Hamilton Thorne Ltd.

Good morning and welcome to the Hamilton Thorne Limited first quarter 2021 earnings conference call. I’d like to introduce myself.

I am David Wolf, President and CEO of Hamilton Thorne. On the call to me with me today is Michael Bruns, our Chief Financial Officer.

This call will have the following format. First, I will provide a summary of operational and financial results for the quarter ended March 31, 2021 with a focus on our sales, markets and operational performance.

Michael will follow with a more detailed discussion of the financial results for the periods as well as a review of our financial position and liquidity. I will then return for a few minutes to provide some information on our outlook for the balance of 2021 and we will open the line up for questions.

I would remind all participants we do not provide financial guidance. So I’d ask you to limit your questions to either historical periods or general trends in the business.

I will begin with our sales results. I am pleased to report the first quarter of 2021 was a solid quarter for us as majority of our customer base returned to more normalized operations.

We achieved $11.5 million in sales, 11% growth over the prior year, with improved gross profit margins and profitability. So, let me give some of the highlights from our performance.

As I mentioned, sales in U.S. dollars increased 11% over the prior year to $11.5 million.

As we had no acquisitions during this quarter our organic growth up 11% as well. Gross profit increased 14% year-over-year to $5.9 million.

Net income increased 495% to $866,000. Adjusted EBITDA increased 27% year-over-year to $2.3 million.

For context, sales increased 5% in constant currency and again, organic growth, the same 5%. Cash flow from operations was $1.5 million for the quarter, up 111% and total cash at the end of the quarter, was $21.4 million.

From a mix perspective, sales of consumables and services, which closely correlate to increased activity of our customers, augmented by market share gains, were up over 33% in the quarter. As expected, equipment sales were down somewhat partially as a result of significant forward buying in the EU in the fourth quarter to take advantage of expiring tax incentives as well as reduced third-party equipment sales as we had no large planned build-outs in the quarter.

Looking at field of use, sales into the human clinical market were up substantially, driven by strong demand for consumables and services. Sales into the cell biology research market also grew substantially albeit off a much smaller base, while sales into the animal breeding market were down.

Our gross profit margins were up 80 basis points at 51%, primarily due to product mix. Operating expenses were generally in line with expectations, with reduced travel and tradeshow expenses offset by increased personnel cost associated with maintaining the investments we have committed to in sales and support personnel as well as some G&A associated with being a public company.

We are pleased to see our adjusted EBITDA rebound to 20.1% in the quarter versus just under 18% in the prior year quarter. I will now turn the call over to Michael to provide a more detailed discussion on the numbers.

Thank you, David. Good morning, everyone.

I am Michael Bruns, the CFO of Hamilton Thorne. I will briefly highlight the first quarter P&L performance as well as the cash flow and liquidity of the company as of March 31.

Hamilton Thorne revenues increased 11% to $11.5 million, an increase of $1.1 million from the prior year quarter, as David outlined. Sales of consumables and services increased 33% to $7.4 million, reflecting the continued recovery from the pandemic.

Total equipment sales, as expected, decreased 16% to $4.1 million for all the reasons noted in our press release. We had no large lab build-outs in the quarter, which are lumpy in nature, and as such, do not occur every quarter, although we have several in our 2021 pipeline.

As a result, consumables and services increased to represent 65% of HTL’s total enterprise sales, up from 54% in the prior year. Equipment sales comprised 35% of sales in 2021, down from 41% in the prior year.

Gross profit for the year increased 13% or $652,000 to $5.9 million due to both sales growth and improved margin rate. Gross profit as a percentage of sales increased to 51.0% for the quarter versus 50.2% last year, attributable to both product and channel mix.

Operating expenses increased 8.6%, which included $130,000 of acquisition-related expenses. Excluding those acquisition costs, comparable quarter-to-quarter expenses increased 5.6%, representing continued investments in sales and support resources and somewhat offset by reduced travel and tradeshow spending.

