Surmodics, Inc.

Good day and welcome to the Sermotics Third Quarter Fiscal 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tim Ahrens, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

Thank you, Cecilia. Good morning and welcome to Sermotics Fiscal 2022 Third Quarter Earnings Call. Before we begin, I would like to remind you that during this call, we will make forward-looking statements. These forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding Sermotic's future financial and operating results or other statements that are not historical facts. Please be advised that actual results could differ materially from those stated or implied by our forward-looking statements, resulting from certain risks and uncertainties, including those described in our SEC filings. Sermotics disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments, or otherwise. We'll also refer to non-GAAP measures because we believe they provide useful information for our investors. Today's news release contains reconciliation tables to our GAAP results. This conference call is being webcast and is accessible through the investor relations section of the Sermotics website. The audio recording of the webcast will also be archived for future reference. A press release disclosing our quarterly results was issued this morning and is available on our website at termotics.com. I will now turn the call over to Gary Maharaj. Gary? Thank you, Tim.

Good morning and thank you for joining us on our third quarter earnings call. We are pleased with both our financial performance and the progress we've made in executing our strategic priorities during this quarter. starting with our third quarter financial performance, which was in line with our expectations. We grew revenue 4% to $24.9 million in the third quarter, compared to $23.9 million in the prior year quarter, driven by solid performance from both our medical device and IVD businesses. We reported gap diluted loss per share of 41 cents and non-gap diluted loss per share of 34 cents. Now, while we're lowering our revenue guidance for the full year based on some predicted softness in our business, we are, however, raising our EPS guidance to reflect our Q3 performance and our continued focus on efficient capital allocation. Tim will provide additional detail on our quarterly results as well as our revised guidance later in today's call. During our third quarter, we continue to make progress on our strategic objectives for the fiscal year. As a reminder, these are, first, to achieve the PMA for Surveil and support Abbott's commercialization efforts. Second, to build a commercial pipeline for our sublime radial and pounce arterial and venous thrombectomy platforms. And third, to drive top-line revenue growth and optimize cash flow from our IVD and medical device coatings offering. Starting with Surveil, I'm quite happy to report that we have made substantial progress in addressing the FDA's questions regarding our PMA submission for surveil. Since our April earnings call, we've had multiple discussions with the FDA regarding the submission. Importantly, we have clarified the additional data and tests that are required to complete the final submission for the PMA. These tests are currently underway. Now they are longer lead times than normal due to supply chain constraints at independent test laboratories. We are working all angles to minimize the impact on our timelines. The majority of the data, and by that I mean the vast majority of the data, will be completed in our fiscal Q4. However, some data may not be received back from these labs until October. While we're not changing our target of receiving the PMA by December, It is tight, and it will depend on our ability to overcome some critical supply constraints at these independent labs. In addition, we are preparing for Abbott's commercialization of Surveil. In fact, we have recently met with our partner Abbott to discuss their perspectives on the drug-coated balloon market, which we found quite encouraging. Over the coming months, we expect to continue our discussion with Abbott about its commercialization plans and forecasts. the expectation continues to be that the U.S. launch of Surveil will follow the receipt of the PMA approval. Moving to Sundance, our below-the-knee surveillance coded balloon. As we have discussed previously, our Surveil distribution agreement with Abbott included an exclusive option period for Abbott to negotiate an agreement for our Sundance BTK-DCB. Abbott has informed us that it has elected to allow this option period to expire. Abbott communicated that its decision was based on current strategic priorities at this time and does not reflect the technology's potential clinical benefits. In the meantime, we are assessing the next steps for the clinical development and future commercialization of the Sundance DCB, for which another multinational strategic partner has already expressed interest. The current investment in the Sundance program consists of completing the swing trial follow-up period and some baseline R&D work. We are intentionally not actively gearing up for an ID submission nor pivotal trial at this point, especially since a potential partner would want substantial input into these important trial design considerations and decisions. We believe in the possibility of our Sundance DCB to improve the treatment of arterial blockage below the knee. Our optimism reflects the promising early efficacy and safety results which we intend to present and submit for publication later this year. Our