Surmodics, Inc.

everyone to Sermatix fourth quarter and fiscal year 2022 earnings call. Please note that this call is being webcast. The web is accessible through the investor relations section of the Sermatix website at www.sermatix.com where an audio replay will be archived for future reference. An earnings press release disclosing Fermatis quarterly results was issued earlier today and is available on the company website as well. Before we begin, I would like to remind everyone that remarks and responses to your questions on today's call may contain 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 CIRMOTIC'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 Sermatix forward-looking statements resulting from certain risks and uncertainties, including those described in Sermatix SEC filings. Sermatix disclaims any duty to update or revise these forward-looking statements as a result of new information, future events, developments, or otherwise. This call will also include references to non-GAAP measures because Thermotics believes they provide useful information for investors. Today's earnings release contains reconciliation tables to GAAP results. I would now like to turn the call over to Mr. Gary Maharaj, Thermotics President and Chief Executive Officer. Please go ahead, sir.

Thank you, Operator. Good morning, everyone, and thank you for joining us. for our fourth quarter and fiscal year 2022 earnings call. Overall, it has been a solid quarter, and we achieved strong revenue performance and continued progress on our strategic objectives as we closed out the year. I'll start my remarks today with a brief review of our revenue performance for the fourth quarter and full year. In the fourth quarter of fiscal 2022, we achieved total revenue of $26 million, representing growth of 8% year over year. We were pleased to finish the year on a strong note, exceeding the high end of our revenue guidance, which implied fourth quarter growth of 4% year over year. Our total revenue growth in the fourth quarter was exclusively driven by medical device revenue, which increased 12% year over year, offset slightly by a 1% decrease in in vitro diagnostics or IVD revenue. Within our medical device business, the outperformance that we saw in the fourth quarter relative to our expectations was driven by a combination of stronger than anticipated product sales, including sales of our pounds and supplying products, along with higher than anticipated license fee revenue related to our surveil agreement. Our strong fourth quarter revenue performance enabled us to generate total revenue of $100 million for the full year fiscal 2022. As a reminder, fiscal 2021 included $11.3 million of revenue that was recognized in connection with an Abbott milestone payment. Normalizing for this milestone payment, we grew total revenue by 5% year-over-year in fiscal 2022, driven by 6% growth in our medical device business on a normalized basis and 3% growth in our IVD business. All in all, we were pleased by the solid revenue performance achieved by our team as we continue to invest in our business and position semantics for strong, sustainable long-term growth. Tim will discuss our financial results in further detail. But first, let me share an update on our recent operational progress with respect to the three strategic objectives which have been our focus. Beginning with our first objective. to achieve premarket approval for the surveilled drug-coated balloon and support Abbott's commercialization efforts. As a reminder, after submitting the final module of our surveilled PMA submission to the FDA on June 21, 2021, we received a request from the agency for additional data to support their review, which we discussed in our fourth quarter fiscal 2021 earnings call. Much of this past fiscal year, our regulatory and clinical teams have been focused on engaging with FDA to obtain clarity on the additional data and test requests and obtaining this data by working in partnership with independent test labs. During the fourth quarter, our teams continue to work diligently with our independent testing partners to gather this requisite data with our external advisors and to prepare a response to the agency's comments. As a result of our team's efforts, I am pleased to report today that on October 13th, we submitted a complete response to FDA's comments on our Surveil PMA application. Our Surveil PMA submission is currently under review by the agency. While the duration of the FDA's review process is ultimately outside of our control, we anticipate obtaining approval by the end of the second quarter of fiscal 2023. As a reminder, receiving PMA approval will result in either a $30 million or a $27 million milestone payment from Abbott, depending on whether the approval is received on or before December 31, 2022. If we were to receive PMA approval on or after June 30, 2023, the milestone payment would be $24 million. Although we can never be certain about what action the FDA will take regarding our application for pre-market approval of Surveil, we believe strongly that application and our related data supports the safety and efficacy of Surveil and ultimately the approval of the product. On November 1st, we are pleased to see the 24-month data from our Surveil Transcend clinical trial presented at the Vascular Interventional Advances Conference, also known as VIVA, These data demonstrated comparable sustained clinical outcomes between the surveilled DCB and impact admiral DCB cohorts through 24 months in both primary and safety efficacy endpoints. This is despite the impact device having 75% more paclitaxel. In addition to our regulatory progress, we are focusing on preparing to support Abbott's commercialization of Surveil, which we continue to expect following the receipt of the PMA. To that end, the Somotics and Abbott teams have had several meetings in recent weeks to review and discuss a variety of aspects regarding Abbott's plans for U.S. commercialization, including launch timing and order forecasts. We are obviously limited in terms of what we can discuss publicly at this stage, but suffice to say we remain excited about our partnership with Abbott and the prospects for U.S. commercialization after Surveil receives PMA. Turning to our second strategic objective, to demonstrate the commercial viability of our sublime radial, pounce arterial, and pounce venous thrombectomy platforms. We began the early commercialization of our Sublime Radial and Pounce arterial platforms in a limited scale in the first quarter of fiscal 2022, in tandem with building out our direct sales force, which initially included only five territory managers. Throughout the fiscal year, we continued our work to establish, onboard, and train our direct sales team. At year end, our direct sales force consisted of 27 