Net interest expense actually decreased 64% or $163,000 primarily due to the reductions in outstanding convertible debentures after the final April 2020 conversion to equity. Income tax expense increased $96,000, up 47% due entirely to the substantial increase in income before taxes.

Current expense is applicable to various states in the U.S. as well as Germany and the UK.

The 2021 deferred tax expense is primarily applicable to U.S. federal tax and as a deferred non-cash expense due to the continuing utilization of prior year’s net operating losses in the U.S.

In 2017, as most investors might recall, the company recorded substantial deferred tax assets related to the previously unused U.S. federal tax carry-forward losses or NOLs as well as other temporary differences.

Net income increased 495% to $866,000 primarily attributable to increased revenues and profitability, lower interest cost and the elimination of the prior year loss on fair value of the derivative. Adjusted EBITDA, which would consider an important metric of our financial performance, increased 27% to $2.3 million versus $1.83 million in the prior year, attributable to overall revenue and gross profit growth and disciplined expense controls.

Adjusted EBITDA is a non-IFRS measure. Please see the reconciliation of adjusted EBITDA to net income for the quarter in our MD&A report filed today on SEDAR and also available on our website as well as our expanded definitions of adjusted EBITDA, organic revenue and constant currency, other non-IFRS measures.

During the first quarter of 2001, we have revised the company definition of adjusted EBITDA to include acquisition expenses directly attributable to acquisition efforts in progress, not just to completed transactions. These expenses totaled $129,500 in Q1.

The revised definition also adds integration, restructuring costs, impairment of intangibles and other exceptional non-recurring or non-operational charges, expenses, gain or income. There are no additional expenses related to these categories in Q1 of 2021 and we will carefully evaluate future activity and fully disclose in expenses, which meets these criteria.

Once again, we believe this adjusted EBITDA metric is important to help our investors understand and measure our results. Turning now to the company’s cash flow and balance sheet, company generated cash from operations of $1.3 million in the first quarter, an increase of over 111% compared to last year’s $709,000.

This increased cash flows attributable to substantial revenue and gross profit growth as well as the gradual return of the company’s inventory levels to more normalized operations as we emerge from the pandemic. Cash used in investing activities was $732,000 were ongoing investments in capitalized intangible development cost by our R&D teams for next generation and new product development as well as CapEx for equipment and demonstration units for our sales teams.

Cash used in financing activities was $1.2 million for scheduled term loan and lease obligations as well as measured reductions in the company’s line of credit. Company’s resulting cash balance at March 31, 2021 decreased slightly to $21.4 million.

Working capital increased to $22.9 million for the period ending March 31. In addition, we have $5 million of availability in the acquisition line of credit as well as another $3 million of availability in our revolving line of credit.

This $8 million of bank lending activity is an important additional resource in our ability to complete acquisitions in relatively lower cost of capital. This availability, combined with our cash on hand of $21.4 million, makes us well positioned to support our operations in the coming months, including continuing our acquisition program and financing further growth as the business climate continues to improve.

Now, let me turn the call back over to David to comment on the HTL outlook.

Thank you, Michael. Looking forward into 2021, we are clearly on tap to more normalized activity in the U.S.

and while at a slower pace than many of our other major markets. Unfortunately, other large markets, such as India, struggle with the worst impacts of the pandemic.

With these exceptions, ART clinics are largely open and the consensus is that on a worldwide basis, we are operating at roughly 90% of capacity. Many clinics report and I should state that this is more anecdotal information than a full market survey that they are as busy as they have ever been serving pent-up patient demand.

This trend is positive for our services and consumables business. On the other hand, we see somewhat conflicting market signals in the capital equipment side of our business, with continued caution on capital expenditures on many customers, while we also have a record number of new lab builds in our pipeline.

Based on these positive industry trends, we are planning to continue to make investments in personnel, R&D programs and systems to support our growth with an eye to balancing top line growth with sustained EBITDA performance in the mid-term and EBITDA expansion over the longer term. Since our last call, one area that has come into greater focus, are certain supply chain issues.

