MiMedx Group Inc (MDXG) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 MiMedx Group earnings conference call. My name is Eric. I will be your audio coordinator for today. At this time, all participants are in a listen-only mode, and we will facilitate the question-and-answer session at the end of the presentation. (Operator Instructions).

I would now like to turn your presentation over to Thornton Kuntz, Vice President, Human Resources and Administration. Please proceed.

Thank you, operator. This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities 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 the 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 statement, 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 over to Pete Petit, Chairman and Chief Executive Officer.

Thank you, Thornton, and thank you all for joining us for our third-quarter conference call. A transcript of this call will be available on our website, which is www.mimedx.com, for the next 30 days.

I have with me Bill Taylor, our President and Chief Operating Officer; Mike Senken, our Chief Financial Officer; and Mike Carlton, our Vice President of Sales & Marketing; and Thornton Kuntz, our Vice President of Administration.

By now, you should have seen our quarterly press release, which came out early this morning. It will also be available on our website.

I'm going to begin by providing some additional insight in the progress we've made this quarter. In my opinion, we made good progress during the quarter in all aspects of the business except our revenue growth. Our revenue growth was disappointing. There are some extenuating circumstances which make us optimistic that we will begin to see our revenue grow quarter-over-quarter again beginning in the fourth quarter.

Our revenues fell from our second-quarter levels and did not achieve the growth goals that we had set, primarily because of our European sales. This was caused by the unfortunate fact that our sales manager for Europe had a personal illness, which caused him to be incapacitated for a portion of the quarter. He actually contracted swine flu while visiting Latvia, and was hospitalized for about eight days and had a period of recovery.

Unfortunately, right after that, his mother had a stroke, and since he is an only child, he was burdened with a great deal of care and support for her. Therefore, he was actually out of the market for almost half the quarter. While we tried to supplement him with US staff, they were all quite busy with their duties, as you can imagine.

In addition, we failed to achieve by mid-September, which is what we had expected, the additional CE Mark, which is European approval that we are seeking for our HydroFix Spine Shield. Remember, Spine Shield is a product mainly in Europe. A number of the distributors who want to represent us decided to hold up their purchases until we receive the additional CE Mark for the use of the HydroFix Spine Shield in posterior surgeries.

The good news is that the reviewing body has told us they would give us approval upon receipt of our additional animal study data. We've completed the 90-day explants and are presenting that data to them in two weeks. The 180-day explant which will complete their request will not be available to them until mid-December.

Therefore, we feel confident we will receive the CE Mark, because the animal data that we've seen is just as compelling as the data that we presented when we received the approval from European sources for our anterior surgeries. Therefore, expect to see some robust growth in European revenues late in the fourth quarter, after receipt of the CE Mark.

Since this opens up a market that is at least 10 times the size of the current market we are servicing with Spine Shield, we expect to see much more rapid growth in our HydroFix Spine Shield product over the next year in Europe.

Sales in the United States of our HydroFix Vaso Shield were slower than we desired, but are steadily increasing. We actually implanted almost 2.5 times as many Vaso Shields in the third quarter as we did in the second quarter. Therefore, we do have growth.

We would like to have more rapid growth, absolutely, and I can emphasize that several more times. However, we are going through the very deliberate process of physician training and obtaining hospital approvals (technical difficulty), and to some extent, changing some practice patterns.

Now let us discuss the issues that will be meaningful to the Company in our future quarters. They primarily relate to obtaining further regulatory approvals for other uses of our medical device concepts made with our HydroFix, as well as our CollaFix materials. The Company has developed an extremely detailed plan for introduction of our new product concepts for the two materials. We have some regulatory applications on file now, and will have a number of applications that we are preparing to file.

At the moment, we currently have three 510(k) applications where we are having final discussions with the Food and Drug Administration. One relates to our CollaFix product and two relate to other HydroFix Vaso Shield indications for use. While we think the outcomes of our discussions will be positive, one never knows with regulatory matters of this nature for certain until substantial equivalence letters are received.