second strategic objective is to demonstrate the commercial viability of our sublime radial platform and our PONS arterial and venous thrombectomy platforms. Let me start by saying we like what we see. As we have previously described, Fiscal 22 is about building our customer base, which is an essential catalyst to driving future value creation. We have attracted high-quality sales talent, which has led to a sizable increase in the number of customers purchasing pounds of Sublime products during the third quarter. We are well on our way to finishing the fiscal year with over 100 customers for both our pounds and Sublime products. Much of this credit goes to our commercial team, which has grown to a total of 30 field professionals at the end of Q3. Importantly, our account pipeline of prospective customers has expanded significantly. During the third quarter, we experienced a greater than 100% increase in the number of hospital value analysis committees that are considering our Sublime and Pounce products. We're still early in our commercialization efforts. Our average rep tenure is less than five months, and our average customer tenure is approximately four months. To date, our sales organization is primarily focused on building our customer base. However, they are also driving repeat orders in our existing accounts. In my view, early indicators of success include adoption and stickiness, which we are seeing to date. Over 85% of our customers ordered one or more times during the third quarter, and since we launched our commercialization efforts last fall, two-thirds of our customers have ordered several times, two or more, despite nearly half of those customers ordering for the first time during the third quarter. Furthermore, we're seeing an increasing quarterly product utilization amongst these early customers. So, again, we're seeing some early evidence of the adoption and stickiness, which we believe are a foundation for growth. Now, our products continue to demonstrate a profound clinical impact on patients. In a recent case, Dr. Nachiket Patel of Mercy Gilbert Medical Center in Gilbert, Arizona, used our Pounce thrombectomy system to treat a 65-year-old patient admitted to the ER with extreme limb pain and coldness of the leg and foot. The patient presented with clots that extended from the femoral artery at the top of the thigh to the tibial arteries below the knee, approximately 50 centimeters in length. Because of the significant thrombus burden and complexity of this case, which consisted of both acute and chronic clots, the physician used the Pounce device. Due to the high volume of clots removed by the Pounce thrombectomy device, along with the mechanical disruption of the clots, The ICU team was able to shorten the infusion to only a few hours of half the dosage of thrombolytic therapy that would have been prescribed in an alternative case. Following this therapy, the patient was discharged from the hospital 24 hours after a follow-up balloon angioplasty procedure. The physician and staff were astounded at the success of the intervention because of the overwhelming amount of thrombus burden removed with the need, again, for only half of the dose of thrombolytics. This case is one example of Pounce offering physicians and care teams a new standard for treatment of peripheral arterial thrombus. Moving on to our Pounce venous thrombectomy platform, which enables physicians to safely separate large and mixed morphology clots from the vein wall and rapidly extract it without removing the device from the patient. We have experienced some delays in our initial manufacturing efforts and the resulting product availability to start our clinical evaluations on any consistent basis. Our team is working diligently through these issues. Because of this, we don't anticipate starting a cadence of product evaluations until the issues are resolved, and we'll have more to share on this matter during the next quarter's call. Turning to our third strategic objective to drive top-line revenue and optimize cash flow from our diagnostics and medical device coatings offerings. Our medical device coating offerings and diagnostic businesses reported 1% and 3% year-over-year growth, respectively. With both delivering strong operating results in line with our expectations, we remain confident in the ability to generate meaningful cash flow contributing to our growth initiatives. We continue to believe that the long-term growth will be what rewards our shareholders. While early, our recent performance provides initial evidence supporting this value creation thesis. The strength of our balance sheet has been and is essential to unlocking our long-term growth potential. Given this and the current macroeconomic uncertainties, I believe it is prudent to assess financing options, such as increasing the size of our credit facility. This will allow us to strengthen our balance sheet so that we may be financially resilient in this current macroeconomic environment. I expect we'll have more to report on this topic in the coming months. Our team has delivered solid results during the first nine months of our fiscal year. Delivering on a long-term goal of consistent and robust revenue growth starts with executing our fiscal 2022 strategic objectives. And we are pleased with this progress during the third quarter and look forward to sharing with you significant progress throughout the remainder of our fiscal year. I'll turn this call over to Tim to provide more details on the third quarter fiscal 2022 results and full year guidance. Tim?

