MiMedx Group Inc (MDXG) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second-quarter 2010 MiMedx Group Inc. conference call. My name is Deanna and I will be your operator for today. At this time, all participants are in a listen-only mode, but later, we will conduct a question-and-answer session. (Operator Instructions). I would now like to turn the presentation over to your host for today, Mr. Pete Petit, Chairman and CEO. Please proceed.

Good morning. First of all, let me ask Thornton Kuntz, our Vice President, Administration, to read our Safe Harbor for you.

This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based upon the current beliefs and expectations of our management and are subject to risk and uncertainties. Actual results may differ materially from those set forth in, contemplated by or underlying these forward-looking statements based on factors described in this conference call and in our reports filed with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2009 and our most recent 10-Q. We do not undertake to update or revise any forward-looking statements except as may be required by the Company's disclosure obligations in filings it makes with the Securities and Exchange Commission under federal securities laws. With that, I will turn the call back over to Mr. Petit.

Thank you, Thornton. First of all, the call will be on our website for about the next 30 days. Second, I hope you have seen our press release and on our website this morning, we posted our second-quarter shareholders letter for your future reference.

I have with me Bill Taylor, our Chief Operating Officer and Mike Senken, our CFO. Mike Carlton, our Vice President of Sales and Marketing is out on a sales call, which is, in our mind, where he should be. Also, you have heard from Thornton Kuntz, our Vice President of Administration.

Now in terms of progress that we have made in rapidly maturing MiMedx Group from a business standpoint, I think we can classify this quarter as excellent. The type of things I know to focus on, plan on and manage all went well with one exception.

As you will hear from Bill Taylor and Mike Senken, significant progress was made in operations, sales and marketing and accounting and finance. Also we brought two new key executives to MiMedx. Bill Jackson is our Vice President of Regulatory Affairs and Quality Assurance and Richard Brown is our Director of Product Management. Read about them in our shareholders newsletter.

One other comment. I am very pleased with our management team. We have assembled a group who can grow MiMedx very rapidly, which is always a challenge and probably into the $30 million to $50 million range without taxing their talent and experience. They work together well and activity level is intense and we are making good progress.

It is my style always to discuss with our shareholders, management and employees the good, the bad and the ugly. I mentioned we had one disappointment during the quarter and let me elaborate on that a bit. We fell short on our planned revenue for the quarter even though we tripled revenue over our first quarter, which many would say was quite an accomplishment.

There are some extenuating circumstances which we outlined in our shareholder letter and again, I'd refer you to our website for the details there. Our sales growth was delayed in Europe because of country registrations and reimbursement qualifications. There are new and varying requirements country to country in Europe and we ran into some things that slowed us down. Our dealers are not going to issue purchase orders to us until those administrative issues are cleared. They will clear in the near future. There is not any issues there other than the bureaucracy of getting through the process.

For example, in Brazil and South Korea, it takes nine months generally and while the process is started, we are not complete there. But in Europe, we had a few that we thought we were going to clear and they didn't clear for us by the end of June.

In the US, we are finding hospital review committees are constraining the rate of acceptance in spite of doctor desires. Our product is cost-effective. In fact, we will be issuing a white paper here next week or so delineating the cost-effectiveness of our HydroFix Vaso Shield and Spine Shield and that will be more information for us as we go in front of these committees.

But that is sort of a new trend in the US healthcare system and even though doctors want our product, they have to, in many hospitals, not all, but in many hospitals, particularly large ones, go through this committee review process.

Now, what this is revenue shortfall mean? First, let me review with you relative to how we published our budget from last fall. Last fall, we developed a detailed budget for 2010 and presented it to our Board of Directors for review and approval. That is something we will do every year routinely. We do our next year's business plan in detail and we update our strategic plan, which is for the year two and three out, with the Board at that time.

That budget was based on the analysis of the number of anterior spine procedures in the US that were done annually, as well as in Europe. This is where we had FDA approval for our product and anticipated European CE Mark approval in early 2010, which we did accomplish. So based on that data, we developed a schedule also for adding distribution, including how many sales rep groups we thought we could add, how many European distributors we thought we could add, how many sales people they had and then the way the market would accept the product.