We've spent a lot of time during this last year with the medical advisory board members and our product management group and engineers, making decisions on which products should be emphasized and how to develop the devices so that the regulatory approval has a great deal of certainty. We currently have 20 submissions in our regulatory forecast, three of which are complete.

We have a very disciplined process, and the priorities relate not only to clinical relevance, but to market size and other issues associated with the regulatory approval process. I am confident that MiMedx Group has a product pipeline that will produce very productive results in the future.

The most gratifying part of our product strategy is that our two materials can be economically produced in large quantities and are protected by intellectual property and trade secrets. In addition, as we obtain new device clearances, the manufacturing processes are all quite similar. Therefore, we do not have to go through new and complex learning processes as we move from device to device.

I'm going to ask Bill Taylor to make some comments relative to our operations and give some further detail on our product schedules. Bill.

Thanks, Pete. We have posted a public version of a regulatory submission plan or forecast on our website, and will continue to update that periodically as we gain new insights and information relative to our plans.

One of the first things you will notice when you review this is that the product names are generic and refer to HydroFix or CollaFix versions and indications. We mentioned that in our last call, that we purposefully would blind this information relative to the specific device names in order to protect our competitive advantage.

We mentioned earlier in the call we have 20 submissions in our regulatory roadmap plan. The three related to HydroFix are complete, and the other 17 plan submissions are related to five new HydroFix indications and six new CollaFix indications for use. The current balance between the United States and European filings is 10 510(k)s and seven CE Mark submissions.

Pete mentioned that our manufacturing processes for several of our products are quite similar. This is where we gain a substantial amount of leverage from a development and manufacturing standpoint. Nine of those 20 regulatory submissions relate to our HydroFix technology in sheet form. What makes that so significant is from a production standpoint, is because we make the same sheets of material for each of the nine products, then simply we diecut them and package them into one of the specific product configurations. The 11 CollaFix submissions represent three distinct configurations, all of which utilize the same or similar manufacturing equipment.

On the operations front, we've completed the transfer of our production equipment of our initial CollaFix product lines from Tampa to Marietta, and at present, we are in the process of the process qualification phase of the pieces of equipment that we transferred.

As I communicated in previous operations updates, we continue to examine ways to reduce our ongoing manufacturing expenses. In keeping with that, we've recently implemented a process improvement that will reduce our fiber costs for CollaFix significantly, and we've also made improvements that will reduce HydroFix manufacturing costs and expand our capacity.

On the marketing front, we participated in two key spine-related trade shows in September and October, Euro Spine in Vienna and NAS in Orlando, and we are very pleased with the significant number of distributor and physician leads that came out of both events.

Lastly, we've discussed in the past that we have numerous applications for our technologies, in fact, many more applications than we can commercialize ourselves. To that end, we are exploring options to OEM various configurations of these technologies. This means that we would contract with large organizations and manufacture components like our collagen fiber or finished devices using our technology that would bear the OEM company's name. Then we would sell that product component to the OEM, and they in turn would commercialize it and market the finished product.

These kinds of potential relationships take time to develop and execute, and I'm happy to say that we continue to have a number of these very promising opportunities in progress, and as they develop we will keep you updated.

With that, I will turn it back over to Pete.

Thank you, Bill. I had a conversation recently with another industry executive, and we were discussing our product philosophies and our strategies. And he said to me, well, it seems like you are very focused on hitting singles and not swinging for the fence. And I said, well, that's exactly right. With the materials we have, we've got a number of products that all have their own markets, and over time, those markets will build. We do have some home run hitters, but they are going to be coming a little bit later in the process.

So that is absolutely the case, and I think we are fortunate to be in that position. So everything is not focused on one product, one home run, but continuous process of playing the game and hopefully winning inning-by-inning.