territory managers. In addition to establishing our direct sales force, fiscal 2022 has largely been about building a commercial pipeline for sublime radial and pounce arterial thrombectomy platforms. Building our initial customer base is a key aspect of this process and one which requires each potential new customer to pass through several phases, including approval from a hospital or a clinic's value analysis committee, Our stated goals in this respect were to end fiscal 2022 with over 100 total customers for our Pounce and Sublime products, while generating modest but meaningful and growing revenue beginning in the second half of the year in connection with increasing adoption and utilization of these products. I'm pleased to report that we achieved both goals. At the year end, we had just over 100 total customers. And from a revenue standpoint, we were pleased to see strong sequential sales growth in each quarter throughout fiscal 2022. In the second half of fiscal 2022, we generated more than three times as much sublime and pounce revenue compared to the first half of the year. In the fourth quarter specifically, our sales organization continued to focus on building our customer base and driving repeat orders in our existing accounts. We saw strong sequential sales growth on a quarter-over-quarter basis, along with continued evidence of increasing adoption as evidenced by our expanded customer base. In terms of our pipeline of prospective customers, we continue to see healthy growth in the number of evaluations by hospital value analysis committees. And from a utilization standpoint, approximately 80% of our customers ordered one or more times during the fourth quarter, on par with the levels that we saw in the third quarter. While we remain in the very early innings of our initial commercial efforts, with an average rep tenure of seven months across our direct sales force, we're pleased with the progress we're seeing and with the foundation that we have established to drive future growth in the years to come. And lastly, with respect to our third strategic objective, to drive revenue growth and optimize cash flow from our medical device coatings offerings and our IVD businesses. For full fiscal 2022, revenue growth from our medical device coatings offerings and our IVD business was 2% and 3% year over year, respectively. Our medical device coatings revenue growth was consistent with a low to mid single-digit range we anticipated heading into fiscal 2022. while the growth of our IVD business came in slightly below our initial expectations for the year due to a decline in R&D services revenue. IVD product sales, however, increased 8% year over year. Both of our medical device coating offerings and our IVD businesses delivered solid operating results this past year, in line with our expectations, and we remain confident in the ability to continue to generate meaningful operating income supporting our growth initiatives in 2023. Before I discuss our priorities for 2023, I'd like to provide a quick update of some of our recent progress related to our new product pipeline and financing strategy. On the new products front, beginning with our Sundance serolimus drug-coated balloon, we are pleased to see the six-month data from our 35-patient swing below-the-knee first-in-human trial presented at the Amputation Prevention Symposium on October 11. These data met the trial's primary safety endpoint and no perioperative deaths, no amputations at 30 days, and demonstrated excellent primary patency of 88.5% at six months. We remain focused on identifying and evaluating potential partnership opportunities for the development and future commercialization of Sundance. In recent months, we have received interest from a number of large medical device companies and have been engaged in discussions with several companies in connection with this process. Although it would be premature at this point to provide further details on these discussions, we have been pleased with the levels of interest shown in Sundance, which reflects our belief in the potential of this technology to improve the treatment of arterial blockage below the knee. With respect to our Pounce Venus thrombectomy platform, We've resolved the manufacturing delays that we discussed in our third quarter earnings call and plan to continue to conduct limited market evaluations of the product in the second quarter of fiscal 2023. Our aim in conducting these limited market evaluations for new products is to gain experience across a wide variety of cases and clinical conditions and evaluate the feedback from numerous physicians. The real-world feedback obtained through these evaluations will help inform any potential design enhancements that could benefit physicians and patients while optimizing commercial viability. In terms of the progress made on our financing strategy, on October 17th, we announced that we retired our prior revolving credit facility and entered into a new five-year credit agreement providing us with access to up to $125 million in non-diluted debt financing. As we discussed previously, we believe securing this increased borrowing capacity is a responsible step given the current macro environment. It enables Sermotics to further strengthen our balance sheet as we await PMA approval for surveil and ensure we have the financial flexibility to support our long-term growth strategy. Tim will provide some additional power on the remand later in today's call. Stepping back, we brought fiscal 2022 to a strong conclusion in the fourth quarter, generating solid revenue performance and continued operational progress. I'd like to thank the entire semantics team for their dedicated efforts during the past year and their contributions to our success as we continue to work to improve the lives of the patients that benefit from our technologies. As you can see from some of the progress that I've highlighted in recent months, we're not taking our foot off the gas in fiscal 2023 with respect to our three strategic objectives, which are as follows. First, to achieve the PMA for surveil and support Abbott's commercialization efforts. Second, to advance the initial commercialization of our sublime radial and pounce arterial thrombectomy platforms, turning the corner from market entry to rapid growth. And third, to drive revenue and cash flow growth from our medical device coatings offerings and IVD business. By continuing to execute on these strategic objectives and remaining focused in our approach to capital allocation, we will position Semotics to drive long-term growth and ultimately generate enhanced future value for our shareholders. I'll now turn the call over to Tim Ahrens, our Chief Financial Officer, to provide more details on our fourth quarter fiscal 2022 results and fiscal 2023 guidance. Tim?