We, like many other businesses, are beginning to experience shortages and longer lead times in some finished goods that we resell as well as some key electronic components and parts that are incorporated into the instruments that we manufacture. I believe that we are managing through these disruptions, and as of today, do not expect this to have a material impact on results.

However, we are mindful that as this is a rapidly evolving situation, we may see an impact on sales in the second quarter and that this could continue for some period of time that is obviously very difficult to predict. Finally, following the end of the quarter, we closed on the acquisition of Tek-Event, based just outside of Sydney, Australia.

Tek-Event is the manufacturer of the Cell-Tek Microscope Chamber. It’s a specialized product for controlling temperature, airflow, communication, humidification of the air quality that is used in ART and laboratory markets.

It is also a value-added resell of the select range of capital equipment and consumables in Australia, including those manufactured by Hamilton Thorne. Even today, Tek-Event serves about 90% of the IVF clinics in Australia, and I should say, while this was a relatively small transaction, it was somewhat strategic in adding new product lines as well as a base of operations in Australia for direct sales and accretive from a financial perspective.

In addition to this transaction, we have an active pipeline and are actively working on multiple opportunities. And as Michael mentioned, with $21.4 million in cash and $8 million available under our lines of credit, we are well positioned to execute on acquisition opportunities.

We will now turn the line open for questions. Operator, can you please queue up the first call – our first question.

Good morning, David and Michael. First question, last year, I believe you said towards the end of Q1 you were starting to see some of the effects of COVID-19 at some of your customers.

I am wondering, would you say the negative effect of COVID is more or less negatively impactful this Q1 versus last Q1?

That’s an interesting philosophical question, because you are asking sort of what would have happened if COVID hadn’t been there in two different periods. So I am not sure exactly how to answer that in some ways.

So, I would say that – I would say bigger – better by attitude my numbers. So attitudinally, as we were coming into COVID a year ago and it was becoming much into much sharper focus, we are doing our best to try to quantify it, I guess today as we seem to be, hopefully, maybe not overoptimistic exiting COVID as having a significant impact on our business.

We are more looking forward. So I guess maybe I filibuster it up.

I am not sure I can answer that question as to what it really comes out to.

Okay, next question. So, the 33% growth in consumables and services, that’s quite good growth, how much of that would be Gynemed sales in the U.S.

with the launch of those products? And is there anything one-timish about that jump in consumables?

So, let me ask the second – answer the second question first, not that we know of on the one-time this side, I mean, certainly again as clinics open up our expander activity, maybe they bulk up a little bit to kind of refresh their inventories and then buy it at somewhat higher level, but I don’t consider that to be something that is really material. On the Gynemed consumables side, certainly, it was additive, still a very small number and I should add, we are also having success with rolling out Gynemed consumables in the UK.

So, if you look at them together a nice number, but as we have tried to caution everybody in the past, it’s going to take a while for that to become a real material part of our business.

Okay. And my last question, then I will get back in queue.

You mentioned you had a record number of large lab build-outs in your pipeline. I am wondering what is the conversion rate of your pipeline to revenues and can you quantify what the pipeline is right now?

So, we can’t quantify the pipeline or we won’t – so I think it’s better answer for that. Now, when you consider the pipeline, at least what I am going to talk about, it’s business that is actually sold or we have a high confidence level of being sold versus let’s say something that we might be bidding on the same as we do our competition as you do that and the same as everybody else.

So, we have a meaningful number of – a good size of build-outs not quite as large as some we have had in the past, which was good in some ways. We don’t see this huge lumpiness, but including some that have been delivered in Q2.

So when you see a record number, is a record number, a record dollar value or both?

So it’s definitely – what I was thinking about the number of discrete clinics. In terms of record dollar value, probably should turn out that way, but that would require some math.

Okay, thanks. I will get back in the queue.

Yes, thank you.

Good morning, gentlemen. Thanks for taking my questions.

So first from me here, I think you mentioned that some of your customers are seeing pent-up demand come in. I’m wondering if you can – if you have an idea of how much of that pent-up demand were through and we have worked through in the U.S.

so far? And I asked that because I think [indiscernible] on its call mentioned that it doesn’t think the U.S.

growth is so much due to the pent-up demand, but more so due to remote work, making it easier to communicate with customers. Could you talk to that at all?