Relative to the OEM business, one example of that is sutures. We feel strongly that our collagen fiber has some applications, a number of different applications in specialty suture products. On the other hand, sutures is an area that is dominated by several large players in our healthcare industry, and it would take us too long and too much energy to ever enter the suture market as such.

So those kind of discussions are the sort of places where we decide we will take one of our products and approach people who have the market clout to really do justice to the technology we have.

Now, I want to ask Mike Carlton to give you some additional insight into the progress we've made in setting up our distribution and the issues associated with our shortfall in European revenues during the quarter. Mike?

Thanks, Pete. As you mentioned, the majority of our revenue shortfall in the third quarter came mostly from our lack of European revenues from new distributors. We had six distributors that we planned to work with during the quarter to consummate contracts and have them become part of our distribution. However, due to lack of opportunity to interface with them in a timely fashion, we did not bring these orders to closure.

In addition, the situation was complicated by the fact that we didn't achieve CE Mark, the European regulatory approval, for the use of HydroFix Spine Shield in posterior spinal cases by mid-September, as planned. This delay was largely impacted by European vacation schedules, as well as other factors.

However, as you mentioned, the good news is that we should receive this approval sometime during the fourth quarter, and hopefully it will be in time for us to complete these orders from the target group by the end of the year.

The new CE Mark in Europe is quite exciting because it will add a substantial number of spinal procedures where our HydroFix Spine Shield can be utilized. Our market data shows that applicable markets for this product in this application is at least 10 times more procedures than are currently available with our current anterior indication.

Now in other parts of the world outside of Europe, we just added a distributor in Australia and New Zealand, and are focused on other opportunities in South America and Asia during the fourth quarter.

Relative to the US market, we are making slow but steady progress. We would like to see faster growth, but the reality of the situation is that between hospital approvals, training and changing physician habits, it is moving slower than we expected.

Finally, we continue to find our medical advisory board and other key opinion leaders in the industry very enthusiastic about our current products, as well as those which we have in development. Pete.

Thank you, Mike, for giving us a little more detail on those issues.

As I'm sure you can understand, we've spent a lot of time and effort setting up what should be a very efficient and effective US sales representative distribution group. We simply need additional products to offer through our sales representatives. We have some of the best sales representative groups in the country, and we will only maintain our position with these groups if we have products that prove effective relative to their sales and profits. Therefore, we continually interface with our sales rep groups and discuss with them our new product concepts and ways we can better help them manage our sales.

That brings up a point, that because we've taken time and effort to develop our distribution, we are looking at some other product opportunities that would allow us to distribute for other organization products that are similar to our own biomaterials. While I do not know if we will be successful, I can state we are always having discussions of that nature that allow us to speed up our revenue growth and improve the effectiveness of our sales rep relationships.

Also, we [reached] the announcement the Company would raise $5 million in the form of a private placement of a common stock with some attached warrants. We are currently in the process of accomplishing that private placement, and we will keep you informed as to our progress. We found this necessary because our HydroFix Vaso Shield and HydroFix Spine Shield have not had revenue growth as robust as we had initially projected.

As we previously discussed, this is caused by a number of factors. While we expect to see these products develop significant revenues, they are going to develop slower than anticipated. Therefore, this is pushing out our breakeven point into the early part of 2011 and is requiring us to raise some additional funds.

Also, we've been extremely restricted with our product development activities, and having some extra capital will allow us to be more aggressive with bringing some of the new products in the marketplace and pressing ourselves and the products through this regulatory process.

We've had some previous discussions with you about the efficiency of our over-the-counter trading of our stock. In the process of making some decisions without going to another exchange, we've learned a great deal about the current trading systems. I would like to let Mike Senken, our CFO, give you some insight into what we've found out. We've got some information on the website about the situation, but I think Mike can give you some further details. Mike.

Thanks, Pete. Currently, there are two quotation facilities that provide bid-and-ask price information for our stock, and they are the Over-the-Counter Bulletin Board, which can be found on the web at www.OTCBB.com. And the second is OTC Markets, which can be found on the web at www.OTCmarkets.com. The OTC Bulletin Board is also the source for quotation information for Bulletin Board companies on the Yahoo! website.

