Gary Maharaj - President, Chief Executive Officer Tim Arens - Chief Financial Officer.

Welcome everyone to Surmodics' First Quarter of Fiscal Year 2023 Earnings Call. Please note that this call is being webcast. The webcast is accessible through the Investor Relations section of the Surmodics website at www.surmodics.com where an audio replay will be archived for future reference.

An earnings press release disclosing Surmodics quarterly results was issued earlier today and is available on the company's website as well. Before we begin, I would like to remind everyone that remarks and responses to your questions today, 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 Surmodics' 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 Surmodics forward-looking statements, resulting from certain risks and uncertainties, including those described in Surmodics SEC filings.

Surmodics 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 Surmodics 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, Surmodics President and Chief Executive Officer. Please go ahead, sir..

Thank you, operator. Hello everyone, and thank you for joining us for our first quarter of fiscal year 2023 earnings call. I'll start my remarks today with a brief review of our first quarter revenue performance. In the first quarter of fiscal 2023, we achieved total revenue of $24.9 million, representing 8% growth on a year-over-year basis.

Importantly, our total revenue performance exceeded our expectations for the first quarter, which we shared on our earnings call in November.

Our higher than anticipated total revenue growth was driven exclusively by our Medical Device revenue, which increased 12% year-over-year, more than offsetting a 3% decrease in our In Vitro Diagnostics or IVD revenue.

Within our Medical Device business, our year-over-year sales growth was driven primarily by strong sales of our performance coating reagents and device products, including important contribution from sales of our Pounce and Sublime products. We also saw higher royalty and license fee revenue.

In summary, we were largely pleased with our revenue results in the first quarter. Tim will talk through our revenue and other financial performance, including our updated fiscal 2023 guidance in further detail during his prepared remarks.

But first, let me discuss some of the key operational developments during our first fiscal quarter and in recent weeks, beginning with an update on our SurVeil™ drug-coated balloon.

As we shared on our November earnings call, our regulatory and clinical team finalized our complete response to the FDAs comments on our SurVeil PMA application, and we submitted our response to the agency on October 13.

On January 19 we issued a press release announcing the receipt of a letter from the FDA related to our PMA application for the SurVeil. In the letter, the FDA indicated that our PMA application is not approvable in its current form.

We are understandably disappointed to receive this letter, given the hard work and dedication of our team who have been focused on working collaboratively with the FDA to address their requests and provide additional clarification, data and testing as necessary, as well as our numerous interactions with the agency in recent month.

It is important to understand that a ‘not approval’ letter is not a permanent denial decision. The agency provided specific guidance in terms of the information that must be added to our PMA application in order to place it in an approvable form. The information the agency requested was within two general categories, labeling and biocompatibility.

With respect to labeling, the agency requested revisions to some of the language related to the devices patient labeling and instructions for use, and shared revised language incorporating these revisions. We viewed the FDAs labeling questions as generally routine and believe that it can be easily addressed.

And with respect to biocompatibility, the agency raised additional questions related to our non-clinical testing and requested additional data to address these questions. .

Specifically, these data demonstrated comparable sustained clinical outcomes between the SurVeil DCB and the IN.PACT Admiral DCB cohorts, through 24 months in both the primary and safety and efficacy endpoints, despite the impact having 75% more paclitaxel.

As it relates to the FDA letter specifically, I want to stress that the letter did not quest into human clinical data that we submitted, including the data from the TRANSCEND clinical trial. Moreover, the letter did not request any further human clinical data and there were also no concern cited with our large animal studies, our engineering.

With that said, the questions and requests are received with respect to biocompatibility do require additional non-human testing analysis to address.

In the days since we received the letter, our regulatory and clinical teams, in conjunction with our external advisers have been focused on evaluating its content and preparing to formally engage with the DFA.

Specifically, our team has had an informal call with the Agency representatives and is now preparing a request to obtain feedback from the FDA review team through the FDAs Q-submission process.

The goal of this request is to see clarification and obtain feedback under specific requirements for the additional testing and analysis to address the items outlined in the FDA letter. Assuming normal timelines, we anticipate receiving the FDAs formal feedback and our proposed approach via this process in May.