That’s an interesting distinction because I think you have to have demand for people to want to work quietly, but in any event, ardent to be patients remotely, but in terms of the first question, which is how much we are through that, that’s really hard to predict. I think – and as I mentioned, the reports we’re getting of these clinics that are 10%, 15%, 20% above last year are anecdotal information at best.

They are just reporting very, very strong growth. So we haven’t done a full market survey.

In terms of some countries, we’re not really seeing pent-up demand to any great degree and others where, particularly those that had served medical tourism, I don’t even think we’ve started that whole process. So I think it’s going to go on for some period of time.

But certainly, I don’t say that in a particular quarter, it can have a nice impact on our business, but I don’t think it’s – you should look at. Let’s put this right.

We’re not expecting 30% growth to continue for enormous periods of time.

Got it. Okay.

That makes sense. And then I guess continuing on your comment on medical tourism.

I know we’re seeing India struggle a lot with numbers, but it’s – we’re seeing to wear numbers too in Southeast Asia like Thailand, Malaysia, Vietnam, are all struggling as well. Could you provide any color on what you’re seeing from these markets?

And how substantial are they as a proportion of your revenue? I think in 2020, Asia Pac was about 19% or so of your revenue.

Is it kind of similar still? Yes.

Yes. I think we actually disclosed through our quarter release this year.

I think I want to say it was 18% might have – of this quarter, so very similar kinds of numbers. And the – we’re seeing impacts on that.

So certainly, Thailand, which you mentioned in Vietnam, to a certain degree, are big in medical tourism. India has some medical tourism, but also it’s a big domestic market.

Just having a huge population, those are all – from a clinical activity perspective, certainly some of it down. Most of our business in Asia-Pac, I would say is, if you want to say a top five are somewhat differentiates from time to time, would be China, Japan, India, Thailand and Australia.

So, some of those are really largely unaffected, like China and Japan. Japan is back to a state of emergency, but I think that’s the clinical side is doing okay.

And some of those, as you say, are very attentive. So I think we’re still in an area of – I think I’ve used the word, not in terms of our choppiness in market performance.

And we’re fortunate that we had good results in Q1 and hopefully, we will call together good results in Q2.

And I will add that Asia-Pacific was 18% in Q1 of this year, and I believe 19% last year, so relatively consistent.

Perfect. Okay.

Thanks for that color. And then just last one for me here.

Could you maybe – in terms of the shortages, longer lead times that you’re seeing in some finished goods and some of the inputs in your own manufacturing products. Could you talk to exactly which products are being impacted by this?

Is it across the board everything is? And will this weigh just on sales or also on gross profit margin potentially in Q2?

Yes. So in terms of products, it’s definitely – first of all, it’s not across the board.

This – and it really depends on certain – on the finished goods side, we seem to be having more issues with products other than the ones that rely specifically on the same electronic components, and we haven’t talked about our manufacturing, but our products that are more general laboratory products which aren’t a huge part of our business, but things that might be used in the IVF lab, but would also might be used in a testing lab or used in vaccination. So things like syringes, pipe cutting, not the kinds they are used for microsurgical procedures, but kinds of used to measure liquids.

Those kinds of things it’s just getting a little harder to find them longer lead times. So we’ve been managing that.

You might see our inventories and you can check more of these go up a little bit. On the instrument side, it’s longer lead times, again, which you always hear about our electronics, but with this – and it can be everything from electronics to cardboard.

And it’s just a question of managing the – same managing through that buying ahead, if you can, and buying larger stocks. So I again, I suspect it will have some impact in Q2 and going forward, and we will do our best to quantify it and report on that.

But as we sit here today, it doesn’t look like it’s going to be a material number. In terms of prices, we certainly are seeing pricing going up on certain components and certain hard-defined materials.

