MiMedx Group Inc (MDXG) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 MiMedx Inc. results conference call. My name is Lisa and I will be your operator for today. (Operator Instructions). I would now like to turn the conference over to your host for today, Mr. Thornton Kuntz, Vice President of Human Resources and Administration. Please proceed.

Thank you, operator.

This presentation contains forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934. These statements are based upon current beliefs and expectations of our management and are subject to risks 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, 2010, 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'd like to turn the call over to our host, MiMedx Chairman and CEO Pete Petit.

Thank you, Thornton. Good morning. Thanks for joining us.

I have with me Bill Taylor, our President and Chief Operating Officer, and Mike Senken, our Chief Financial Officer. John Daniel, the President of Surgical Biologics, and Mike Carlton, our Vice President of Sales and Marketing, are not with us this morning.

This morning, I want to step back and review our products, their regulatory status, and current market position. I think you'll find this enlightening. Also, I'm certain you will need an explanation of our balance sheet, particularly, so Mike Senken is going to go into detail in a few minutes on our financials. Bill Taylor will review some key operational issues and provide a brief review of Surgical Biologics tissue attributes and the current potential uses of this unique material.

Let me give you a brief review of our products and progress. I know many of you made this investment because our products attracted your attention for their potential to improve clinical care and the quality of life of individuals. Of course, in the process of doing that, you expect the value of your investment to increase. Frankly, those are the reasons many of us at MiMedx are here and those individuals that were at Surgical Biologics were there. So let's review our products with those two issues in mind.

When I stepped into MiMedx Group a little over two years ago, it had two biomaterials, a PVA hydrogel which we call HydroFix, which is a silicon-like material with much better qualities than silicon, and a collagen fiber which we call CollaFix, which was a strong and stiff fiber that matched the qualities of tendons and ligaments. And the clinical studies had shown it acts as a scaffold, allowing cells to grow into it, and those cells that grew into it because the fiber was strong and stiff and could be loaded or ended up being native cells or tendon cells rather than scar tissue, a very unique quality that was quite exciting and compelling.

We first focused on the HydroFix because it was easy to get through the FDA regulatory process. We focused on that material to commercialize it, and we did get FDA clearance and two more clearances since that point in time, and we launched the product. We set up distribution and moved ahead. In the process, we built our business infrastructure and procedures to prepare for the other CollaFix products.

The second focus was on CollaFix, but we ran simultaneously FDA processes. It took longer to make because it makes more -- it takes more complex clinical information and studies for CollaFix than it did for HydroFix. We had some barriers develop and the FDA told us at times they changed their mind about the directions they had previously given to us.

We went to Europe for product clearances and received HydroFix clearance for anterior as well as posterior approvals. And we filed for the first clearance on CollaFix. Hopefully, we'll announce a CE Mark clearance in Europe in the next few months for CollaFix. Then we'll file for one of the devices made from CollaFix in Europe, while we are pursuing our activities in the United States.

This has been a slow and steady progress. This had some frustrations for us, but as I've said to you before, having a great deal of experience with FDA approvals, you have to be diligent and persevere and the process will eventually clear itself.

Now, the potential of CollaFix is still as exciting as we thought it was years ago. However, the timeline for product launch is extended. There is still no competition, and we have more intellectual property than we had two years ago as we've done some additional filings in that area. So, CollaFix certainly is just as great an opportunity as it's ever been. There's no reasons we will not get regulatory approval other than the process itself, and so the future is still ahead of us there with the opportunity for CollaFix.

Now, let me transition to the amniotic membrane tissue products we have now. I knew last summer it was time to look for other biomaterials to add to our other two technologies. We looked at a number of opportunities and we discovered the emerging market for amniotic tissue. We did do diligence and found, among the three companies out there, Surgical Biologics was the absolute leader.

At that point, they had over 30,000 implants specifically in the ocular area of healthcare. They were getting ready to step out in some of the areas where we already had distribution and assets, so it was a perfect match.