Thank you, Gary. Total revenue for the fourth quarter of fiscal 2022 increased $2 million, or 8% year-over-year, to $26 million, compared to $24 million in the prior year period. Product revenue increased $1.9 million, or 15% year-over-year, to $14.4 million in the fourth quarter of fiscal 2022. The year-over-year increase in product revenue was primarily driven by medical device product revenue, which increased $1.6 million, or 26% year-over-year, due to strong sales of our devices, including growing contributions from sales of our Pounce Arterial Thrombectomy and Sublime radio platforms. We also saw contributions from growth in IBD product revenue. which increased 240,000, or 4% year-over-year, driven by growth across several IBD product lines, which was partly offset by unfavorable order timing for distributed damage in products. Royalty and license fee revenue increased 640,000, or 7% year-over-year, to $9.5 million. License fee revenue increased $1 million, or 84% year-over-year, related to our surveil agreement with AVID, Royalty revenue decreased 390,000 or 5% year-over-year. Royalty revenue continues to be impacted by multiple pressures on procedure volumes related to hospital capacity constraints and customer supply chain disruptions. R&D services revenue decreased 500,000 or 19% year-over-year to 2.1 million. The year-over-year decrease in R&D services revenue was primarily due to the completion of a customer development program in our IBD business. Also, we discussed in previous calls, R&D revenue continues to be impacted by lower customer demand for our medical device coding services, largely due to continued supply chain challenges related to certain customer supply products. Before I continue down the P&L, let me remind you that in the fourth quarter of fiscal 2021, we had a $3.6 million benefit to operating income related to the Employee Retention Credit, or ERC, through the CARES Act. This $3.6 million benefit represents a headwind to our year-over-year performance for the fourth quarter of fiscal 2022, impacting product gross margin, RMD expense, and SG&A expense. Details on the prior year benefit can be found in our fiscal 2021 Form 10-K. Product gross margin in the fourth quarter of fiscal 2022 was 61%, compared to 67% in the prior year period. The decrease in product gross margin was impacted by a 3.7% point headwind from the prior year ERC benefit, and by changes in product mix related to the introduction of new products that have yet to benefit from scale. R&D expense, including costs of clinical and regulatory activities, increased 1.5 million, or 14% year-over-year, to 12.3 million in the fourth quarter. In addition to the ERC headline I mentioned earlier, the year-over-year increase in R&D expense was driven by increased product development investments in our Pounce and Sublime product portfolios, partially offset by lower drug-coded balloon spend. SG&A expense increased 5.9 million, or 75% year-over-year, to $13.8 million in the fourth quarter of fiscal 2022. The increase in SG&A expense was primarily driven by increased sales and marketing activities, including the expansion of our direct sales force and related investments to support the commercialization of our pounce and sublime products. Our medical device business reported an operating loss of $6.2 million in the fourth quarter, compared to $800,000 loss in the prior year period. The year-over-year change was driven primarily by the aforementioned sales and marketing investments. The prior year period also includes a $2.3 million benefit related to the ERC. Our IBD business reported operating income of $2.8 million in the fourth quarter, or 43% of revenue, compared to $3.4 million, or 51% of revenue in the prior year period. The prior year period included a $480,000 benefit related to the ERC. Taking into account the ERC headwind, IVD income as a percentage of revenue was comparable to the prior year period. Now turning to income taxes. We recorded income tax expense of $7.9 million in the fourth quarter of fiscal 2022 compared to income tax benefit of $270,000 in the prior year period. Tax expense for the fourth quarter included a non-cash charge of $10.2 million to record a full valuation allowance against U.S. deferred tax assets. It is important to note that this charge has no impact on cash taxes and that the net operating losses that underlie the deferred tax assets remain available to reduce future cash tax obligations. GATT net loss in the fourth quarter of fiscal 2022 was $14.7 million, or a loss of $1.06 per diluted share. compared to a loss of 290,000 or a loss of 2 cents per diluted share in the prior year period. Non-GAAP net loss in the fourth quarter