We projected a very small amount of market penetration, just a matter of a few percent. After we published the budget to -- after the Board of Directors accepted our budget and we published it to the shareholders in late 2009, we also many times added a disclaimer in print and verbally relative to the difficulty in forecasting when launching new medical products and at the same time creating distributions simultaneously. That is a tough job, but at the same, I always try to give people some insight into what we are trying to accomplish. Because we need those goals internally and we work to those goals internally and the Board of Directors, of course, should require us to do that.

Now that we have the product in the market being implanted and distribution in the US and Europe we can forecast much more accurate. We asked our distributors to give us their forecast for the third and fourth quarter of 2010. We have assembled that information last week. We have analyzed those projections, added some conservatism and re-forecast the remainder of 2010.

The cash flow -- since revenues are reduced from our forecast -- or excuse me -- our budget that we have developed last fall, it shows now we may need to raise $2 million to $3 million. Now we do have some potential revenue coming from federal grants we have applied for, as well as some other grants, but if the revenues are better, we will reduce those needs somewhat. If they are less, we will need more.

So we are just going to have to see how we move ahead here on our third-quarter revenues and fourth-quarter revenues will make our decisions as to the kind of funding that we are going to need and we will make our decisions in terms of the best way to raise that funding, which is for the most effective way to raise it from a shareholder standpoint.

This is published in our information, but we've projected third-quarter revenues at around $800,000, up from the $300,000 and some in the second quarter and the $100,000 and some in the first quarter, so we are making rapid progress. But that is going to show we are going to end up with I think EBITDA of about $1.86 million loss. In the fourth quarter, we see revenues jumping up to about $1.4 million. That will reduce the loss to about $1.46 million.

That is where we stand currently. We will keep you informed as we make progress. We are working on a number of OEM accounts, which could end up adding revenue to this. And as I also said, there is some issues associated with potentially getting some federal grants. However, we don't -- meaning your Board as well as your CEO -- have any concerns about raising the necessary money to see this Company's growth continue. I have personally made some significant investments in the Company. I expect those will continue because I have strong faith in what we are doing. So I don't think that is a problem for us. So that should be the number one concern when a company our size misses a revenue forecast.

However, I think, all in all, we had a great quarter. Sorry some of the revenues that we were looking for didn't get booked, but they will show up third quarter and then some of the other things we are doing will start showing up third and fourth quarter.

One other thing I want to cover with you before I turn it over to Bill and Mike is that we have had discussions with shareholders about our desire to see the Company trading on a different stock exchange. We are trading on the over-the-counter bulletin board and we are also trading on the pink OTC QB. That is a relatively new exchange. It is going to take the place apparently of the OTC bulletin board and they have some very interesting plans to make a very efficient market with a lot of the companies that had been previously on the bulletin board.

They also make a very active market in generally European companies who desire to delist from the New York Stock Exchange. But anyway, there are a number of scenarios and factors that will affect our decision. We want to see some analyst coverage, which we are beginning to attract. We want to have more market makers and we want to create better liquidity on a daily basis. However, we also want to consider the fact we might use this opportunity to raise some additional financing for the Company because that process could very well accomplish some of these goals we just highlighted.

At this point, our stock trades with a reasonable degree of liquidity and your Board of Directors is going to continue to make assessments as to the most optimal way to achieve these goals and we will report to you on our final decisions. Okay, let me stop and ask Bill Taylor to give you an update.

Thank you, Pete. During our last conference call, I indicated that we were shifting from a quarter of infrastructure creation to that of creating momentum and we certainly have this past quarter. We have a significant amount of momentum in sales, distribution, operations, R&D, quality, regulatory, just as we expected.

Before I describe some of these accomplishments, let me take a minute to summarize the technologies on which our Company is being built. We have two technology platforms. The first is a PVA, or polyvinyl alcohol hydrogel that came out of Georgia Tech and a collagen fiber technology that came out of the University of South Florida and Shriners Hospital for Children. Our trade name for our hydrogel technology is HydroFix and the trade name for our collagen technology is CollaFix.

As we have discussed, these technologies are platforms with very large numbers of applications each. We generally look at our products in four levels -- platform, family, indication and configuration or size. The platform is, just as I mentioned. CollaFix or HydroFix. The family level is the device embodiment such as the sheet for HydroFix or the surgical mesh or braid for CollaFix. Within the family is then our indication for use, which in the case of our first HydroFix product is as a cover for vessels during anterior spinal surgery. The last is the configuration or size, which for example in our HydroFix sheet family of products would be the 0.6 millimeter thickness and 5 by 6 centimeters in area.