What they'd done was develop a complex procedure to receive a donated placenta and process the amniotic membrane so it could be a viable commercial and clinical product. And that's no small undertaking. It's been known for decades that amniotic membrane had remarkable healing qualities, but was not practically usable in hospitals due to not being available in a timely manner and with no assurances of infections being transferred.

Surgical Biologics has solved all those practical issues with their Purion process. And now we offer a product in various sizes and clinical configurations that looks and feels like a piece of waxed paper that is stored and shipped at room temperature and has a five-year shelf life. With those practical aspects in mind and having been solved, then you need to focus on the clinical attributes of this very unique tissue that is "bio-active." Keep that in mind.

It reduces inflammation. It enhances healing and reduces scar tissue formation. These are attributes being touted for stem cell products today; however, stem cell products are generally stored frozen and have all the associated application problems with shipping and storage with frozen tissue, plus they are extremely expensive compared to our product. As an example, our amniotic tissue could be used in the first aid and trauma field pack for a medic in combat. That's how practical the Purion process is in terms of developing something extremely usable and simple to use for a clinician.

I'm going to let Bill Taylor talk more about the amazing tissue in a few minutes. At this point, I simply want to say it may take some time for this opportunity to be fully understood by clinicians and our shareholders. Personally, it's one of the most exciting breakthroughs I've seen in my 40 years of healthcare. As a management team, we are working very diligently to exploit and optimize the potential as quickly as possible of our amniotic membrane tissue and all of its uses.

Now before I go to Bill Taylor, I want to comment on the disclosure made in our recent 10-K filing. I committed our Board of Directors to provide a line of credit to the Company of up to $3.6 million. This is disclosed in that filing. This is what we feel would take the Company to break even, plus cover the required working capital increases associated with rapid growth. We're keeping our PIPE investment open for the time being. I think it goes without saying I would not be making these commitments without a strong feeling about our future successes.

Let me take -- turn it over to Bill Taylor now, and then I'll pick it up when Bill is finished.

Thanks, Pete. Good morning, everybody.

I'm going to briefly focus on three main topics today, a regulatory update, operational consolidations, and a little bit about our tissue process development and the tissues themselves.

On the regulatory front, we are making slow but steady progress towards additional U.S. clearances and CE Marks for Europe, as well as additional registration and reimbursement internationally. Relative to HydroFix, we recently had another 510-K cleared for our anterior vessel cover and we are in what we expect to be the final several weeks of our orthopedic 510-K HydroFix submission.

Regarding CollaFix, our CE submission for our surgical mesh continues to move through the process, and we are submitting to the answers to what should be the final questions this week. Then we expect our notified body to complete the review in the next several weeks, and our CE Mark should then follow shortly thereafter.

On the U.S. side, we continue to have our challenges moving our collagen -- or CollaFix first product through the FDA, but we are optimistic that we will make progress later this quarter. In our view, the issues are not related to safety or efficacy, but are more associated with the changes in the philosophy at the FDA within the last two years.

The process development activities relating to CollaFix are incredibly complex, and our team in Tampa has done a phenomenal job in making this technology commercially feasible. As you all know, it would be much more preferable to have all our operations under one roof, but a little over a year ago we decided to continue operating two facilities. There were many reasons for this.

First of all, the collagen fiber production process is very complicated. From start to finish, it takes about six weeks to make each lot of fiber. With such a long lead time, the activities such as process development improvements, manufacturing process qualification, and validation all necessarily take a very long time. Couple this with the speed at which we expected to rollout our products into production and the relative complexity of keeping all of our development efforts on schedule, as well as focusing on the great team we have in place in Tampa, the decision to keep both facilities was the right one.

While today, as we've discussed, things have changed because of the slow pace of regulatory clearances and submissions, and we necessarily need to reduce our expenses related to CollaFix and HydroFix. Therefore, we made the decision to consolidate our Tampa facility into Atlanta, and we've made further staffing reductions at our Marietta HydroFix facility.