Thank you, Gary. During today's call, I will provide an overview of our third quarter operating performance as well as an update on our fiscal 2022 financial guidance and liquidity position. Revenue for the third quarter of fiscal 2022 grew 4% to $24.9 million, compared to $23.9 million in the prior year quarter. Revenue from our medical device business grew 5% year over year to $17.5 million, driven by strong product sales. Our in vitro diagnostics business revenue grew 3% to $7.3 million, compared to $7.1 million in the prior year quarter. IBD performance was driven by solid product sales growth, which offset lower R&D revenue. Product revenue increased 15% to $13.9 million in the third quarter, compared to $12.1 million in the prior year quarter. In our medical device business, product revenue grew 23%, or $1.2 million, to $6.7 million on broad-based growth across our medical device products and coating reagent. with growing contribution from our pounce arterial and sublime radial commercialization efforts. Product sales of our medical devices in the third quarter grew 64% from the year-ago period, which includes contract manufactured bloom catheters, specialty catheters partnered with Cook and Medtronic, and our pounce arterial thrombectomy and sublime radial device products. Turning to the fourth quarter of fiscal 2022, As Gary discussed, the commercialization timing of our Pounce Venus product has been delayed, which is one factor unfavorably impacting our revenue guidance for the full year. However, we expect double-digit year-over-year growth to continue in Q4 for medical device business product sales, driven in part by our Pounce arterial and sublime radial commercialization efforts. Our in vitro diagnostics product revenue grew 9%, or $590,000, to $7.2 million in the third quarter. IVD product sales growth was broad-based. For the fourth quarter in our IVD business, we anticipate unfavorable order timing for our distributed antigen products, as well as softness and R&D revenue. Our third quarter royalty and license fee revenue totaled $8.8 million and was essentially flat compared to the prior year. License fee revenue under the AVID agreement was $1 million for both the third quarter of fiscal 2022 and the prior year quarter. Royalty revenue totaled $7.8 million in the third quarter and was essentially flat compared to the prior year quarter. Third quarter royalty revenue performance continued to benefit from growth from our serene coding. We believe that there are several macro factors impacting royalty revenue reported by our customers, including multiple pressures and procedure volumes related to hospital capacity constraints and customer supply chain disruptions. We expect these headwinds to persist in our fourth quarter and therefore expect royalty revenue to be relatively flat for the full year of fiscal 2022. R&D services revenue of $2.1 million in the third quarter was down $850,000 compared to the same prior year period, primarily as a result of the completion of a customer development program in our IBD business. In addition, R&D revenue was impacted by lower customer demand for our medical device coding services. largely due to continued supply chain challenges related to certain customer supply products. I also expect these headwinds to persist during our fourth quarter. Product gross margin in the third quarter of fiscal 2022 was 63% compared to 58% in the prior year quarter. The prior year quarter included a tailwind of $730,000 in charges in our medical device business related to a product replacement matter for one of our contract manufactured products. Gross margin for the third quarter benefited from leverage on higher sales volume compared to the prior year quarter. I expect that our fourth quarter product gross margin will be unfavorably impacted by several headwinds related to higher material costs and product mix. R&D expense, including costs of clinical and regulatory activities, was $13 million in the third quarter, or 52% of revenue, compared to $12.2 million in the year-ago period. R&D spend for the quarter was lower than what we previously communicated as a result of recent decisions related to the prioritization and timing of certain product development activities. We continue to invest in our pounce and sublime platforms, including commercial readiness activities for both our surveilled drug-coated balloon and our pounce venous thrombectomy device. For the remainder of the year, quarterly R&D spend is expected to be approximately in line with our Q3 levels. SG&A expense in the third quarter of fiscal 2022 was $12.9 million, or 52% of revenue, compared to $7.9 million in the year-ago period. The increase in SG&A expense is primarily related to sales and marketing activities, including new hires to support the commercialization of our Sublime and Pounce products. As Gary mentioned, we now have a team of 30 experienced and talented sales professionals dedicated to building the commercial pipeline for our Pounce and Sublime products, up from approximately 20 at the end of the second quarter. While we do not anticipate increasing the size of our sales team in the near term, we do believe that we have the appropriate scale to build a meaningful customer base to demonstrate the value of our commercialization strategy. For the full year, we anticipate SG&A expenses to be in the high 40s as a percentage of revenue. Our medical device business reported an operating loss of $7.3 million in the third quarter compared to an operating loss of $2.5 million in the year-ago period. In addition to sales and marketing investments, our third quarter performance includes the addition of $1 million in operating expenses, of which $520,000 is an intangible asset amortization related to our fourth quarter fiscal 2021 VTEX acquisition. Our IVD business reported operating income of $3.4 million in the third quarter and was consistent with the prior year quarter. IVD operating income for Q3 was 46% of revenue compared to 48% in the prior year. Now turning to income taxes, we recorded an income tax benefit of $1.5 million in the third quarter of fiscal 2022 compared to income tax expense of $780,000 in the year-ago period. The current quarter's tax benefit is a result of the pre-tax loss for the third quarter. The prior quarter's tax expense reflects pre-tax income for the full fiscal year 2021 with the receipt of the $15 million Abbott milestone payment. On a GAAP basis, we reported a loss per share of 41 cents in the third quarter of fiscal 2022, compared to a loss per share of 24 cents in the prior year quarter. On a non-GAAP basis, we reported a loss per share of 34 cents in the third quarter, versus a loss per share of 17 cents in the prior year quarter. Moving to the balance sheet. In the third quarter, we began with 27 million of cash and investments. During the third quarter, cash used by operations was 3.5 million, and capital expenditures totaled 860,000. As of June 30th, 2022, we had cash and investments totaling 22 million, and the balance of our line of credit remained unchanged at 10 million, related to the funding of the July 2021 VTEX acquisition. We anticipate that we will finish the year with approximately $17 million of cash. This estimate is lower than the $20 million that was previously communicated, in part due to ongoing delays in IRS payment to certain income tax-related receivables. As Gary discussed, we are taking measures to assess financing options, such as increasing the size of our credit facility. And we will have more to share on this topic in the coming months. Turning now to our outlook for 2022. We expect fiscal year 2022 revenue to range from $97 million to $99 million. This revenue outlook reflects delayed timing for the commercial launch of our Pounce Venus product, as well as expected softness in customer demand affecting both product revenue and R&D services revenue. As a reminder, this outlook includes between $4.5 to $5 million of license fee revenue associated with the added surveil agreement. As a result of our financial performance for the first nine months of fiscal 2022, we now expect full-year diluted GAAP EPS in the range of a loss per share of $1.50 to a loss of $1.35. We also expect non-GAAP diluted EPS in the range of a loss per share of $1.23 to a loss of $1.08. With respect to income taxes, we expect the full-year impact of income taxes to range from a tax benefit of $5 million at the low end of the guidance range to $4.5 million at the high end of the guidance range. Operator, this concludes our prepared remarks. We would now like to open the call to questions.