Our first commercially available product, the HydroFix Vaso Shield in the US was the first product in our HydroFix family and the same sheet, in the same or similar configuration with the exception of packaging and labeling is the same product that is expected to be used on our first five HydroFix products. Each of which will have different indications for use. This is a very specific example on how we expect to leverage our technology platforms. So that is five distinct products using the same body of development work and the same manufacturing equipment and capacity. That is definitely leverage.

As we complete some of the next steps in our product roadmapping activities, we expect to publish some information on our website to help give our shareholders perspective on our upcoming products. Please bear with us though because, at times, we will need to be cautious with the level of detail we share publicly in order to preserve our competitive advantage.

In terms of our product development roadmap, we recently updated it and have more than 10 planned regulatory submissions between now and the end of the first quarter next year in both Europe and United States. These submissions are for our first four product families. One of them is the product family for HydroFix, which is our sheet product family and then the other three are all for CollaFix.

So to repeat that, we have more than 10 planned regulatory submissions between now and the end of the first quarter next year in the US and in Europe. That is very significant for a company our size.

Now with respect to some of the other accomplishments, we have made a lot of progress recently. As you have seen from one of our press releases, we received another 510(k) for HydroFix Vaso Shield in various thicknesses from 0.4 to 1 millimeter also with alternate sizes.

Also in the quarter, we received our first FDA inspection, which was a very long ordeal and we only had one observation that came up on the last day. We were very pleased with it, particularly for a company at our level of development. Very pleased with our progress there.

Also as we discussed in our call in April, we did file our first CollaFix 510(k) last quarter or excuse me at the end of the first quarter and we have been in communication with the FDA regarding that submission and we expect to complete the process in the next six weeks or so.

We also initiated several preclinical studies for HydroFix and CollaFix during the second quarter and the interim results so far have been good. You have seen indications of our projected gross margins over the last several months and the cost reductions we have made over the second quarter are coming into place exactly as we had expected.

Also as you have seen in our press release, we added additional US distributors to bring our total in the United States to 21 and we now have 7 internationally and we represent distribution in over 10 countries. We are making some very significant progress and we are very pleased with our success to date. With that, I'll turn it over to Pete and follow up from here.

Thanks, Bill. All right, let's hear from our Chief Financial Officer, Mike Senken.

Thanks, Pete. During the quarter, we successfully raised an additional $3.2 million through a discounted warrant offering resulting in a stockholders' equity balance of $8.2 million and cash in the bank of $2.7 million as of June 30. Revenues increased significantly in the second quarter to $322,075 as compared to $114,855 in the first quarter of this year.

We are very encouraged by the progress made in reducing the direct material and labor costs of our products, which once we achieve our targeted production run rate shall yield an overall product gross margin, which meets or potentially exceeds our budgeted gross profit margin projection.

Overall for the quarter, our net loss decreased by $455,000 as compared to the first quarter of this year driven by the increase in revenue and a reduction in interest expense, somewhat offset by costs associated with building our sales and distribution network.

Due to the revenue shortfall in relation to our budget, we have identified spending cuts that will be implemented in the third quarter. These cuts combined with the forecasted increase in revenue should yield a continued reduction in operating loss in the third quarter.

To that point, I would like to correct a couple of numbers that Pete disclosed in his opening statement. The $1.8 million and $1.6 million that Pete had spoke about third quarter and fourth quarter respectively were our earnings before share-based compensation. Our EBITDA numbers are actually projected at $1.6 million loss and $1.2 million loss third quarter, fourth quarter respectively.

Turning to operational progress and finance and accounting, we continue to enhance the management reporting to drive greater accountability and improved financial performance. Specifically, we have integrated the budgeting and forecasting system into our ERP system to provide detailed call center comparisons of our budget and revised forecast to our actual results on a monthly basis. By automating the process, we now have the ability to react quickly to changes in market demand and adjust spending targets accordingly.

In addition, we have completed the consolidation of our IT support services under one vendor to reduce costs while improving service levels to system users in addition to strengthening computer system reliability. Our goal continues to be focused on supporting a rapid increase in demand for our products.

In closing, I would just like to emphasize that finance and accounting will continue to implement leading-edge tools in support of our continuous improvement objectives and the maximization of shareholder return. With that, I'll turn it back over to Pete.

Thanks, Mike. Let me make one commitment to our shareholders and that is, during the quarter, we will continue to take our new product development plans and formalize those in every way we can. And then we will reforecast our 2011 and 2012 revenue and business plans.