Our most critical team members in Tampa will be moving or commuting to Atlanta, and this decision should reduce our expenses by around $140,000 per quarter after the transition is fully complete. We also expect to gain efficiencies by moving into the open space in the Surgical Biologics facility, as well as some incremental space nearby.

Changing topics now to our Surgical Biologics tissue process development, I can tell you about some of the great progress we've made. Since the tissues processed by the Purion process are not devices, but instead are considered transplanted tissues by the FDA, we can move very quickly to develop new configurations to address specific surgical needs. We are very careful to make sure we only minimally manipulate the tissue and promote it for homologous use. By keeping within these parameters, we stay within Section 361 of the Public Health Service Act and they remain tissues rather than devices.

In the last four months, we expanded our wound care product line with an additional SKU and we announced our nationwide EpiFix launch. On the heels of that launch, we are nearly ready to launch our AmnioFix nerve wrap, and late this quarter, we expect to launch yet another configuration with a very large potential market in pain management. So, it's a very different development and commercialization cycle in the devices, and we're very excited to move all these projects forward.

Lastly relative to our amnion product -- or tissue, we are very excited in particular about our EpiFix amniotic membrane for wound care. We previously mentioned in a press release that the total overall market for the wound care and tissue management market is multiple billions of dollars. While our applicable market is only a portion of that total market, it is still very sizable and growing rapidly with the demographic changes in our population. We feel that this is going to be a very significant portion of our business in the years to come.

Now, I'll explain a little bit about the amniotic tissue. As Pete mentioned, it's been used a long time. It's actually been used -- the amniotic membranes themselves have actually been used clinically for over 100 years. The clinical uses of fresh amnion were for wound care patients and burn victims. There have been over 90 publications of the use of amniotic membrane for uses ranging from wound care to gingival recession and reduction of fibrous tissues following spinal surgery. The amniotic membrane has been shown to reduce inflammation, downregulate scar tissue, and promote the regeneration of connective tissues.

And the Surgical Biologics Purion process has a unique proprietary process that enables the bioactive properties to remain in the tissue as they are processed, and as Pete indicated, it can then be carried around at room temperature with a five-year shelf life.

So within the tissue, there are structural proteins such as collagen types IV, V, and VII. There are elastins. There are specialized proteins within the amniotic tissue such as fibronectin, laminins, and TIMPs 1 through 4, which is obviously above my pay grade and more relative for our scientists to explain the effectiveness of those.

With that, I'd like to turn it back over to Pete, and we'll move forward.

Thank you, Bill. Mike Senken now is going to go through our financial progress for you and also give you some explanations on our balance sheet, and I'll probably have some comments to follow that up. Mike?

Thanks, Pete.

On January 5, 2011, MiMedx successfully completed the acquisition of Surgical Biologics. The following financial update reflects the results of the first quarter of 2011 for the combined entity as now fully consolidated.

For the quarter ended March 31, 2011, the Company recorded revenues of approximately $1.044 million, as compared to approximately $115,000 in revenue for the same period in 2010, which is a year-over-year increase of $929,000. On a pro forma consolidated basis, which takes into account both Surgical Biologics and MiMedx revenue for the first quarter of 2010, revenue increased $629,000, or 152%, as compared to Q1 2010.

Strong demand from existing Surgical Biologics customers, combined with the launch of the amniotic tissue platform to existing MiMedx customers, contributed to the increase. Demand in ophthalmic, spine, and orthopedic markets was strong throughout the quarter.

The net loss for the quarter was approximately $3.348 million, as compared to a net loss of approximately $3.142 million for the quarter ended March 31, 2010. The net loss in 2011 included a non-cash share-based compensation expense of approximately $488,000, as compared to $199,000 in 2010. The increase in 2011 reflects management's philosophy of aligning key employees and key partner compensation to that of the investor, while gaining the benefit of cash preservation in the critical early stages of the Company's development.