Thank you. If you wish to ask a question at this time, please press star 1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will now take our first question from from Lake Street Capital Markets. Please.

Thank you. Good morning, guys. I appreciate all the comments. I guess I'll start off by mentioning that I had a long talk with another CEO yesterday who's also involved with trying to get some laboratory testing done. And he sort of mentioned to me it was what I would call a highly variable environment, depends a lot on who the suppliers are, depends a lot on the labor situation at those suppliers, the workload, et cetera. How confident do you feel in your lab testing partners that you're going to be able to get the work done on surveil in a timely fashion and get that whole submission buttoned up for the FDA?

I'm quite confident, and in fact, you know, we chose not to go shopping around. The type of data we have to generate is very highly specialized, and there are several laboratories depending on the type of tests we have to do, but these are lab partners. We would not want to switch from them because of expertise through the whole surveyor program. So they're running the tests. It simply is a stack up of testing, and some of these are 30-plus days studies, so really we can't compress that time as well. So quite confident. The issue for us is really in the pursuit of trying to get this PMA before the end of the year, the calendar year, there's a certain amount of clock time left when the submission is complete, and that's 90 days left on the clock. You can imagine the end of September is a critical day for us. On the other hand, there are some reports and analyses that we simply cannot rush. Sometimes speed and complexity don't mix, and the data we're looking for has to be quite accurate and interpreted in an accurate manner as well. So we're doing everything we can to pull it in. But at this point, the quality is much more important to the final submission to the agency than saving a week or two. If we can, we will, but not compromising the quality. But I would say just net-net, highly confident in all laboratory partners. They have done this for many years with us.