We haven’t yet done this, but certainly, we’re looking at whether we should be increasing our prices as well. We typically do it once a year at the end of the year, but this is an unusual year.

So I think it will have an impact on – it could have an impact on margins. I think at some level – definitely will have an impact on margins.

The question is whether we will be meeting or not.

Understood. Okay.

I will get back in queue. Thank you very much, David.

Hello, good morning. I just have one quick question.

I know that we’re seeing a return to normal activity in the U.S. and then sort of trending towards operations at a 100%.

In terms of European activity with all the news flow on reduced IVF activity there, sperm shortages, etcetera. What are you seeing in terms of a reversion back to the mean?

What do you anticipate, I guess, timeline-wise for European clinics to return to pre-pandemic activity levels? And do you think that they are going to be met with the pent-up demand similar to what we are seeing here in North America?

Yes.

So I think Europe, as we all know, it’s one word, but it’s still 20-plus different countries with different behavior, regulatory, schema, reimbursements and the like. So I think we see a lot of variation among clinics.

So the ones that we know best are Germany, UK and France, where we do direct sales. So we’re really in touch with the clinics.

Germany is pretty much back to normal and was for most of last year, we actually saw demand go up in Germany last year. So IVF was up more than it has been in many prior years.

And it was up 9% in the back half of the year, which is more than anybody was expecting. So I think perhaps that pent-up demand, if there was any, has already been gone through, but activity still seems strong.

UK, there is a lot of demand. And – but the clinics are not our kind of, in some cases, slowing things down because they have got additional safety protocols in place.

It’s – UK is one of the, if the most highly regulated IVF market in the world from kind of very, very solid regulatory regimen. So they are doing things that perhaps all their labs don’t find necessary.

So we’re seeing good solid demand there. France is a mixed bag.

It’s a combination of public and private clinics, public and private hospitals and still a fair amount of caution. So that those are the ones I know about.

And then we mentioned areas that are very strong in medical tourism like Spain. Spain has been a down year.

We’re certainly expecting that to be up substantially over this year.

Okay. Yes, I was going to – like my next question on that was like you mentioned that Germany is doing well, but countries like Spain and Italy, they are lagging behind also Sweden.

What, in your opinion, do you think other than medical tourism is impacting those countries compared to, say, the UK and Germany?

So I guess, I’m not sure it’s measuring period you’re using, but there is been – Italy, certainly last year, was subject to really significant prolonged shutdown since Sweden took an entirely different approach and didn’t really shutdown at all, so it had really serious problems at the end of the year. So it’s really – I think that frankly, we crunched a lot of speculation on my part, what goes on in the individual markets and then the individual patients.

I think the trends that we are seeing are – what we’ve been reporting on, but that’s a little bit of a mixed bag and some places are going great guns and well out, some aren’t. And we do believe in reversion to the mean.

So I think the areas that are dealing with huge pent-up demand will eventually revert to the mean, the ones that are behind will revert on mean and then you get back to the what is the long-term growth of our field, which I think is in the range of 7% plus. And it’s still a healthy business to be in.

Okay, thank you. I guess last question for me.

Just quickly, how much direct sales force increases were the reason for margin improvement and sort of how that is trending?

So we did – that’s a good question. Our direct sales – direct sales as a percent – we don’t want to break this out every quarter, but direct sales as a percentage of our sales was up for the quarter.

So it had an impact. I don’t want to get too – it’s 80 basis point increase in margins, which is good.

We will take that, but I think it’s sizing the salami a little too thin, if you try to say how much was attributed to direct sales, how much was attributed to the product mix, how much is attributed to a particular new customer. It’s a lot of different things.

Okay, thank you. I will jump back in the queue.

Thank you.

Good morning and congrats on the strong quarter here. Just you have done record number of new labs in your pipeline here, do you guys see this backlog largely a deferral of project that resulted due to the strong industry fundamentals, I guess, driving clinics to expand at a more rapid pace?

Yes. So I think it’s a combination of two or three things, back to the pent-up demand, some deferred projects.