In tandem, following the receipt of the FDA letter, we informed our commercial partner Abbott, and provided them with a copy of the communication. Our interactions with Abbott remain continuously productive as we proceed the next steps with the FDA that I just outlined.

Our overarching goal in perusing these steps is to obtain additional clarity from the agency on what is required for this amended application to receive an approval decision.

Based upon the feedback received from the agency during this process, our team and external advisors will determine the appropriate path forward, and we'll look forward to sharing additional details.

While we work to obtain additional clarity and evaluate the path forwarded, we believe it is important for the investment community to appreciate some of the important considerations as we continue to navigate the regulatory process.

First, while we're optimistic, we'll be able to address the FDAs questions through our engagement with the agency, we could learn that it may not be practical for us to proceed the level of evidence or request. While unlikely, if this were to occur, we would need to reevaluate our regulatory and commercial strategy for the product.

The second, as we have shared in the past, if we obtain PMA approval for SurVeil before December 31 of this year, we are entitled to a final milestone payment of at least $24 million under our development and distribution agreement with our commercial partner, Abbot.

After December 31, we remain entitled to this $24 million milestone payment following the receipt of the PMA approval, provided that Abbott chooses to commercialize the product and does not exercise their right to terminate the agreement.

Ultimately, despite this unfortunate development in our path to commercialization of the SurVeil DCB, our team remains focused and productive.

We will continue to engage with the agency and our commercial partner Abbott as we navigate the next steps in the regulatory process that I have outlined, with the goal of bringing this innovative product to physicians and patients as efficiently as possible.

We'll look forward to providing the investment community with additional details on our strategy as we obtain additional information from the FDA and to determine our path forward. Now, let me provide you with an update on our progress related to our other strategic objectives for fiscal 2023.

Beginning with our second strategic objective, to advance the initial commercialization of our Sublime radial and Pounce arterial thrombectomy platform.

During the first quarter of 2023, our recently established direct sales force of 28 territory managers continued to focus on building our customer base and drive repeat orders across our expanded account base.

Our market development team has successfully raised national product and brand awareness of our Sublime and Pounce platforms, with two dedicated supplements published in Endovascular today, which is viewed as one of the most recognized publications in Endovascular medicine.

The Sublime radial access risks to foodsupplement was published in November of 2022 and outlines a compelling case for our radial revolutions spearheaded by the Sublime line of products in the peripheral space is gaining momentum.

With a shift of Endovascular procedures moving from hospitals to ambulatory centers and office based labs, the benefits of radial access approach will be strategically important for owners and operators while having a positive impact on patients.

In December of 2022, the Pounce thrombectomy supplement was published and reinforces the importance and success of our grab-and-go device that offers on the table results.

The risk of arterial clot has increased significantly in the post-COVID era, which exemplifies the need for a simple, efficient Endovascular solution versus the more complex capital intensive devices that exist today, and a traditional surgical [inaudible] procedures.

I highly recommend for you to read each of these if you want to understand more about our mission and why we remain committed to bringing these incredible technologies to market.

Our team has made strong progress in engaging with potential new customers and working with them to get our products approved through their hospitals or clinics Value Analysis Committee. I am pleased to report that we ended the quarter with over 135 total customers for Pounce and Sublime, compared to over 100 at the end of fiscal 2022.

And lastly, our pipeline of prospective customers has continued to expand at a healthy pace. At the end of the first quarter, the number of value analysis committees that are considering our products increased by more than 20% compared to the end of fiscal 2022.

We are beginning to see the impact of our brand awareness and market education programs, which continue to drive new customer interest. Ultimately, we remain in the initial months of commercialization with a small, but growing customer base and an average sales force tenure for approximately nine months at quarter end.

Looking ahead, we remain focused on building our recent progress through the next nine months of fiscal 2023 as we progress through our first full year of commercialization and continue to lead a foundation for strong future growth.

I'm excited about the ongoing clinical performance of our commercial offering and will continue to find ways to accelerate growth in these areas. Lastly, an update on our Pounce venous thrombectomy device.

We have recently begun to conduct limited market evaluations to venous that we experience across a wide variety of cases and clinical conditions and evaluate the feedback from numerous physicians.