Great. I know it's probably dicey to comment on anything from Abbott, but I'm guessing they're probably not going to even start ordering inventory before you get final approval from the FDA. Is that what your expectation is for Abbott? You'll get the approval and then everybody will really crank up and try to get moving when we're in 2023?

I can say two things. I've been very impressed My recent meetings with the Abbott commercialization team and their leadership, so the partnership, I believe, is very anxious to be in the market. Now, there has to be some prudence to that because these products don't have an infinite shelf life. So even though we would all want to be in the market sooner rather than later, I think we have to look at the supply chain, the manufacturing, and the shelf life. If you build things too early, then you have a lower shelf life naturally. So I'm sure we'll work these things through with them, but I feel very positive about their commercialization intent in the meetings that I've been with. Final decisions really come down to the expected timing of this PMA. And, you know, given the agency, it's still... there's still a tolerance bandwidth for a couple months because the clock does stop for questions in a 90-day period. So we're working through that. As soon as we have clarity on the end date that we can complete the submissions, we'll be able to communicate that back to Abbott to say it's clock time now.

I'll just add a little color on to Gary's comment here, Brooks, for everyone on the call today. Abbott has communicated several times that it's their intent to launch Surveil following PMA approval. And I will tell you that we've shared publicly as well that to fulfill or satisfy the Abbott stocking order could take up to four months. So Abbott's aware of that as well. And we're making great progress, as Gary mentioned, in terms of discussions and communication with the Abbott commercialization team. And I'm hopeful that we'll have a bit more to discuss on this topic here on an upcoming call.

Okay, that's great. Let me just ask you two more hopefully quick ones. But obviously you're gaining experience with the direct selling model. I'm just curious if you could compare and contrast kind of what you see from the direct model in terms of pros and cons versus what you've seen historically from your partnership model.

You know, they're both quite different. And in the partnership model, some of these devices were really slotted in for specific needs of the strategic companies, right, or customers. In the direct model, though, these products are new to the world. They're not part of a portfolio. So what we like about having our direct sales team is, that this is their focus. There are not 50 other things in the bag. There's not other sales contests or promotions for different parts of the portfolio. Being our portfolio, we both have the focus, and I would say the resilience, because these products are breaking ground in how healthcare is conducted, how the treatment of a patient is, and that's intrinsically a bit more difficult in the early days of market entry. The control and intensity, and I would say the connection and feedback from the healthcare practitioners is highly valuable to us in terms of the feedback for our product portfolio. We are in the stream and know how we need to navigate and what our future pipeline needs to adapt to. Which is something, it's very hard to hear that from our our B2B customers, because they're on the front line and then telling us about it. And, you know, there's always some transmission noise and things like that. But our team hearing it, being in the cath lab, is quite a different and positive environment for us.

Absolutely. That's great. I'll just ask one more, and I appreciate all your comments. This is kind of a conceptual question. So historically, last couple of years, you've invested 50% plus of revenue in in R&D, I'm expecting a fairly significant acceleration in revenue growth and profitability as we get surveil approval and some of these other products move into commercialization. So conceptually, are you thinking that 50% plus of revenue in R&D spend is what's likely to continue, or are you more committed to the, you know, whatever it is, 30%, 40%, I forget what the number is for R&D spend right now. How do you think about that?