Non-cash debt discount related to the beneficial conversion feature in our notes resulting from in-the-money conversion options was approximately $73,000 in 2011, as compared to $569,000 in 2010. The expense in 2011 was related to the note payable issued as part of the purchase price of the Surgical Biologics acquisition, which I will explain in more detail in a few minutes.

The 2009 noncash debt discount was related to the conversion of approximately $3.5 million in convertible debt issued originally in 2009. Amortization of intangible assets was approximately $334,000 in 2011, as compared to $167,000 in 2010. The increase is related to the intangible assets acquired as part of the Surgical Biologics acquisition, which will be described later.

Depreciation expense in 2011 was $116,000, as compared to $110,000 in 2010, which is also attributable to the acquisition.

Due to the significance of non-cash related expenses included in reported net loss, and with a Company goal of becoming cash positive in the third quarter of this year, management has established an adjusted EBITDA target, which allows management the opportunity to focus day-to-day operations on becoming cash flow positive. Adjusted EBITDA is earnings before interest, taxes, depreciation, and amortization, with the additional adjustment being share-based compensation, which is also a non-cash expense, included in our Selling, General, and Administrative expenses. Included in today's press release is a supplemental disclosure that reconciles our reported net income to adjusted EBITDA.

Adjusted EBITDA for the first quarter of 2011 was a loss of approximately $2.321 million, as compared to a loss of $2.072 million in the first quarter of 2010. Included in the 2011 results were one-time legal, accounting, and audit costs of approximately $236,000 specifically related to the acquisition of Surgical Biologics.

Product gross margins for the quarter were approximately $385,000, or 36.9% of revenue, as compared to a loss at the gross margin line of approximately $265,000 reported in the first quarter of 2010. The increase in net sales, as well as the increase in production rates resulting in the absorption of a greater portion of our fixed manufacturing costs, were the primary reason for the $650,000 (multiple speakers) swing in product gross margin. Product gross margins for the quarter were in line with management's expectations and are expected to continue to improve as we further ramp up production.

Research and development spending increased by approximately $276,000 in the quarter. The increase in spending included $90,000 related to the resources supporting our amniotic tissue platform, as well as increased investments in animal studies for regulatory and market launch purposes and patent legal fees in support of an increase in patent filings on planned new products. It should be noted that the animal study costs are expected to decline over the balance of the year.

As Bill Taylor mentioned, the Company has decided to consolidate research and development activities into the Atlanta area, and as such we will be closing our Tampa facility, which will result in further reductions in R&D spending.

Selling, General, and Administrative expenses were approximately $2.793 million in 2011, as compared to $1.711 million in 2010. The increase of approximately $1.082 million includes the previously mentioned noncash share-based compensation expenses; amortization and depreciation expenses which totaled $938,000 in 2011, as compared to $477,000 in 2010, which accounts for approximately $461,000 of the increase. Also included in the increase is approximately $297,000 in Surgical Biologics staff costs and the one-time acquisition-related expenses I referred to earlier of $236,000.

Turning to the balance sheet, cash on hand was approximately $1.021 million at the end of the quarter. During the quarter, the Company raised an additional $1.212 million through a private placement and secured a line of credit, as Pete mentioned earlier, of $3.6 million. As of March 31, 2011, the Company had drawn $800,000 of a line of credit.

It should be noted that the cash flow from operating activities was a negative $1.790 million in the current quarter, as compared to $1.897 million in 2010. The first-quarter 2011 operating cash burn represents the lowest quarterly cash burn since the Company began recording revenue.

Moving to other significant balance sheet items, accounts receivable totaled $503,000 as of March 31, 2011, as compared to $162,000 as of March 31, 2010, as a result of the increased sales volume. Inventory as of March 31, 2011, was approximately $571,000, as compared to $112,000 as of March 31, 2010. The increase there is the result of the planned ramp-up in production based upon anticipated demand for our amniotic tissues.