The real world feedback obtained through these renewed evaluations will help inform potential future design enhancements that benefit physicians and patients while optimizing its commercial viability.

With respect to our third strategic objective, to drive revenue and cash flow growth from our Medical Device coatings offerings and Diagnostic businesses. Broadly speaking, we were pleased with overall performance of our core businesses during the first quarter.

Revenue from our Medical Device performance coatings offerings grew 10%, while revenue from our IVD business decreased 3% year-over-year in the first quarter. Now the decrease in IVD revenue was driven primarily by the completion of a customer development program.

Together, these businesses generated significant cash flow to support our growth initiatives, including the year-over-year increase in operating expenses related to the expansion of our direct sales force. So with this as an operational update as a backdrop, I'd like to turn now to discuss the spending reduction plan we have recently implemented.

As we indicated in our press release on January 19, the FDAs response to our SurVeil PMA application, which means that we will not receive the related Abbott milestone payment in our second fiscal quarter as anticipated.

This prompted us to evaluate options and take action in order to preserve capital as we prioritize investment in our key strategic growth initiatives.

As a result, we have recently implemented a spending reduction plan, designed to reduce our planned use of cash by approximately $10 million to $11 million for the remainder of fiscal 2023, prior to the restructuring charges. Approximately 48% of the spending reduction is from SG&A, 27% from capital expenditures and 25% from R&D.

Importantly, this plan is created and implemented after carefully valuation. We do not expect it to impact our ability to serve our customers, nor our ability to respond to FDA. The spending reduction plan includes two primary components; a workforce restructuring and additional cash saving measures.

Let me take a minute to cover both of these components in some more detail. The workforce restructuring involves a 13% reduction in our employee headcount.

These workforce reductions are intended to streamline and refocus the teams in several areas of our business, including manufacturing and operations, R&D and clinical, sales operations and our direct sales force, so that we can continue to execute our growth strategies more efficiently in fiscal ’23.

On a manufacturer and operations front, we have reduced a number of positions that support the manufacturer of our SurVeil drug-coated balloon while retaining our core team that support SurVeil, including key manufacturing, technical, regulatory and clinical personnel.

On the R&D and clinical front, we have aligned our headcount to support our current R&D priorities from a product development standpoint, which I'll discuss in a minute.

And finally, we've reduced the size of our commercial organization, supporting our Pounce thrombectomy and Sublime radial access products to optimize our investment in sales operations. Our direct sales force consists now of 21 territory managers as of today's call, and remains focused and committed to driving growth in these product platforms.

The additional cash savings measures that I mentioned, including a reduction in our planned CapEx, a reduction of our hiring plan for the remainder of fiscal 2023 and the refocusing of our investments and product development to prioritize progress, primarily on our near term commercialization opportunities.

In terms of our priorities from a product development standpoint, we'll focus our product efforts on areas including Pounce arterial, Pounce venous and the Sublime radial product platforms. Several of our pipeline projects with a longer path to commercialization, including our Sundance Avess Drug Coated programs have been placed on hold.

As it relates to our Sundance Avess Drug Coated balloons, we continue to be proud of a compelling first in human clinical data we have generated for these products to date, and the ongoing follow-up of our first in-human studies that is ongoing.

More recently, we were pleased to see the 12 month data from our 35 patient swing trial for Sundance, presented at International Symposium on Endovascular Therapy or ISET conference on January 19. These data clearly show that the use of Sundance was associated with a primary patency maintained at 12 months and 80% of the protocol analysis population.

Based on the 12 month data, our co-lead investigator for the trial, professor Ramon Varcoe, concluded that Sundance holds significant promise for treating real world patients for Peripheral Vascular artery disease.

Given that Sundance and Avess DCB use the same -- similar drug delivery technology to that of SurVeil, we'll use the experience we gain from the SurVeil product PMA application process to develop the commercial and regular strategies for these drug-coated balloons.

So stepping back, implementing the spending reduction plan and the related adjustment in our staffing levels was a very difficult decision for us, and in no way is it a reflection of the incredible talents and hard work of our team members during their time at Surmodics.