Some strong industry fundamentals, people just needing to needing more space. And again, the question of lab build out can be one of the semantics be we add another workstation in the lab.

We don’t call that a full lab build-out, but if somebody, let’s say, has a lab and wants to do a major expansion of that, we would consider that a lab build-out. So those are some points you could argue.

And then there are at point of industry fundamentals, just people that are opening greenfields, completely new clinics and completely new cities because they see strong demand or that they have a different approach or whatever reasons they believe they are going to be successful. So it’s a combination of all of those.

We are seeing just to be clear, more of that in the U.S. U.S.

has been very dynamic. It looks to be very dynamic this year versus, let’s say, last year, were not much was going on.

And the every quarter was very dynamic as well. So back to our lumpiness, they do come and go.

Okay. No, that’s great.

I guess with this pipeline as well, is there any, I guess, travel restrictions that could be maybe part of that at risk of being completed or just the timing of completion?

So I would say across the board, we are seeing a lot of these miss their completion base. And it’s a combination of travel restrictions to a certain extent, on our part, supply shortages to some – as people have said, things that we’re supposed to have a 8-week 3x something now, it’s a 12-week lead time.

But that’s not always, it could be the same – if you’re building a new lab, there is a lot of multiple contractors you have to get in place as you are putting in mechanicals, gas and all the other products that are used in the IVF clinic, for the procedure rooms and other areas that we may not sell. So I would say, anybody who’s been involved in new construction probably knows the latest part of the game.

I wouldn’t attribute it to travel restrictions as being the primary cause, but several things going on, so one of the contributory causes.

Okay, great. I will jump back in queue for now.

Thanks.

Hi, guys. Thanks for taking the question.

Most of my questions have been answered, but maybe I’ll just ask you a bit about what your M&A pipeline is looking like. Obviously, you did a small deal in Australia.

Is there maybe a focus for you to keep looking in certain geographical areas? I mean, obviously, you’re going to have a more direct footprint in Australia.

Are you looking to maybe do something with more of an Asian footprint going forward?

So I would see two different questions here. The first one, which is what does the pipeline look like?

I try to answer this exactly the same way every time as, we don’t give anything away because it’s not really the thing should be doing. But clearly, we are very active on the M&A front in terms of looking at finding, nurturing and moving opportunities through to potential completion.

It’s very hard to predict, in some cases, the progress of these. A lot of the businesses, we are looking at buying are typically small, either family or entrepreneur owned businesses, which have different dynamic and a different cadence.

So deal development and let’s say, if you are buying a division from a large corporation that was hiving it off for some reason or another. So, I would say we are active.

I think the key message is that we did this relatively small deal has not slowed us down on the other activities that we average, not – will not slow us down on the other activities. So, there is a lot of other activity going on, but I don’t want to get ahead of myself and make promises as to where, what our timing.

In terms of your second question, I will kind of answer it obliquely. So, I don’t think that we did a deal in Australia has affected us.

We have always been pretty clear that we – Asia Pac is – got low numbers, rounding up a little bit, 20% of our business is going to see a lot of strong growth over a long period of time. And it is an area where we put a lot of focus on in terms of everything that makes our business successful, finding and nurturing fantastic distributors, maybe adding some direct sales in certain areas and potentially doing acquisitions.

So again, the fact that we just did something kind of on the other side, the world doesn’t make that more or less likely. It’s still an area on same timeline.

Great. Thanks.

Thanks. Hey guys.

Thanks for taking my call. I just had two really quick questions.

Maybe first, just following up on the loss on M&A, I wanted to ask, just what’s on the top of the priority list in terms of some of the products you are looking to acquire? And then secondly, given some of the supply chain, I guess, concerns in the near-term, wondering if that factors into M&A?

Yes. So, in terms of the priority list, again, we try not to talk too much about that because obviously, we don’t show our hands much, but also, we – while we have – I think you know the nature of our field there in round numbers, 160 potential targets – 150 to 160 potential targets, about half of them are targets that we have identified as businesses that could be interesting to us, and we put for higher priorities.