We are going to have to do that for our Board of Directors this fall anyway and I think, at this stage, with all the activity we have put into the new product portfolio during this quarter and previous quarters, it is time for us to redo that.

The large product portfolio we are developing was not included in those forecasts previously nor was, of course, the input we now have from distribution. So we will put all that together and I think you will be pleased with what comes out as we will be.

The two basic technologies that the Company owns and has the rights to are exciting. They will end up in implants in numerous places in the human body in the years ahead and we are excited not only about the products we have focused on and we know we can market through our own distribution, but we are also excited about some initiatives we have going in terms of some OEM business whereby we would supply our product in some format to one of the larger manufacturers in the industry.

So other than missing some revenues by a bit in this quarter, I think we had a very productive quarter. I am proud of what we have accomplished and I look forward to reporting to you results as we finish up third and fourth quarter. Let me open the call now for questions.

(Operator Instructions). Steve Gorlin, MiMedx. (Operator Instructions).

Operator, go onto the next question and we will see if we can come back to Steve Gorlin.

[Troy Walker].

Gentlemen, you guys have done a great job. The only question I have got is, and it may be something regulatory where you can't do it and I don't know the answer to this, but we had a presentation that was performed on June 7 at the Noble Financial conference. On the June 7, we were still listing forecasted earnings for this quarter in the neighborhood of $900,000 and I understand why we did not meet that, but you are still trying to get some additional market coverage.

Is it going to hurt us to be making those revenue projections that late into the quarter knowing that we are not going to be hitting -- we should know by now at this point in time that we are not going to hit those and then try to get that coverage reserved. Is there a regulatory reason why when you do those conferences that they can't be updated to what you are currently anticipating revenues to be at the end of this quarter or close to it?

Troy, the issue is simply this. In the maturity of our sales efforts, until we get into the last couple of days of a quarter, we are not going to be able to really project where we stand. The orders coming in from Europe could have put us pretty close. The orders coming in from the domestic side of the market were also flopped over by a few days.

So we have, I think very adequately, informed our shareholders in writing, as well as when we make those verbal discussions up to this point, the fact that the revenue forecasts, and it was $900,000 in revenue, as you had mentioned -- you said profits -- it is revenues. The revenue forecast at this stage of the Company's development is very difficult to predict accurately. We have done the best we can, but there are a lot of uncertainties. And till we end up in the last week and really the last few days of a quarter, we probably don't have enough insight to know where we stand.

So on June 7, if we had known that we weren't going to come pretty close to $900,000, we would have spoken to that and we didn't, not until really the last couple of days. And by that time, you are at the point where you are in a quiet period. From a regulatory standpoint, you have to gather your numbers and release them.

So we are very early in our revenue development phase of this Company and I am, again, having spent decades as a public company executive, I am well aware of the issues associated with giving any kind of projections and trying to stand behind them. And if you are not going to make them, you quickly disclose that as quickly as you know it.

But I don't think in the early stages of this Company's life here that making a miss in the quarter -- percentagewise, it is huge. But when you get down to it dollarwise, it is not a lot. But I don't think this miss with the caveats that the management has wrapped around it is going to cause us any issues whatsoever.

The real issue is what I tried to discuss is the fact that with our dealers now and our sales rep groups able to forecast for us -- again, that is a two-way street. We don't want a sales rep or a dealer forecasts so low that we know they are ridiculously low. It is incumbent upon us to manage that distribution and distributor. But now that we have their insight in the market, with their knowledge of the specifics in their market, we can better, much better, much better manage our revenue expectations, as well as that for our shareholders.

So I think we will be much better. When we did that budget almost a year ago, it was based on the best ability we had at the time to understand the product we had, the approvals we had from the Food and Drug Administration, the number of procedures that were going to be done annually here in the US and build up from there. And the fact we fell short is, of course, always disappointing, but it also could have been relatively foreseen with particularly what we were saying about it.

Well, I am good with it. I just didn't know and like I said, I didn't know if there was a reason why it couldn't be restated legally or relativelywise, but what you said makes perfect sense and my question was more from a leaning perspective versus what occurred. So I appreciate the time that you took to enlighten me, sir.

Thanks, Troy.

(Operator Instructions). Steve Gorlin, MiMedx.

Have you got me this time?

Yes, you are on.