You know, from an algebraic viewpoint, I would expect it to go down if the revenues that we see go up. We're not committed to keeping a percentage of R&D. It depends on what's on the table for us to work on. As you know, Brooks, the drug delivery programs are fairly... are indeed intensive in expenses and time over time. And so as we look at the partnerships for Avess and Sundance, we expect a lot of that will be through the partnership income from a partner as well. So net of that, our thrombectomy and sublime platforms, the absolute amount we put in there, you should see a decline. Now, I don't want to I don't want to be a pundit and predict it, but you can imagine if we expect to see double-digit growth, we will see that R&D percentage come down over time. And, Brooke, just one other thing, just going back to your last question that's different with B2B versus direct. You saw Tim say, you know, when our customers have supply chain disruptions, they can't send us parts to work on, and that impacts our revenue. And so... So while we all have supply chain issues, and I'll just tell you it's pervasive in industry, when it's revenue dependent on customers having their supply chain issues resolved, that puts us at a little bit of disadvantage as it has in this quarter. So we like controlling the supply chain a little bit tighter with our direct products. Still difficult, but one less level of lack of control. Sure. Great.

Thanks a lot. Appreciate all the comments. Thanks.

We will now take our next question from Jim Sidoti from Sidoti & Company. Please go ahead.

Good morning, and thanks for taking the questions. You know, just to follow up on the supply chain and inventory issue, if you look in your company, your inventory was around 7 million at the beginning of the year. It's up to almost 11 million by the end of the third quarter. Is that... primarily finished goods, or is that just increased raw materials to hedge the impact of the supply chain challenges?

Great, Jim. I appreciate the question. You will see in the 10-Q, which will be filed shortly, kind of the composition of the inventory. You're going to see that probably about two-thirds of the inventory balance is really kind of more materials and work in process. A third is finished goods. And we've been deliberate, and I think we've made the comment here in the last couple of calls, we've been really looking to get in front of some of the supply chain challenges, and philosophically we've been carrying inventory at levels greater than what we have in the past. And certainly a significant amount of the growth, as you mentioned, from $7 to almost $11 million, is really reflective of a lot of the things that we're doing here, both on the commercial readiness activities with Surveil, but also both with our Pounce platform and our Sublime platform. Our view is that we feel comfortable where we're at. Clearly, there are certain items in the supply chain that continue to have long lead times and have some risk, but I do like where we're at with the inventory level at this point, and I think if you think about it relative to the product sales, product sales have been increasing substantially, double digits every quarter these last few quarters, it kind of gives you a little bit of a perspective in terms of how we're thinking about the future as well. So it's both about preparing for the future and making sure that we're mitigating risk.

Yeah, and I'll give you an example, Jim. Paclitaxel is $800 plus or minus a gram. So we have to have a short supply of Paclitaxel. So if Tim and I have to make a decision to buy a kilogram of Paclitaxel, it'll serve us for quite a long time. we need to make sure there's no risk in key products like that.

So it sounds like part of the increase is your preparation for the launch of Surveil.

Correct.

Okay. In terms of salespeople, do you think this level around 30 professionals is about right, or do you think you'll continue to add?

You know, I feel good where we are right now. Clearly, we're not long-term not going to be competitive with 30 salespeople, but for what we have in our plates right now, we believe it's an appropriate amount to have that critical mass to demonstrate revenue success. Now, we may wait for the fourth quarter earnings call to talk about our philosophy and goal as we grow, but clearly this is part of our commitment to not overextend ourselves, and to be efficient users of capital there. So 30 feels right. We may add some field clinical support, which is an essential part of creating a sticky business, but I like where we are right now.

Okay. In terms of financing, you know, is this something that you think you'll continue to need long-term, or is this just kind of a bridge to get you through the There's approval for Savelle and the associated payment. We'll use that payment to pay down whatever financing you borrow before that.

Jim, thank you for the question. We'll talk certainly a lot more about this going forward as we provide guidance for 23 and beyond, but you're thinking about it the way we think about it. We look at this as really kind of a bridge And really to help just give us, we consider it good housekeeping. You know, clearly there are challenges in the macro environment. So really it provides us with the ability to both, you know, mitigate risk and also gives us the opportunity to provide optionality in terms of future decisions. But we think we've got a business model and we've got a plan and products that suggest and support long-term growth. And we expect that that growth will be valuable in the future. And putting additional financing on the balance sheet will just help us to achieve our longer-term goals.

Got it. All right. That's it for me. Thank you. Thanks, Jim.

As a reminder, to ask a question, please press star 1. We will now take our next question from Mike Mattson from Newtown & Company. Please go ahead.