So, while it’s a large enough number that if you are working that pipeline, if you have confidence you can attain a deal. It’s not so large that if you start.

I think, we are only focusing on this geography hopefully say on this product line, frankly in some cases, not even enough to work on. So, a little bit is a combination of we are pushing everything through and then being opportunistic.

Obviously, we got to this point where we had two transactions of completely everybody else being equally equal size, equal profitability, but want to have maybe a more attractive product that we will make different decisions. But today, we really focus on moving it through the pipeline.

And so far, we haven’t had those – we had some of those kind of conflicts, and we have just managed through with openness and sometimes just pushing things off a little bit. In terms of supply chains, we trust in questions.

So, we clearly are doing more due diligence around supply chain, if that answers your question. I don’t know that we have talked to whether we should change our targeting based on supply chain considerations.

I think in general, given – I think I just answering it extemporaneously, I think given that on the finished goods side, most of the issues we have had are with more generic lab products, probably not an area of focus for us. So again, we could be opportunistic there.

And then on the components side, we are not a chip foundry or the kinds of things that are causing those kinds of delays. So, I think it’s probably impactful, but not going to drive us to do deals in a different direction.

Got it. Okay.

That’s helpful. I guess my second question, again, sort of related to M&A.

Wondering like COVID, we are seeing improvements, but with some M&A that’s in your pipeline, do you see some of the lingering effects and some of these markets impacting your ability to do due diligence and close some of these deals? And I guess maybe a last piggyback question to that is was there any delays with the most recent acquisition due to COVID?

Yes. So, COVID has a couple of impacts.

One is purely on the financial side. So nearly every business, I am sure there is some exceptions and maybe not be there some exceptions, but nearly every business had a variable performance last year.

And it requires us to do more due diligence around how do you normalize, what activity is likely to be going forward, because business is down, it’s due to the COVID, but somebody lost a larger customers and it’s been a big regulatory change that has affected us. So, it required us to do a lot more.

We do that due diligence anyway, but it requires us to really being made it second or third layer deep in the onion where everybody is willing in a nice way and everything appears in order. You don’t need to find a second or third dimension issue.

Evaluation, obviously that’s more interesting question. So, taking what we did structured it with the combination of cash or fund base on historical requirements and that we had to include some of the historical performance pre-COVID just to realize that, but based on the equivalent we turn to more typical performance metrics.

And then on due diligence side in terms of just the mechanics it makes things more challenging when there are travel restrictions. Again, most recent deals, a little easier because we know the company very well, they have been a customer of ours, not a huge customer, but customer of ours for some period of time.

As you said for select products of just more opportunity very much different, but we know the people well and we are able to – so we didn’t – our team did not do a visit as part of this we have local essentially partners to do physical things that need to be on site. But if we came across a business that are – that we didn’t know quite as well and no other players have never really been there.

That would be more challenging, but hopefully not becoming less and less of a concern over time.

Okay. That’s helpful.

And then just one last question, just revisiting the – some of the questions on the equipment segment and the implied backlog, just curious like if there is 1 particular reason that comes up for why some of these labs are being so cautious in allocating capital, considering capacity utilizations apparently 90%. So, I am wondering if there – what specifically is causing the caution in the short-term?

Yes. I think just in general, again, we are talking on a worldwide basis.

So when we mentioned, for example, in the U.S., where we are seeing maybe a little less caution, where the people are building – adding to laboratories because of increased capacity and opening complete greenfields operations, but if you look at some other countries where there is still particularly parts of Europe and Asia, which we talked about earlier, where there are still lockdowns potentially in places or are being re-imposed and much lower vaccination rates and a lot more worry. I think I can understand that caution.

And reality is, even at 90%, you can probably get by with the equipment that you have. It’s unique equipment buying is lease-based, either unique new technology because it offers something exceptional, which we hope we do.

Sometimes people say good luck they have, because they are not ready to try it out, something great and you just have to replace it or your – and then the third, which is probably doing as much more of our activity in general is as it has utilization increases, their labs get overcrowded or there is contention for use of equipment. So, they need to buy more equipment to whether it’s an incubator to house embryos or microscope and a laser to perform microsurgery.