Pete, we had a Board meeting yesterday and I don't know if it is appropriate, if it isn't, there is no need to answer, but some very significant numbers were presented as to what the market opportunity was, what the size of the market was and the number of applications [how to] basic products have. Is it appropriate at this time to let the people know what the size of the potential market is over a period of time?

Steve, let me do this. Bill has got those figures in front of him and what I will commit to the shareholders is that we will, within a matter of a few days here, put some of this information on our website. I will let Bill give some highlights, just some highlights of what we are talking about. But the process of continuing to determine -- as we add new products to this long list of products we know we can develop with the current materials and we set priorities in terms of market size and distribution and how difficult it would be to get to that particular product in the market and whether it is going to be an OEM initiative where we know that we can't -- for instance with sutures, there is no way that we can compete ever with the large companies that offer sutures around the world.

We know that if we have got a product that would be beneficial in the suture area, we need to go to one of those other companies and consider an OEM arrangement with them. If it is a product that fits in with our current distribution and something that would be a little smaller market and different to approach, we will take that in terms of we can develop that product for our own distribution.

So there is all those factors that go into this. But in the process of doing that, our product managers, Matthew Bine and Richard Brown, spent a lot of time researching in detail the number of procedures that would be applicable with this product group that we are currently working on. And these don't even include some of the other things that we know we are going to have opportunities in.

So I will let Bill discuss a little bit of that for a few minutes and then I will just tell the shareholders that we will have that up on our website shortly because it is enlightening to not only us, but to them. But I also again reiterate what Bill said. There is always a balance here in running a public company between keeping your shareholders well-informed and understanding what your potential plans are strategically and tactically and not informing your competition.

Now we don't have specific competition in some of the things we are doing here. But we, when we outline certain things that might give other organizations some incentives and some insight into, well, maybe we ought to be looking in these areas, I just don't believe in that. I want to keep our cards close to our vest, keep our creativity to ourselves and keep shareholders informed reasonably well, but not feed information to our competitors that could end up being detrimental. So Bill, go ahead and cover some of those items.

Okay. Thanks, Pete. Thanks, Steve. As Pete mentioned, our product managers have done a very deep dive into some of the potential applications for both of our platform technologies. Just to give you some examples, for our collagen productline, the collagen technology, CollaFix, we believe that we have some significant opportunities in general surgery, OB/GYN, sports medicine and other orthopedic areas, some fixation and grafting areas, plastic and reconstructive areas of medicine, wound care, both chronic wounds and burns, vascular applications, some neuro and spinal applications and some dental and cranial maxillofacial applications.

With our hydrogel technology, HydroFix, we also have some similar areas -- pelvic floor reconstruction, hernia repairs, graft prep, some anterior applications, some posterior applications, some cranial maxillofacial applications that are pretty interesting for us. And we mentioned this in our June presentation that, with some of these opportunities, we think that the overall market opportunity is in the neighborhood or actually in excess of $3 billion in opportunity for our product opportunities that we would address right now.

And one of the things I mentioned to the Board yesterday was that our long-term goal should be a goal that is such that our biomaterials would be used in every one of these types of applications in some shape, manner or form either through our own distribution or through our OEM partners. That is the kind of big goal like Microsoft had 25 years ago on having their software being on every computer in every home across the world. Now that is a big audacious goal, but we have to have something to look forward to. And I think directionally that is something that our technology just has a lot of promise.

And we will get into -- as Pete said, we will apply more detail to our estimates and make that available to the shareholders, but we have to, again, caveat that so that we don't give our competition a leg up.

Thanks, Bill. Again, I think MiMedx Group has two very exciting new biomaterials. We have characterized them well. I think we know them well. We have covered them with a lot of intellectual property and the more that we bring our product into the market, the more we show physicians, the more ideas come to us. Things just happen here on a very active basis on a daily basis with new concepts coming at us and we have to set priorities, of course. We can only do so much. But I think we have got a very bright future. These materials will be used in a lot of different applications, in a lot of variety of ways and find their way into the market through lots of different sources. Not only our own distribution, but through others over time.

It is just a case of day by day, week by week, quarter by quarter doing the things we know how to do and continue to make the kind of progress that we are making and the revenues will follow and the profits will follow and we will be an entity that a lot of people will be talking about. Any other questions?

[Henry Millen], Millen Group.

Hey, Pete. With all the currency fluctuations over in Europe and (inaudible) the dollar bill and all that, is that having any impact on the sale of the Vaso Shield as far as for margins?