After monitoring the daily bid-and-ask price information that has been provided by both facilities for the past three months, it is our recommendation that investors refer to OTC Markets and not OTC Bulletin Board for the most accurate reflection of current bid-and-ask prices for MiMedx Group stock.

A recent statistic that was published by Pink OTC Markets for the quarter ended September 30, 2010 reported that the average spread of an OTC security, duly quoted on the OTC Market facility and the OTC Bulletin Board facility, was $0.07 and $0.39, respectively. We have been in contact with officials of the OTC Bulletin Board to make them aware of this situation, but we have not received any indication that the issue will be resolved in the near-term. It should also be noted that the OTCBB has recently been sold and will most likely undergo additional changes under new ownership.

Again, in conclusion, we would highly recommend that you access -- again, the website is www.OTCmarkets.com to obtain the most accurate bid-and-ask prices for our stock. You can also find this recommendation and link on the Investor tab on our website.

With that, I will turn it back over to Pete.

And one other issue -- we found that Yahoo! only gets its downloads from OTCBB, which is unfortunate, and they don't seem to be interested in changing and getting their downloads from a more efficient trading system. So keep that in mind, when you pull up on Yahoo!, you are pulling it off the most inefficient and ineffective trading platform.

Okay, now, Mike, let's go ahead and ask you to give a brief overview of our third-quarter financial results.

Okay. Thanks, Pete. The Company recorded revenues during the quarter of approximately $108,000 as compared to zero revenue for the same period in 2009 and $322,000 in the second quarter of this year. As Pete mentioned earlier, the main reason for the shortfall in this quarter was due to the incapacitation of our European sales manager and as a result of the delay in regulatory approval of our HydroFix product for posterior applications.

Net loss for the quarter increased $158,000 to approximately $2,854,000 as compared to the second-quarter net loss of $2,697,000, mainly due to the decline in revenue. As mentioned in the second quarter conference call, we have taken a proactive approach to reducing operating expenses in light of the slower than expected revenue ramp, which has resulted in a net decrease in our R&D and SG&A expenses of $162,000.

It should be noted that this decrease in the quarter-over-quarter spending would have a larger if not for investments in animal studies of $209,000 in the quarter, which is a $126,000 increase over the last quarter. And those animal studies were made, obviously, in support of our previously mentioned regulatory clearance activities. Additional costs were also incurred as we continue to set up manufacturing capability in our Marietta, Georgia facility for our CollaFix products.

Overall, net headcounts declined to 33 full-time employees, a reduction in force and a conversion of several full-time employees to part-time. Additionally, we have reduced the number of contract workers and reduced the amount spent on outside consultants in an effort to reduce the cash burn.

At the end of September, we had $429,000 in cash on hand, and have recently arranged for short-term bridge financing through a convertible promissory note with our Chairman and CEO, as well as two Company directors, in support of our short-term cash needs. As previously announced and as Pete mentioned earlier, we intend to make an unregistered offering of shares in connection with a Private Investment in Public Equity, or PIPE offering.

The offering is intended to raise $5 million, the net proceeds of which will be used for working capital purposes, including, without limitation, to support expansion of our distribution channel and to fund our product development and regulatory approval processes. The PIPE is expected to close in the fourth quarter of 2010, subject to market and other customary conditions. With that, I will turn it back over to Pete.

Thank you, Mike. I don't have any further comments. I will as we wrap things up, but let's open the call now to questions and answers.

(Operator Instructions) [Stephanie Haggerty], Register Financial.

Can you give us any clues as to what new products are on the top of your list for getting new approvals and so forth, and how far along you are with them, how much money it will cost to keep working them?

Good question. Again, we refer everybody to our website and the regulatory submission plan that is on the website. We mentioned that we had discussions going with the Food and Drug Administration on three 510(k)s right now. I will let Bill elaborate on that in just a minute.