of fiscal 2022 was 3.7 million or a loss of 26 cents per diluted share, compared to a loss of 1.3 million or a loss of 10 cents per diluted share in the prior year period. Adjusted EBITDA loss in the fourth quarter of fiscal 2022 was 2.5 million compared to adjusted EBITDA of $510,000 in the prior year period. Note, our adjusted EBITDA in both periods includes an adjustment for stock-based compensation expense. For your reference, we include a detailed reconciliation in our earnings press release. Moving to the balance sheet. In the fourth quarter, we began with $22 million of cash and investments. During the fourth quarter, cash used by operations was $2.5 million. and capital expenditures totaled $570,000. As of September 30, 2022, we had cash and investments totaling $19 million, and the balance in our line of credit remained unchanged at $10 million. Subsequent to the quarter end, we entered into a new five-year credit agreement with MidCap Financial in mid-October, comprised of up to $100 million in term loans and a $25 million revolving credit facility. We drew $25 million on the term loan and $5 million on the revolving credit facility at close. These proceeds were partially used to retire our prior revolving credit facility with Bridgewater Bank, of which $10 million was outstanding. Upon closing, our cash balance increased by $19.5 million. Turning now to fiscal 2023 guidance. We expect fiscal 2023 revenue to range from $103 million to $107 million, representing an increase of 3% to 7% compared to the prior year. We expect fiscal 2023 GAAP loss per diluted share to range from a loss of $2.80 to a loss of $2.40. Non-GAAP loss per diluted share in fiscal 2023 is expected to range from a loss of $2.54 to a loss of $2.14. Our fiscal 2023 guidance excludes revenue associated with the achievement of the final surveil milestone payment upon receipt of the PMA from the FDA, which has been our practice with previous regulatory milestones. And it also excludes surveil commercialization revenue. As Gary commented earlier, we anticipate receiving the PMA approval by the end of Q2 fiscal 2023, which will result in either a $30 million or $27 million milestone payment from Abbott The revenue that would be recognized in fiscal 2023, assuming a $27 million milestone payment, would be approximately $25 million. And the earnings per share impact would be approximately $1.75 per share. I'll now share a few additional considerations for modeling purposes. From a macro perspective, our guidance assumes that the current environment remains consistent with fiscal 2023. with respect to the recent headwinds, including supply chain constraints and hospital staffing shortages impacting procedures. Our fiscal 2023 total revenue guidance assumes revenue for our two businesses, medical device and IVD, expected to be approximately 73% and 27% of revenue, respectively. Product revenue is expected to be approximately 58% of total revenue, driven in part by contributions from sales of our sublime radial and pons arterial thrombectomy platforms, as we continue to drive increased adoption and utilization. Revenue associated with our legacy medical device coatings offerings and IBD businesses are expected to grow modestly. Abbott Surveil license fee revenue is expected to range from $3.5 million to $4 million. This compares to $5.7 million in fiscal 2022. In terms of expenses, our fiscal 2023 guidance reflects product gross margin contraction of several hundred basis points driven primarily by product mix and inflationary pressures. We expect operating expenses excluding product costs to grow in the low to mid-teens driven primarily by a full-year expense associated with the fiscal 2022 new hires and investments to support our growth initiatives. With regard to R&D expense, we anticipate quarterly spend of $12.5 to $13 million. SG&A expense is expected to grow approximately $500,000 sequentially each quarter throughout the year. Related to our recent financing, interest expense is expected to be $3.4 million. With respect to tax, we expect to have minimal tax expense during the year as a result of the establishment of the full valuation reserve against our deferred tax assets. This means our earnings per share will not include tax benefits on net operating losses. Lastly, with respect to our revenue growth, In the first quarter of fiscal 2023, we expect first quarter revenue to decrease in the high single digits on a quarter-over-quarter sequential basis. We expect revenue growth to increase on a quarter-over-quarter basis beginning in the second quarter and continuing for the remainder of fiscal 2023. With that, operator, we would now like to open the call to questions.