We value every employee of Surmodics and have taken careful measures to ease the burden of those impacted, including severance and our placement services. Ultimately, this is a decision that we believe is both appropriate and necessary for the longer term success of our company and the benefit of all of its stakeholders.

These steps of refocused organization to better align our spending with our near term strategic priorities and growth opportunities. As we look ahead, we remain focused on our three strategic priorities.

First, we will continue to make progress with respect to our regulatory strategy for the SurVeil drug-coated balloon, as we prepare to engage with the FDA and evaluate the appropriate path forward.

Second, we will continue to advance initial commercialization of our Sublime radio and Pounce arterial platforms, turning the corner for market entry eventually to rapid growth. And third, we will drive revenue and cash flow growth from our Medical Device performance coatings offerings and IVD businesses.

Despite the challenges we have faced in recent weeks, we believe that pursuing these three objectives represents the best part to achieving strong sustainable growth and creating long term shareholder value.

With a recently enhanced balance sheet and access to approximately $60 million and incremental debt financing, a disciplined approach spending in capital allocation, strong and stable core businesses, and a portfolio of innovative technologies, we believe we are well positioned for the future and remain committed to executing our strategic initiatives, efficient.

I'll now turn the call over to Tim Arens, our Chief Financial Officer, to provide more details on our first quarter fiscal ’23 and our updated fiscal ’23 guidance.

Tim?.

We began the first quarter of fiscal 2023 with $19 million in cash and $10 million in debt outstanding and a revolving credit facility with Bridgewater Bank. Cash used by operations during the first quarter was $10.8 million and capital expenditures totaled $1.0 million.

It is important to note that our first quarter historically requires a higher use of cash to fund our working capital needs, such as an annual employee bonus payments and our annual prepaid insurance premium.

In mid-October we entered into a new five year credit agreement with MidCap Financial, comprised of up to $100 million in term loans and a $25 million revolving credit facility. We drew on the term loan and revolving credit facility at close and received net proceeds of $19.3 million.

A portion of gross proceeds were used to retire our prior revolving credit facility with Bridgewater Bank. As of December 31, 2022 we ended the quarter with $26.4 million in cash and $29.4 million in long term debt.

Long term debt includes $5 million in borrowings on our $25 million revolving credit facility and $25 million in borrowings on our $100 million term loan facility.

As of December 31, 2022 we have approximately $60 million in debt capital available, consisting of $50 million on our term loan availability, as well as incremental availability in our revolving credit facility, which is subject to borrowing base requirements. Turning now to fiscal 2023 guidance.

We have updated our fiscal 2023 revenue guidance to reflect our performance in the first quarter, as well as our revised expectations for the remainder of fiscal 2023. We now expect fiscal 2023 total revenue to range from $102 million to $106 million, representing an increase of 2% to 6% compared to the prior year.

This compares to our prior range of $103 million to $107 million or an increase of 3% to 7% compared to the prior year. Our updated total revenue guidance incorporates revised fiscal 2023 revenue expectations for our Pounce and Sublime products, including changes to reflect our updated sales headcount, which Gary mentioned.

We now expect fiscal 2023 GAAP loss per share to range from a loss of $2.40 to a loss of $2 compared to our prior range of 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 $2.09 to a loss of $1.69 compared to our prior range of a loss of $2.54 to a loss of $2.14.

Our updated fiscal 2023 loss per diluted share guidance reflects a revision made to our total revenue guidance that I just mentioned, as well a net favorable impact of our spending reduction measures.

It is important to note that guidance does not include any incremental expense that may be incurred to potentially conduct any animal studies or other expenses that may be required to address the FDAs biocompatibility concerns related to SurVeil.

In addition, our guidance excludes revenue associated with any potential future Abbott milestone payment on receipt of PMA from the FDA, which has been our practice with previous regulatory milestones. I’ll now share a few additional considerations for modeling purposes.

Our fiscal 2023 total revenue guidance assumes revenue for our two businesses, medical device and IVD is expected to be approximately 73% and 27% of revenue respectively. Product revenue is expected to be approximately 58% of total revenue.