Yeah. Good morning. Thanks. Thanks for taking my questions. So I want to, I want to ask a question that I got a lot back when I, a few years ago when I picked up coverage, when you kind of embarked on this whole product solutions strategy and, and that's that, you know, what's the risk here that you lose some of your, your coatings customers given that you're now competing with them? I mean, you know, originally you were intending to just kind of provide products to some of these companies and let them sell them, but you've taken it even a step further now with your own Salesforce. So is there some risk that that annoys some of these coatings customers and they start trying to shift that business away from you guys?

Yeah, you know, it's something we have put a lot of thought into as we looked at positioning what we're trying to achieve. You know, in some of these spaces, We're not directly competing with our customers. I think some of our customers are looking anxious to see if we make headway in some markets that they may someday want to enter. The way I look at it is, I may have explained in the past, we have a really strong firewall, another firewall with a wink, wink, nod, nod. It's a firewall of two separate types of team members. separated both in different facilities and also in what we share. So when customers send us a customer supply product, the R&D team working on a proprietary product does not have any interaction with the R&D team helping in the commercial development realm. And it's a very high bar and a very ethical firewall for us. Our customers Some of them anxious. I would say that's a varying degree. With 30 salespeople, I don't think anyone sees this as an existential threat to their business. But I do think they're observing us and seeing how far and what our level of success is. So far, the customers I've dealt with, and these are the large strategics, have not expressed grave concern. Yeah.

I'll just add on, Mike, just to provide a little bit more context. We haven't seen it yet. We've not seen any of our customers inform us that they want to terminate agreements. We've not seen any of our customers that we're aware of switch the coding from a sermatics coding to a competitive coding on their existing product. So we're not seeing any of that. I think it's important for individuals to be mindful that within our codings business, we have about 150 licensed customers, they already compete against one another. And so that competitive discussion already exists, and it's with other companies not named Sermotics. I think we've established a lot of trust over the 42 years we've been in business, and I don't think we're ever going to jeopardize and have reputational risk by taking advantage of our understanding of some of the development activities that our customers are pursuing We continue to get and see the same level of development, feasibility, and optimization programs that we've seen over the past six, seven years. So we're not seeing anything that would suggest that our customers are viewing our relationship any differently than they've been viewing it over the history of our relationships. I think a lot of that has to speak to the codings team and their professionalism, the service that we provide, and the value proposition of our coding. it's not an area that I, quite frankly, spend a whole lot of time thinking about, but I can guarantee you are coding CMS.

Okay, thanks for that comprehensive answer. I guess, you know, the other, you know, challenge I'm dealing with here is, you know, I've covered the company now for almost four years or over four years, and, you know, you've been doing this whole product solutions, you know, strategy for that period, and You know, we've yet to really see any material revenue from this, as far as I can tell. You've spent a lot of money on R&D and the marketing efforts. And so, you know, you have these 30 reps now. You have some interesting products with Palance and Sublime. I mean, is 23 going to finally be the year where we really start to see some revenue from this effort?

I expect so, Mike. And I'll reiterate maybe what I said in the last earnings call. We're doing a very difficult pivot as a public company. Most of the companies who have gone public and are currently considered unicorns, the messy first year or two were behind the public scenes. They weren't in front of the public. And so I would say we are still You know, as you heard us, our average tenure of our salesperson on board is five months. So let's just be realistic about what that commercialization revenue should look like in 2022. But you are right, in 2022, we expect that to accelerate and get to that double-digit revenue growth for the direct model products. Now, the one thing I would say is, in the last 34 years, you're still in market entry until your sales force has been on a weighted average on board for a year. And that is, if you've checked the publicly available data of the comparables that we'd like to be compared with someday soon, you would see that empirically, we're on track. Being public and making the sausage in the public markets in the first year is exceedingly difficult, but we are confident and where we're heading in 2023. So the short answer is totally understand your point, but keep in mind the empirical growth curves there. When you see them after they have gone public, they have already tripped, skinned their knees, worked out the bugs for a year or two beforehand.