We also have ongoing discussions with the regulatory body in Europe on the approval that we didn't get in mid-September, which gives us additional use of the Vaso Spine Shield in Europe for posterior procedures. In terms of impact on our revenues, the posterior use of the product in Europe will be a huge, huge opportunity for us in terms of recent revenue growth at a much, much, much faster clip than we've seen.

Here in the US, it is going to take a bit longer to get through those kind of regulatory processes. One of the 510(k)s that we are discussing right now with the FDA is our first CollaFix product. That is very meaningful to the Company, because it will be the first time we've had regulatory approval for our collagen fiber product.

And other than that, it is a case of taking the products that we've got lined up, some of them already submitted to the FDA, and going through the rigorous process of finishing up 510(k)s and getting regulatory approvals. Bill, I will let you go ahead and add to that.

Well, I'm not sure if you had a chance to look at it, but our submission plan is on our --

I didn't realize it was there. Sorry.

That's okay. But we have blinded the names, so I can't talk in detail on specifically what some of them are. But as Pete mentioned, our first CollaFix product is a springboard for further 510(k)s. And that is in the middle of being reviewed right now. We went back and forth with the Agency, and we hope to be on the final legs of that.

Then two of the other ones are HydroFix 510(k)s. I won't go into the detail on their indications for use, again, for competitive reasons. But really, the biggest one is our CE Mark that we're in the middle of right now for posterior applications for HydroFix. And as we mentioned earlier, we are confident that we are going to get the CE Mark. It's simply a matter of timing relative to getting the animal data into the notified body.

Can I ask one more question? I listen to you talking about cutting back personnel, cutting back R&D, cutting back -- and I understand that money is short. But I also understand that you've got some dynamite products. And I wonder where you have to be on the revenue line to be able to crank up again on some of these new things. And I was just blown away by all the possibilities you have for your products.

Well, Stephanie, you're exactly right. But for everybody that's on the call, Stephanie and I have worked together for decades -- let's just say that. So she knows me pretty well.

We are conservative. We haven't cut any activities here that will keep us from moving ahead very, very quickly on our product initiatives. We had some people we'd scaled up, thinking production on our Vaso Shield Spine Shield was going to be higher than it was to meet revenue expectations. That has fallen off, so we do the things that prudent management does. We make cuts and just tighten our belt a little bit. But we are not doing the things here that are going to prevent us from being fairly aggressive.

Now, if we had some extra cash, which we hope this next round of financing will give us, then we can be a little more aggressive. Our animal studies, for instance, which we do at various places around the country, but are emphasizing Saint Joseph's Translational Research Institute here in Atlanta, are costly. And those things are scheduled with a lot of care and negotiations because they are costly.

So Stephanie, I think I can assure you we are keeping the pressure on our product development activities because of the fact we have so many opportunities. And I've just learned in my healthcare career, I don't care what your product looks like and how excited you get about it, I would rather have more than less, because something is going to hold something up or something is going to change.

So we have a lot of opportunities, and the case for us is just getting these products through regulatory process, into the market. And I just can't say how frustrating it is to a management team to have products that our doctors are asking for or want, and it is just a long, laborious process getting through the regulatory processes. But that is just the way the healthcare device business is.

Thank you.

If I can just add -- this is Mike Senken -- as I mentioned in my initial comments, we actually spent more in terms of our clinical animal studies in the third quarter than we did in the second quarter, and our forecast continues at that rate going forward.

You know, there are two or three critical areas in terms of spending. Certainly regulatory support is critical to us and we are not scaling back there. Our buildup in terms of sales and marketing to get our distribution channels up and running, we are not touching that. And of course, the clinical studies.

So suffice it to say, as Pete mentioned, we are very much focused on investing in the areas that will allow us to execute on this plan.

Good luck, guys.

(Operator Instructions)

Okay. Well, it seems like those may be the questions.

