gives you a little bit of cover in terms of not hiring back too soon. But, of course, we're going to watch that. And to the extent that we feel that becomes an exposure and that changes, then you want to start rehiring again.

Gotcha. Hey, just the last one, and I may have missed it if you touched on this, George, but any update on the China Xenosure trial? Thanks.

Yeah, sure. Actually, things are going well. Believe it or not, with the bounce back of COVID in China quickly at the end of last year, the patients started showing back up for follow-up. And so, We're now fully enrolled on both sides of the cardiac and the vascular trials, the two different trials we're running there. The very short news is in May we'll be filing with the Chinese FDA for that approval. Again, that's a long runway time. I think that's another two years to wait, but I think we'll have that in in May. Okay. All right, great. Thanks, guys. Thanks a lot, Mike.

Your next question comes from James Sidoti from Sidoti and Company. Your line is open.

Hi. Good afternoon. Can you hear me? Yes. Hi, Jim. Great. Great. I hope everyone's healthy. A couple follow-ups. You've talked on the last couple calls about the notified bodies and getting CE marks renewed for some of your products. Just give us a sense... what that added to R and D costs in the quarter, what you think, how long do you think the extra costs will continue? And, you know, is this something that keeps you up at night or are you pretty confident you'll be able to get the switched over to new notified bodies?

Hey, Jim, maybe I, maybe I give you some thought bubbles on this and then JJ fills in with some numbers after I'm done with that. And the answer is, does it keep me up at night? I'll tell you, um, There's two things now. We've got a really good track going with one set of folks, and we're still kind of struggling. And I think you heard that in JJ's script. It's also in the 8K. So we engaged a couple new guys in Q3, Q4, I think September, October. And those folks, principally this SGS company, they're moving ahead and they're getting stuff done. We got our first CE mark in 12 months in February for that lifespan product. and we feel really good about three more. Of the total of six that we need, those guys control four of them. On the flip side, the story continues with this TUV notified body. They're our notified body, and we're collaborating with them, and we're working with them, but we keep getting a lot of questions, and we're two years deep in this, what I'll call a struggle. We're very fortunate in that 13 European governments have stepped up for us, and they've done what's called a derogation. It's a mini approval with a temporary mini approval. So, you know, these devices are available in 13 countries based on the state derogations while we continue to struggle with TUV. So, yeah, it bothers me a lot. It's very frustrating. As to the spend, unfortunately, it's a very large spend, And maybe I've worn down the clock here a little bit, so JJ might have some answers on, Jay, rough ballpark to the back end of his question.

Yeah, I mean, at the high level, Jim, R&D as a percent of sales over the last four quarters, you really wouldn't notice it if you were looking at all R&D. You know within R&D we've got product development, process engineering, and regulatory. And the thing that has changed is the mix. And so... You know, while the aggregate spend may be in the same ballpark as regulatory and clinical spend is, you know, almost doubled sort of kind of from where it was, and the other two have come down, I guess I'll say. And so that mix has shifted with R&D. It's still under control in the aggregate, but we don't like that mix, and we don't like spending more on regulatory and less on the other two buckets because those other two buckets are obviously forward-looking. forward-moving investments. And so I think that's the high level on sort of where it's been. Though contained, it's altered that mix within R&D. Okay.

All right. And then cash. You said if you take out the debt pay down, your cash is up about $14 million and you had net income on $7 million. So where did the balance come from?

So $7 million of net income working cash from operations, Jim, in total was about $14.2 million. So call it 3.4 or so from depreciation, amortization, stock-based comp, another 3.5 to 4 from working capital generally. CapEx was, quote-unquote, only $1.2 million in the quarter. And then we had stock option exercises at $4.3 million. So maybe that's the missing link for you, a nice chunk, healthy chunk of stock option exercises.

Okay. And then last question is also related to cash. You announced the stock buyback, and you also announced the increase to the dividend. And I'm just curious, you still have some debt left over. from the autograph deal, what's the priority as you generate cash in 2021? Is it to pay the rest of that down, to do the stock buyback, or to keep increasing the dividend?

I'll take the front of that since dividends are always on my happy list here. I feel like the dividend, usually the cadence of this company is you announce a dividend at the first quarterly call. and then that keeps playing out. I'm not guiding what the board's going to do at the next three quarterly meetings, but that would be the cadence you'd look back at. So that feels like it's set to me, and it feels like, I think, roughly speaking, Jim, that's about a $9 million aggregate payment. Jay, am I close on that? $9 million for 20 million shares, something like that? That's about a $9 million place to go. You just heard JJ say we produced 14.7 in a nice quarter, albeit, but We produced 14.7 in Q4. So it feels like that's coverable. And I'm going to get to Jay in a second, but I would say we've done a tremendous job of being focused on. We had a revolver for $25 million starting in June at the acquisition. That's been wiped clean already. So you can hear we're very focused on that. Maybe, Jay, any more color on this for the back of this?

The order is what you probably think it would be, Jim, is generate cash flow. Pay dividends and pay off debt and then buy companies. And, of course, when we find a good acquisition target, we'll disrupt that and buying the company will be the number one priority. But on a steady-state basis, I think that's the answer. So we feel pretty good about the debt we've paid down in the second half of 2020. I think that was a really nice accomplishment, and we're going to try and keep that momentum going into 2021.

All right. You know, the reason I brought it up is you announced that you have authorization to purchase 15 million of stock as of February. So, you know, where does that sit in on that list?

Yeah, that's interesting. So I think the stock repurchase is sort of good housekeeping, Jim. It's not necessarily a big topic for us right now. But, you know, in the event that the world came unglued and the stock price dropped, we'd like to be able to buy back some shares immediately. at a bargain, at a discount. So I think it's just nice corporate oatmeal to have that in place. The next logical question is, hey, would you ever raise equity and pay off debt? And if the stock price is high, that's the time to do it, obviously. And that's an interesting question. Who knows? We could talk about that one for a while. But I think that question, given our high stock price, could be an interesting one as well.

Okay. All right. Thank you.

Thanks a lot, Jim.

I am showing no further questions at this time. Ladies and gentlemen, that concludes today's conference. I would like to thank you for your participation.