The acquisition of Surgical Biologics represents the most significant impact to both total assets and liabilities, and therefore I would like to spend a few moments walking through the balance sheet impacts of the transaction. The total purchase price of the acquisition was approximately $16.4 million, which is comprised of $500,000 of cash paid at closing with a holdback of $150,000 due in early May of this year. Additionally, a 4% convertible note was issued for $1.250 million; 5,250,000 shares of MiMedx stock valued at $1.35 per share, which was the closing price of the stock on January 5 when the deal closed; $183,000 of assumed debt; and $7.405 million of contingent shares based upon the achievement of certain revenue goals in 2011 and 2012.

Again, the deal was structured to provide fair value for the acquisition while preserving cash in the near term. A subsequent valuation of the Company resulted in the recording of approximately $12.497 million in intangible assets, some of which are amortizable over various lives ranging from three to 14 years.

Additionally, the Company recorded $3.183 million in goodwill as a result of the transaction. The balance of the purchase price was applied to acquired working capital and fixed assets.

As a result of this transaction, the Company recorded a long-term liability of approximately $7.405 million, which will be paid out in MiMedx common stock when and if it is earned in 2012 and 2013. The Company also recorded an initial liability of approximately $813,000, representing the discounted value of the 4% convertible note payable. A discount of $437,000 will be amortized over 18 months, which is the term of the note, resulting in an additional quarterly non-cash charge of approximately $73,000.

With that, I'd like to turn it back over to Pete.

First, let me apologize for the complexities of today's accounting rule changes that, frankly, make the statements very difficult to understand. This trend has been underway for about eight years, as I recall. In the interest of making disclosures clearer for the public company shareholders, the opposite has occurred.

About five or six years ago when I was calling on analysts and portfolio managers in my role as CEO of Matria Healthcare, they were all saying they could no longer really understand all the changes and the implications associated with these new rules. The thrust of taking what used to be very adequate disclosures on financial statements as footnotes are now being pushed up to the balance sheet as pseudo-assets or pseudo-liabilities. They are all saying they now focus on EBITDA or cash flow in order to be able to analyze a Company's performance.

In order -- they have to do that in order to eliminate all the non-cash charges required by these new pronouncements. I think what you just need to focus on, because it's certainly what I do when I make investment decisions, is, number one, is revenue growth occurring? That's finally beginning to happen for us. Surgical Biologics revenues last year, calendar year, were up a little over $2 million.

We've produced $1 million of revenue in the first quarter of this year. Predominately, most of that was Surgical Biologics based on their existing customers as well as new customers we brought with our infrastructure. In April, we had rapid growth was developing because of the order rate is up substantially, approaching up to $0.5 million. So it looks like we're building some real strong momentum for second quarter.

Our products all have high gross profit margins. Producing them as we currently do and improving those margins monthly as we do is going to be a real attribute for us. You have an experienced management team and some products with some exciting opportunities for us in healthcare.

So, if you can try to get through Mike's complexities, frankly sitting through an audit committee meeting today with these kind of things going on is -- with even some, as we have on our Board, some very, very, very experienced financial executives, is a challenge. So don't feel challenged by what Mike just read to you because it's challenging for everybody.

But again, the bottom line is we have a balance sheet that has some things hung on it that could've been quite adequately dealt with with footnotes. The Company is going to do well here now with revenue growth beginning to accelerate on us and a management team that knows how to manage, I think, most things that are coming at us.

So with that, let me stop and go ahead and throw the call open to questions.

(Operator Instructions).

Chris?

Chris Mellon, Mellon Consulting.

Pete, I just wondered if you could clarify when the collagen fiber might get through the FDA process.

Chris, I have never had the ability to be clairvoyant.

But let me say seriously that, number one, there aren't any clinical reasons that this particular product should not receive FDA clearance for a number of different uses.