Okay, thanks. And then just a couple of product updates, questions. I apologize if you went through some of the stuff. I joined the call a little late, but can you just give us an update on where things stand with the other indications for the drug code balloons, I guess, Avess, and forgetting the name of the blow that you want, and then for Pounce, what's the latest thinking around the venous FDA clearance?

Okay. No, thanks. So, first of all, I will say the take-home message for me in this call is, we have absolute clarity on what we need for surveil. I can't overstate how big that was and what a big shift that was from our last quarter earnings call in terms of working through the FDA. And that is something I feel really good about. Getting that clarity is half of the issue of getting the PMA. So that's in the bag. We've just got to do the doggone test and get through the supply chain issues and get the results. And I feel very confident in what the results will demonstrate as these tests are ongoing. For Sundance, you know, as another multinational has expressed interest, clearly we could not pursue that during the exclusive option period with Abbott, so I believe that will be progressing. Now, Sundance, the data, I think it's terrific, and that's why I'm excited if we can publish that or submit it for presentation at least on the podium later this year so our shareholders can actually see the merits of that below-the-knee surveillance technology. As I said on the call, I don't anticipate that the gearing up for an IDE submission and a pivotal is best done with a partner because of the decisions that need to be made. We were quite clear when we did surveil. We went ahead and started the IDE process there without a partner because we were quite clear the tracks we were following in. In below-the-knee disease, there is still some debate of what's the best trial design and how best to conduct it, and I'd hate to get ahead of a potential partner and cement those decisions before they're involved. Also, with a partner, it could help defray some of those expenses as we go forward as well. A vest, the issue for us really is, you know, we believe in the product, but the reimbursement that we expected to come through from The prior strategics working the system with CMS, we haven't seen that come through yet. I think ultimately they will be successful, but for an AVBCB to really have a strong market, total attainable market, will require, I believe, some adaptations in the current reimbursement profiles. AV fistula stenosis is one of the largest costs in Medicare. And if you have devices that actually increase the patency, I think I've seen other companies' data. We're talking about billions of dollars in healthcare cost savings. I believe CMS needs to move on that, and that'll open up that market. So the interest in Avess is two things. One is everybody is waiting. It's a similar product to Surveil. It's almost identical. So I believe the interest will actually grow when we have demonstrated we've gotten the PMA for surveil. The two are interlinked that way. So Rolmus is slightly different because it's a different drug there. As far as Pounce, Pounce Arterial, I feel really good where we are. We have, I believe, I don't say this with fighting words, but the only and probably unopposed mechanical thrombectomy in the arterial space that's building a real large clinical profile. Pounce Venus, look, I was disappointed. What came off the first batch of manufacturing lines, we clearly had some issues with that first batch, which led us to have very limited product from the first batch. So we're recouping from that. but there are some intrinsic changes we need to make for that to make sure that doesn't happen again. The product we do have that we can get into the clinic, we have to use it in a certain manner which doesn't make it optimum for the results we hope to see or derive by treating the patient as they would treat in an open commercial environment. So that's going to take us, it's not in weeks, it might be a couple months, for us to figure out how soon we can get that back into the market to get the clinical evaluation going again. Still highly confident in the product, too, but these things happen sometimes in the manufacturing and design environment.

Okay. Just to follow up, so the Pounce Venus, I mean, the gating factor there is this manufacturing issue as opposed to, can you remind me, is it cleared right now for Venus use, or...?

Pounce Venus has both a CE mark and FDA clearance, yes. Okay. All right. Thanks. So we call it we do a very intensive limited market evaluation because the Pounce Venus product has been used on 19 patients, but we really like to get 30 to 40 patients under our belt before we go to a broad commercial environment. And so some of the early learnings for manufacturing are And the impact we're having also on some of the design elements are what we're looking at and saying, what do we need to do to get it into the hands of customers where we're not hovering over the product while it's being used? Let's put it that way.

Okay, got it. Thank you.

As a reminder, to ask a question, please press star 1. We'll pause for a moment. As there are no further questions at this time, I'd like to turn the call back to your speakers for any additional or closing remarks.

Well, listen, thank you, everyone, for your time on the call today, and we look forward to updating you next in our fourth quarter innings call. Take care.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.