Revenue associated with our legacy medical device coating offerings and IVD business is expected to grow modestly. Abbott SurVeil license fee revenue is expected to range from $4 million to $4.5 million. This compares to $5.7 million in fiscal 2022. Turning to the rest of the P&L. Our updated fiscal 2023 guidance reflects the following expectation.

Product gross margins are expected to be in the mid-50s for the remainder of fiscal 2023. As a reminder, we continue to expect margins to be impacted by product mix and inflationary pressures. In addition, we expect higher absorption of fixed overhead costs in our cost of sales.

As commercialized products are allocated in the increased share of our overhead expenses due to reductions in drug-coated balloon production.

With regard to operating expenses, excluding onetime severance costs, we expect rest of the year quarterly expense of $12 million to $12.5 million in R&D expense and $13 million to $13.5 million in SG&A expense. Interest expense is expected to be $3.4 million for the full year. We expect a nominal amount of tax benefit for the full year.

Lastly, with respect to our fiscal 2023 cash utilization, we anticipate that we will finish a year with approximately $11 million to $13 million in cash.

We expect our cash use for the full year fiscal 2023 to be approximately $26 million, which consists of the total change in cash, excluding the net proceeds from long-term debt in the first quarter of $19.3 million. Further, we expect our Q3 and Q4 cash used to be approximately $3.5 million to $4 million each quarter.

This reflects the following items and assumptions, our updated revenue guidance and active management of working capital; our spending reduction plan, which as Gary discussed, is expected to reduce cash use by $10 million to $11 million, excluding severance costs.

We expect one-time severance costs of $1 million to $1.2 million, which we expect will be mostly incurred in the second quarter. And lastly, we expect to incur no further borrowings on a revolving credit facility in term loans.

We expect to continually evaluate and asses capital allocation decisions throughout the year to ensure effective and efficient use of our cash and resources to support our business needs. With that, operator, we would now like to open the call to questions. .

Thank you. [Operator Instructions]. And our first question will come from Brooks O'Neil with Lake Street Capital Markets. Please state your question. .

Good afternoon everyone. I appreciate the substantial amount of detail and clearly thoughtful comments about all aspects of the business. I guess one thing I didn't hear you discuss that I think investors would like a little color on is whether you considered kind of the go-it-alone versus partner approach for Sublime and Pounce.

And if you did, which I assume you did, perhaps you could just give us a little color about your thinking in that regard. .

Yes, I mean we evaluated this a long time ago and continuously scanned the environment on this issue. It was clear that the best way to create long term shareholder value creation was in the hands of our direct sales force. As you know, we have some experience with the partnership of whole products.

Given the unique capability of these products at this point, nothing has changed there. We like what we see. You know, the cost is going to take some time to produce ongoing milk production.

But the early development in the first nine months of -- I'm sorry, that's an analogy of the use of – you don't measure milk production from a calf, you measure from a cow, right, just to remind everybody.

But look, with nine months of average tenure into this, its early innings and we're seeing the uptake and growth of these products as this begins to develop and it is best in our direct hands. .

Okay, good. Let me ask a second question, which is, I appreciate attempts, comments on the guidance and Gary your comments on the outlook forward for Sublime.

I'm just curious, given that the FDA has given you some guidance about the path forward, why did you guys decide not to include the potential cost of animal testing in the forward guidance?.

Yes, you know here is the issue. We don't want to speculate publicly when – after we come out of the submission issue meeting, which we expect in the next couple of months, and we have alignment to the agency, only then will we have what we call much firmer data to share with our shareholders.

Right now it will be subject to speculation, I'll give one caveat however. This is in the – this is not $10 million.

This could be $1 million or $2 million dollars, and then again I'm speculating there, but I want to be clear, this is not in the large number of millions of dollars, which is why we said in the script, if it appears to be that, we will pause and reconsider the best options for our shareholders.

But I don't want to speculate without having the agency basically get to alignment with us, and then if I speculate now, I'll be updating that and I prefer to hold that in reserve at this point. .

Okay, just a quick follow-on. You do think that likely the FDA will want additional small animal testing, right. .

So in the letter they laid out in specific but not directly detailed terms, what type of data they like to see to cover any gaps that they believe exists, so – and much of this really deals with small animals, not for the large animal testing. .

Right, I get that. Okay, thank you for taking my questions. .