Henry, in each country in Europe, and we have been over there -- I have been over there personally; Bill has been there and Mike Carlton has been there a couple of times. Each country has its own little set of headaches, but in the big picture of things, fortunately for a healthcare product like this, there is not a lot of issues financially or otherwise. If we had to modify some pricing a bit in Europe, yes. However, Bill discussed the gross profit margins that the products have and the progress we have made in increasing our margins. With the gross profit margins the product has, we can take those kind of currency fluctuations or pricing differentials here and there and make them up here and make them up there. Those are not the things that really we lose any sleep over.

Got you. All right, thanks.

Thank you.

This concludes the question-and-answer portion. Pardon the interruption. We do have one more question from the line of Bruce Conway, MiMedx.

Hi, Pete. I am just first off very impressed with all these product applications that are lined up through Q1 of 2011. and when I think of all these products coming out and the capitalization of our Company, I guess the first thing that comes to mind is access to distribution channels and that puts a strain on a company with our size capital versus some of these OEMs that already have existing distribution channels worldwide. And they are just very developed and they have all the people in place to push products. What sort of a focus do we have in trying to align some of these people versus trying to develop our own distribution?

Bruce, we are running what I would call very much parallel paths. Two product managers -- remember six months ago, eight months ago, we had no product managers in the Company. We brought Matthew Bine in and he made an immediate contribution. Then we brought Richard Brown in. The Company needs -- in fact to me -- I have told the management team this. Product management is the key to this Company's success. Now embodied in that is a whole lot of things, including regulatory affairs, getting products teed up and through the Food and Drug Administration, etc.

But our product managers are able now to reach far and wide. They have made contacts with a lot of large companies in this industry. I have had conversations; Bill has had. We are moving that process along quickly. If we had five more people to devote to it, we might move it along 30% faster, but then you got the economies of scale.

So I am very comfortable right now the management team we have I believe is the critical mass we needed and it took a while to get here. The critical mass we need to move things along at a pretty optimal pace without wasting money. Sometimes small companies in rapid growth can have too much money and waste it. I can tell you, since I have been at this Company, we have never had too much money. We have husbanded our funds very carefully, but I am very comfortable with the fact that we have got two excellent product managers. It is something Bill looks at every day. I watch it. Mike Carlton, our Sales and Marketing VP, does.

I would like to add something too, Bruce. Of the more than 10 regulatory submissions between now and the end of the first quarter, there are three of them that would use the exact same, at least three of them -- I am just looking at my chart right now -- that would use the exact same distribution that we have set up for our first product and at least another three of them we think we would be able to use at least 50% or 60% of the distributors we have right now. So that is a lot of overlap.

That is a good point. That is a really good point. I just want to say I am really impressed with all you guys are doing.

Well, let me add one other ingredient to that. The thing that makes this really as efficient as we have been able to be is the materials and the embodiment of the materials have broad markets. As Bill was trying to outline earlier, the Vaso Shield is basically a sheet of PVA. That can find its way into several different productlines or numerous productlines without the production line here changing much. Maybe repackaging. So we have got some real efficiencies in terms of billing what we have here rapidly.

And the same thing with distribution. We have got distribution that is really good in certain areas. We can add a bit more, but we have also got the OEM opportunities. So it is unique and even with the small staff we have, we are making very rapid progress now. And that is better than we were six months ago and of course, way better than we were a year ago.

Maybe if I could add one other point. This is Mike Senken. If you were to model out this Company, one thing that we are focused on is minimizing our fixed costs. So as we look at increasing the revenue, you will see sales expenses increasing, but they are variable costs. Our philosophy is not hiring permanent staff; our philosophy is working with third-party distributors, third-party reps or OEM partners as we branch out beyond our base targeted market.

So we are very positive about the future because we believe that we have a relatively low fixed cost base for the market opportunities that we think our products are best suited for. And as we move into these other areas, we do it with other partners. So there should not be a concern about us going out and building a large direct salesforce.

Great. Thank you all.

Bruce, you have heard from three of us. That is about all I can add. Good question.

Well, thank you very much.

There are no more questions at this time. I would like to turn the call back to Mr. Petit for closing remarks.

Okay. Well, thank you. I appreciate very much everyone being on the call. I appreciate the questions and look forward to continuing to report good progress to you. Look at our website, we will have some more information up on it in the next week or two and then more as the quarter goes on. Thanks so much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.