We are going through, as is every device company in the country, a period where the FDA's philosophy has changed in the last 1.5 years. It does frustrate us. But I've been through these changes in my some 35 years of dealing with the FDA. I've seen how the agency can change depending on administrative changes or philosophy changes, and one just needs to persevere.

We are continuing to make progress in terms of traditional clinical studies. Those of you that are interested in going to our website will see some very compelling clinical studies we conducted recently. They are sheep studies, which are the animal studies generally preceding human studies, with some amazing results in terms of using our collagen fiber braid to prepare an inflicted wound in the Achilles tendon of a sheep, where we actually took a 3/8-inch gap across two-thirds of the cross-section of their Achilles tendon in a number of sheep, and the results were amazing in terms of how quickly the wound healed and the ability of the sheep to use their limbs as good as they had previously and the other aspects of it.

So, Chris, I can't answer that question. Bill just articulated what's about to happen. We think with European approval for CollaFix, we hope to have -- we've got two applications in with the FDA right now on our collagen fiber and hope to get some breakthroughs here in the months ahead, but I can't articulate a date.

Okay, thanks, Pete.

Troy Welker, IPT.

Pete, you did a great job. Thank you all.

Because of the balance sheet and the length of explanation that you've already talked about, is it possible prior to your quarterly calls to have that actually posted on the web? Because being as simple-minded as I am at times, I have a hard time following what's being said verbally. It would be extremely helpful to be able to be looking at it as he is discussing it, unless I just happened to have missed it.

First of all, the financials are published with the press release. So what we have done, and most public companies do, they put out the press release with the financials. And then, they will have a call some hours later or the next day after those go out the night before. I believe our press release went out last night.

So I would ask you to, and we also give shareholders several weeks' notice of when we're going to have this press release and call. So, you should try to pull it up through the various sources of publication of press releases. We also put it on our website. However, that probably didn't go up last night, did it? That might be helpful for you if we got it on the website so you wouldn't have to search it out through other sources.

But the information is available, and I apologize for the complexity of the financials today, but every public company out there has these same headaches and frustrations, and it's as far as -- it's just not going to change. It's just the way the accounting profession has decided to do things, and it frustrates our accountants just as much as it does us. So it's just the way it is.

Not disappointed at all. I was just on the website and I was just trying to look at it as you went through it on your website. I didn't think about going to an outside source for it. I just went to the investor site and was trying to look at it and pay attention to it as he was talking about it, and I couldn't find it. So, my apologies here.

Well, we'll be certain we get it up on the website. Every time we put out a press release, it will be on the website simultaneously.

Thank you. And thank you for the hard work that you're doing.

(Operator Instructions). There are no additional questions at this time. I would now like to turn the presentation back over to Mr. Pete Petit for closing remarks.

Thank you. Again, I suggest that we all try to focus on the opportunities we have with the current Surgical Biologics products, as well as our HydroFix.

Surgical Biologics is an extremely compelling opportunity for this Company. I've generally tried to focus all of our companies in the past on being the number one or two business in a particular market area. In the case of this particular product, we are number one. But it's a new and emerging sector of healthcare devices.

We plan to be the leader. We are the leader. And there's going to be some exciting revenue growth here in the quarters and years ahead. So stand by for further proof of that.

We will make a lot of progress in this second quarter. We're extremely busy with managing the various aspects of product launch not only in existing products that we have, but also a couple of new opportunities in -- with the nerve wrap, which is a new use of the product also. Our wound care opportunity is being launched this quarter under the auspices of [Frank Burriss] and some tremendous things are already going on there.

And we'll have a new opportunity we'll announce in June with the use of our amniotic membrane tissue in the area of pain management. So, stand by for some exciting things.

And I realize that collagen has been something on your mind for a long period of time. I want you to realize that's still coming, but we probably got an opportunity here many times larger. Many times larger than the opportunities we thought we had and do have with collagen for us in terms of a potential market growth. Thanks so much. We'll be in touch.

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