Sure..

Our next question comes from Mike Matson with Needham & Company. Please state your question. .

Yes, thanks. I guess just to start with SurVeil. So I think you said you expect to hear back from them in May. So if you hear back from them in May and then you have to do some additional testing, maybe you can resubmit something in kind of like the fall. So I mean is it possible we could get another – an answer from the amendment in calendar ‘23.

Can you give us the timing, right?.

Yeah, I appreciate the question, and you know the timing, I can lay out just briefly the process. So to get the feedback is like filing a brief in front of a judge. You can't secure the meeting until your brief is complete.

So our team is working around the clock to complete our view and our brief and our point of view on the requirements, only then do you send that in any secure meeting, which takes in the matter of not months, but it's a matter of weeks, so it could be a month.

And so, this process is really important for us to get it right with our brief, then get that meeting. So all of that as we said, under normal timelines we would expect it to happen by May. If animal, small animal testing is required, depending on the numbers, the type of species, etc.

this will then be scheduled with our partners at animal labs that conduct these. These pre-clinical labs that are independent that would conduct it. So if you're asking us if we would like this done by the end of fiscal year – by the end of the calendar year, absolutely.

And I appreciate the question, but until I have more appropriate information, again, I prefer to get in front of the agency and get some level of detail before speculating openly. One caveat again, clearly we are working as fast as we can, and if there's a way to get this before the end of the calendar year or earlier, we would be using every angle. .

Okay, I understand that you won't really know what's going to need to be done on the testing aspect, but let's just say that you're able to do that and then I guess my question would be, once you complete – let's say there's some digital testing.

You complete it and submit that back to the FDA in this amendment, is there some kind of time requirement for them to – you know what's the clock there? How much time do they have to respond to that when you resubmit that amendment, once whatever testing is done?.

Sure, you know they are not from what we call them the [inaudible] clock right now, and 180 days is typical, but we don't expect it to take that long. This is not a whole application. It's a subset of a subset of biocompatibility, and so the early indications are they recognize that and they don't – I don't want to quote them.

But until I have this in a committed, written document from the FDA, I don't want to speculate again. But 180 is typical. We don't expect it to take that long. .

Okay. All right, and then you know just maybe can you explain this whole process. They just seem to have some kind of hang up on whatever you're using in your coating. So what is it in the coating environment that you’re so worried about this? I mean the drug is the same right. It's a lower dose, so it's got to be some other ingredient right. .

Please stand back in a moment, please stand by. Ladies and gentlemen, thank you for standing by. Please continue to hold as we reconnect the speakers, thank you. All right, please continue. Thank you. .

Thanks. The call drop for some reason. So thanks, we're back. .

Thank you. [Operator Instructions] Mr. Matson, go ahead. .

Yeah, thanks. So I guess I don't know at what point I got cut off, but you know I was asking a question about just kind of what the concerns are at the FDA about biocompatibility. I mean, I guess I thought that's why you've done the kind of round of test that you did last fall to address those concerns.

So, I mean what – I don't know if you can comment, but I mean what is it about the product that they are so hung up on. Is it like – I mean it's the same drug, it's a lower dose. It doesn't seem like that's the issue, but is there some other sort of ingredient that you're using that’s unique to your balloon versus some of the others. .

So certainly. We use some, what I call exciting technology, and you know I'll just say this. None of this going back to it relates to human clinical data, large animals or the engineering. And if you think about it, we have the only, and I mean the only pivotal will by trial of the low dose versus high dose.

No, no other company has that in the industry. So approaching four year human safety data now, and so we feel that clearly our technology has a dramatic benefit, because no one else has demonstrated it in a level three evidence, randomized control trial like we have. So we were confident in doing it, because we are confident in the technology.

It is highly unusual to be going back after you have hundreds of patients out to four years and with sort of a pristine safety and efficacy record. So what I'll say Mike is, I don't want to divulge some of the unique components of Surmodics technology at this point.

But needless to say, these technologies that we believe mitigate the risk of using very powerful drugs by being able to use a lot less. And we believe we have actually put our money where our mouth is and conducted once again, the only pivotal trial in the industry versus the high dose device, nobody else has done it.