Operator, any more questions?

[Bruce Conway, MiMedx.]

Hi, Pete. Bruce Conway. And a question for you or Michael. Could you give us a little more color on what is required to get on the exchange, and how soon you think we might be able to accomplish that?

Bruce, we were pushing in the June timeframe for taking the Company to another exchange. And in the process of doing that -- well, the reason for doing that is we were getting complaints and saw the issues associated with the quote system not being very efficient.

But again, we tracked that down, did a lot of homework and found out that most of the issues came through the fact that our shareholders who were having trouble were pulling things up on Yahoo!, which is an obvious place to go.

As we traced that back, we found out that Yahoo!'s downloads come from the Bulletin Board, which was a platform -- trading platform that FINRA owned. And FINRA was not making any investments in it, didn't want to make any investments in it and had it for sale. So a situation like that, you know it's not going to get any better.

But there was slack being picked up by another exchange -- what used to be the Pink Sheets, but it is now becoming a more mature exchange, and it has a lot of European companies, large European companies traded on it. And in conversations with them, we got some assurances that they were a very robust trading platform and most over-the-counter broker-dealers use them.

Therefore, we got a little more focused on the efficiencies we could engender there. And the other operating activities in the Company got us a little defocused off continuing to pursue going to a lot of larger exchanges.

So I think we are in the status as follows. We will finish up our fiscal year here in just a few months. We will get our audited results after that and take those to an exchange -- and I won't call out which one, because we'd probably look to several and decide which ones we want to go to -- and move on up to another exchange.

But in the meantime, I think I can say that Mike Senken and I, as well as the Board, who have reviewed this, are very comfortable with the fact we are getting good quotes through the Pink Sheets system. And Mike gave you the website there.

The only trouble that is frustrating to us, in discussions with Yahoo! -- we've have those discussions -- they seem to be uninterested in taking a download from anybody else, even if they heard the inefficiencies of what they were doing. So if you want to file some complaints, you can bark at Yahoo!, but we've certainly done it.

But that's our plan. We just got -- we felt like we were getting good trading on the other system. It is efficient. We've monitored it. And the work associated with management here, transitioning to the other exchange, we just moved over and put it on the back burner, and we will do that again early next year, after we get our year-end financial statements completed.

Great. Thank you, Pete.

Just one other note related to that OTCmarket.com, which we are recommending everyone go to at this point. They have one other feature that the OTCBB does not, and that is they have electronic trading facilities there, as opposed to the OTCBB, which is all telephonic. And so many of the market makers, if not all of the market makers, have moved over, and some have actually dropped off of the OTCBB in that process.

So just looking at some of the names of companies that are on the OTCmarkets.com, you have Adidas Group, BASF, Roche; there are some very large companies that are actually on this OTCmarkets.com.

And many of the European companies that stopped trading here in the US because of regulations, et cetera, have gone to that exchange. And as Mike just mentioned, Roche and a number of other large European companies.

So again, I think we are getting efficient and effective trading and good quotes, and the urgency of moving just got us -- we refocused on operating matters, and obviously, we should have, because our revenues aren't where they needed to be. So we focused there, and we will refocus on this right after the first of the year and move us on, hopefully at that time, up to another exchange.

Great. Thank you, Pete and Mike.

Thank you, Bruce. Any other questions?

We currently have no more audio questions in queue at this time.

Okay. I thank you all for joining us and for your patience as the Company goes through its early teenage years, I'll call them. I've raised three children through those teenage years. I always tell Mike Carlton, who has six children, that he just doesn't have any idea what he's getting ready to go through.

But we are akin to a teenager. And I used to tell my children when they were out on Friday nights, you know, there was generally three bad things that could happen and only one good thing. So be careful. We are in that stage. We're working hard. I think we know what we're doing. We are confident, hard-working executives. And we will continue to make progress here and pretty soon the revenues will be doing what we want them to do.

If you have any questions, you know how to call us. Thank you so much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day.