So, if we were in spaces, we were not in the growth business on the – then we would be serving largely a replacement market as opposed to a growth market. So, I think the growth is what is – which we are still not completely seeing in every market has been what’s driving that caution or, in some cases, lack of growth.

Great. Okay.

That’s really helpful. I appreciate it and I will hop back in the queue.

Thanks.

Thanks for taking my follow-ups. You mentioned travel expenses and conference attendance expenses down, which is obvious.

I think you also mentioned general expense control probably outside of those 2 areas. I am wondering, coming out of COVID, do you expect things to fully bounce back on the expense front to where they were or is there – are there sustainable expense controls that you put in place that you believe will continue?

So, I will respond on the sales and marketing side, then I will ask Michael to maybe amplify on the other expense controls. In general, we are seeing, as we said, reduced travel and reduced trade shows.

Reduced travel, we are going to – we expect potentially to continue – it’s going to be more travel expense than it was certainly Q2, Q3 of last year. But we – people clearly are fighting to be and other – and webinars and other things to be effective ways to meet and present market products.

So, we proved it. We did a lot of business during periods when you couldn’t really travel, travel around much at all.

So, I think it’s not unlike your business on the – certainly on the banker side, you have got a new face-to-face. Face-to-face is critical when you are talking about new relationships and it’s critical in certain areas, but a lot of things that have historically really have to be done as a turned out that they don’t need to be.

So, we certainly would hope to see some continued restraint on the travel side. And on the trade shows, we are still expecting not much to be happening in Q2.

And right now, there are actual exhibitions and conferences scheduled in Q3 at both in Europe and the U.S. that we are hopeful will actually come off.

But on the other hand, you could also imagine further delays, so there might be some constraints on that. And that’s going to be a really interesting question to see whether those come back as dynamic and is well attended as they were historically, which was the reason we would go to those and spend a lot of money or if people for various reasons either exercise caution or just interested in going to the conferences, and those become a diminishing part of our field, which would come back and kind of to circle and amplify the need to do more digital marketing and touching communication.

So, I would say that’s how I look on the – those 2 pieces of it. Michael, I don’t know if you have any comments on general expenses.

So yes, good question, David. I would say in very general terms, we would expect and our own internal planning, budget planning for 2021 as some general return to the prudent and reasonable levels of expenses by category, by percent of revenue.

So, we are in a growing industry, a growing macroeconomic industry, and we certainly are growing and have our goals to grow more than the industry norm. So, we are investing in that, as we say, every quarter.

So, we are – when I say expense controls, we look at it prudently. We plan a budget on an operation by operation basis.

And we look for a significant impact from our operation management teams. So, that’s the sort of background for control.

I would say that, that’s in terms of prints and reasonableness. But at the same time, we are looking for opportunities to invest, looking for opportunities to find ways within our operating plans to expand products by category and very general from sort of organic basis within our enterprises.

So, we are – we don’t have any artificial limits or controls on those. And we look at all reasonable opportunities and reasonable new ideas by the operations teams.

And we modestly say, yes. So I think in general, we would see some return to more normalized expense levels to go with the revenue growth that we are looking to achieve in 2021.

Okay. Thanks.

Last question, what would you estimate is the global market size for microscope enclosures, so the market opportunity for Tek-Event?

Yes. So, that’s a – again a difficult number to answer.

There is not a lot of great market sizing data. I would say, we kind of think of it as like small, medium and large.

So today, it’s a niche market. So, relatively small from an overall market size, if again, by part of a larger business with more sales and marketing we have behind us, you can put more emphasis and education around these products and get greater adoption, that’s where the room is for growth is going to come from.

Okay. Thanks.

Alright. Well, thank you very much.

I want to thank everyone for joining our call this morning. As always, we encourage you to go to our website, www.hamiltonthorne.ltd which is our investor website for more information on the company products and services and further investor information, and we look forward to speaking with everybody in mid-August timeframe.