So we'll work through this with the agency. I think it's just a matter of us getting in front of them and getting alignment, and until I get that alignment, I prefer to just stick to what we know now. We're still in fact in finding mode with them. .

Okay, I understand. And then I think on the prior call, maybe it was the last quarter, I don't remember, but you talked about building up some SurVeil inventory. So is that the case, and I mean maybe that's why you had to do the manufacturing reduction, I don't know.

But you know what’s the shelf life? Is that stuff going to happen? Is there a risk that stuff has to be written off? If this doesn't end up being approved or takes longer than expected. .

Thank you, Mike. This is Tim, and I appreciate the question. There is obviously some moving parts here. You're addressing an important aspect of what's impacting the product growth margins for Q2, Q3 and Q4.

This basically speaks to our expectation that we would have been in a position to have received the PMA and begin to support the Abbott commercialization engine, and you see that in our inventory build this most recent quarter versus Q4.

But it also affects us, because the folks have would be working in the production line, all of that, that would have been hitting some inventory for Q2, Q3 and Q4 is now being absorbed into our product sales. So it does have an impact there. You can probably do the math, its $1.5 million to $2 million, and those costs are going to be hitting the P&L.

In terms of scrap and how to think about are there things in terms of our raw materials inventory on the balance sheet, it's important to know that we really don't have final finished products on the balance sheet. It's all raw materials or components that are on the balance sheet.

There are a few things that will probably have some potential for reserving against or scrapping, but again, it really is going to be dependent upon how we think about the timing of a potential FDA decision based upon the process that Gary described with the Q-submission.

And we should hopefully have greater insight and perspectives on that as we kind of get into the May earnings call, but I don’t know that there would be anything other than probably something nominal for the fiscal ’23. .

Okay. Got it thanks. .

Sure. .

Thank you. [Operator Instructions]. Our next question comes from James Sidoti with Sidoti & Company. Please state your question. .

Good afternoon. Thanks for taking the question. So you talked about the $10 million to $11 million in cash spending for the remainder of the year.

How much of that carries over into fiscal 2024 assuming that you don't bring back Sundance and Avess?.

Thank you for the question, Jim. It's Tim. I would tell you that obviously this is a nine month view. Actually its closer to eight months given the timing of the decision and it's fair that you can run rate a good portion of that.

One thing to be mindful of, the $10 million to $11 million that's reflected in the reduction, the spend reduction efforts would actually be probably greater, because there are things that are more likely to be a cash impact that would occur in our Q1, for example the annual incentive plan or payment.

So it probably is not incorrect to get you a pretty good view on the dart board at least, taking the $10 million to $11 million and run rating that out..

Okay, right. And then you mentioned that Abbott would have the option to not commercialize the product if you don't get approval by the end of calendar 2023.

If that were to happen, would you have to refund the many of the milestone payments they've given you so far?.

We would not..

Okay.

And so if they've already invested $60 million plus into the product, it's probably unlikely that they would opt to not commercialize it if it takes a few months into 2024, that same reason?.

Understood. We are limited in what we can say about Abbott, but I have found them to be a highly constructive and engaged throughout this entire regulatory process. So that partnership as we continue to interact with them is strong and it continues. However, they decide months from now, I think that will be however – it’s really up to them.

So I’m limited on what I can say on their behalf obviously. .

All right, and then just one more on Sundance and Avess.

If you don't decide to go ahead with commercializing those products, are there any other options to either monetize that? Are those assets that you can sell?.

Gary Maharaj:.

SurVeil:.

Okay. All right. Thank you. .

[Operator Instructions]. Our next question comes from Mike Petusky with Barrington Research. Please state your question. .

I guess, Gary, you described Abbott as engaged and highly constructive. I'm just curious given their wealth of experience and all the rest.

Have they given you any input on anything based on their experience that's similar or any advice or any – essentially guidance as how they would sort of try to approach this?.

I'll say we have an excellent regulatory and technical connection with the Abbott team on this. And so they know what we're filing, they know the idiosyncrasies of the FDA interaction and I will say I've only high respect for their technical experts that they give us on loan to comment or give advice on this.

So yes, that interaction clearly has been always a part of the partnership through each of these stages and I believe it will continue in that way. That said, and I believe they understand our technology as well enough.

This comes down to a matter of perspective, a matter of to me at least using the totality of data versus dissecting small data sets and then using that to guide as the whole. We have a plethora of evidence from humans, to all the way down to small animals.

So I think it’s really making sure that the FDA understands that perspective and narrative at a high level versus just a mere drilldown into a specific small components data set.

So, I would say Abbott is being constructive and they know I don’t, I don’t expect that constructive interaction amongst the peers on Abbott team and all the technical and regulatory peers to change. .

I guess probably for Tim.

I guess the maybe $2.5 million or so of R&D expense reduction, is most of that around Sundance and Avess or is there other things there that make up a meaningful amount?.

Yes. No, it's a good question there. It's obviously impacting more than just Sundance and Avess. We do have – we've made some decisions to delay some of the longer-term activities in some of the R&D programs and of course some of the personnel.

So there is a number of factors, but you're picking up on a key one there, which is a drug-coated balloon aspect of this..

Right.

Would that be the majority of the $2.5 million or $3 million?.

It's a fair amount of it, yes..

All right. And then jumping over to Sublime and Pounce. I didn't catch it. If you said it, I missed it.

Anything to say on reorder rates and any anything to share there even anecdotal?.

I'll say you know, when dealing with small data and small numbers of time, you can draw many conclusions. When we have looked at the reorder rates, they are exactly where we expect them to be, and that's not a negative statement. That's a positive statement.

I think what's really interesting and frankly quite exciting to us, if you look at LinkedIn and you see physicians unprompted, saying things like I just did my first Pounce case, and I've got to tell the world about it.

And I know I don’t want to sound like an advertisement for Vascular today, but the best way to get our – just a small tip of the iceberg stands for the power of these products is to read those supplements. They are physicians and cases that talk about the power of these products. So the reorder rates, we are happy with the reorder rates.

I'll let you know that. Growth we are happy with the growth, Clearly we’ll take a bit of trim on revenue give that we have eliminated some of these territories, but we are still going to have very efficient growth. It was clearly an optimization of cash versus growth and value creation.

Tim and I made the right choice of how to get that revenue growth, but also ensure cash burn within reasonable disciplined limits for the cooperation. I'll say this one more time, I'm quite excited about the evolution of those products..

Right. Your comments today – just jumping back real quick this last one. Your comments today that you got the notification from FDA, you sort of talked about you know possibly having to go back and do some animal testing.

Is there anything in your learnings since that day that would indicate it could possibly be expanded beyond animal testing in terms of additional data that would need to be captured for some reason or are you pretty confident that that would be the extent of it, although you don't know exactly how involved the animal testing would be?.

You know it's a very good question. What I'll say is my risk adjustment for dealing with the agency from the lessons learned here has clearly gone up. However, the way to mitigate that risk is to get assurance from senior management of the agency of the integrity of the process, the timing and the exchange of scientific information.

Life as an FDA reviewer has got to be hard. They have to go wide and also deep. However, sponsors know the technology just by nature, much deeper than an FDA reviewer can.

Without the right level of interaction, if we are not able to demonstrate to these reviewers the levels of detail that are relevant to their decision, we think you'll always get a deficiency.

And so part of it for me is the process doesn't lend itself to the engagement and dissemination of scientific judgment and understanding when it comes to technologies with the new and different. So, I'll leave it at that, so with that being said, I'd be quite surprised if there is something to come up about human clinical data.

I can't see that happening, but allow me to risk adjust it a little bit again. I don't see it happening, while highly improbable, I'll say it could be possible, but I don't mean to scare you with that. Just giving you the risk that I see until we get full alignment of the agency.

I'll say we run the best trial that's ever been conducted in the industry, and again, the only head- to-head randomized pivotal trial worldwide, and so I feel really positive about the clinical data, and I think what's stuck in my claw is that this device can be having a huge beneficial impact to me on U.S. patients.

But we'll work through this with the agency..

Very good. Thank you, guys. Appreciate it. .

Thanks. .

Thank you, Mike. .

Thank you. And that does conclude our conference for today..