MiMedx Group Inc (MDXG) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Q2 2011 MiMedx Group Inc. results conference call. My name is Erin, and I will be your operator for today. At this time all participants are in a listen-only mode. 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's call, Mr. Mike Senken, Chief Financial Officer. Please proceed, sir.

Thank you, Erin, and good morning, everyone. Before we get started, I would like to read our forward-looking statement disclosure.

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 the 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 the conference call 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 statements except as may be required by the Company's disclosure obligations and filings it makes with the Securities and Exchange Commission under federal securities.

I would now like to turn the call over to Pete Pettit, our Chairman and CEO.

Thank you, Mike, and good morning. Welcome to our second-quarter shareholder call. I have with me this morning Bill Taylor, our President and Chief Operating Officer; and, of course, Mike Senken, our Chief Financial Officer, and in addition, Mike Carlton, our Vice President of Sales.

I hope you have a chance to read our press release. It is on our website. As I said in the press release, I think MiMedx Group had a good quarter. Our revenues were up significantly over the first quarter of this year and very significantly up over the same quarter a year ago.

Our revenue increases are primarily attributable to our Surgical Biologics amniotic membrane tissue grafts. I believe that in our coming together with Surgical Biologics will prove to be the most significant event in this Company's early-stage development.

Surgical Biologics brought five years of their development of the Purion process, which has a lot of intellectual property associated with it, and they had revenues. Surgical Biologics is the largest and premier provider of amniotic membrane tissues to the healthcare industry and we are in the very early stages of growth and development of this new technology.

Of course, MiMedx Group brought this relationship -- brought to this relationship a maturing sales and distribution group as well as our other public company business infrastructure. Also, MiMedx brings the future potential of our HydroFix and our CollaFix products. In my opinion, this is one of the most synergistic mergers that I've ever been associated with, and I've made over 47 acquisitions with my previous companies.

Now I want to take a few minutes and put in perspective for you from a business standpoint, not from a science standpoint, the attributes of our amniotic membrane tissue. The science overview will come in future communications.

Five years ago, the founders of Surgical Biologics, John Daniels and Randall Spencer, embarked on a passionate mission to figure out how to take natural amniotic membrane from a placenta and turned into a commercially viable product. There had been almost 100 years of medical usage of amniotic membrane in a number of medical procedures. The natural healing qualities of the membrane had been noted almost a century ago, even before the science was available to document what was causing these successful clinical results.

Surgical Biologics was successful in developing what we now call our Purion process. There has been a number of patents filed related to the Purion process, and we continue to increase intellectual property associated with it even today.

However, most importantly, we now routinely process amniotic membrane tissue under the Section 361 regulations of the Public Health Service Act. Our placentas are collected from scheduled cesarean section operations where our staff can fully preassess the health status of the mother and obtain her permission for the donation. We subsequently serological tests to further ensure safety, and we terminally sterilize the tissue through radiation.

Therefore, we are confident in our Purion process, which has numerous checkpoints. We are also confident that our facility, which has recently been inspected by the FDA, is capable of keeping up with our increasing demand. And we look forward to continuing to offer minimally manipulated amniotic membrane tissue grafts to physicians for specific uses that are homologous to its previous use in the human body. That is, for applications where enhanced healing, reduced inflammation and reduce scar tissue formations are clinically relevant.

Now, I have been associated with fast-growth healthcare product lines in the past. Both Bill Taylor and I have seen rapid growth associated with those types of innovations. I can tell you in no uncertain terms that MiMedx Group has exactly that with the Surgical Biologics amniotic membrane tissue grafts. And, in the future we should have that certainly with our collagen fiber products.

We have enthusiastic reception from physicians who are using these grafts in orthopedic surgical procedures, in wound care and burns. We have other physicians who have heard of the tissue grafts and are interested in using it in other surgical procedures, such as GYN and EMT. We have interest in the plastic surgery field. Our OEM partners in ophthalmology and dental are finding increased usage of the tissue.

We are very, very busy doing additional clinical tests and studies on the tissue so we can assure physicians that the few claims that we are making are factual and they can be assured of appropriate clinical results. In addition, we are finding that we have distinct cost advantages over some of the existing treatments currently in use. Therefore, we think we have the best of all worlds in healthcare today, a graft that will be clinically effective as well as cost effective.

Incidentally, we are on the verge of having our tissue launched in Europe also. There are several countries where we have made some quick progress in having the tissue available for the market. Mike Carlton will give you a more detailed update in a few minutes on our sales activities worldwide. We will keep you apprised of the rapid developments that should occur around our international launch of this product.

Now, let me give you a little update on our collagen fiber initiatives. Bill Taylor will give you further detail, but just let me say that we continue to press both in Europe as well as the US towards regulatory approval. It looks as if we will receive regulatory approval for our first collagen fiber product in Europe this quarter. That first product will be collagen fiber mesh, which will have a number of clinical uses. We will file that with some other initiatives that will take us towards tendon wraps and, finally, towards the use of the product in soft tissue repair.

Relative to the US, we continue to work on our 510(k) applications and are continuing to gain insights into new expectations of the FDA relative to our collagen fiber products.

Relative to our HydroFix products, which is beginning to make some sales headway in Europe, we have received some additional clearances recently. In addition, we have actually received some additional broadening of our indication for the use of the HydroFix product, through the Food and Drug Administration here in the US. Therefore, progress is being made on the regulatory front with our HydroFix and CollaFix products.

However, it is much lower than anticipated, but it seems to be the current trend in our industry.

Relative to our expectations going forward, I think we have clearly signaled that we expect robust growth in revenues in the quarters ahead. We expect to cross over breakeven for adjusted EBITDA sometime in the third quarter. Therefore, we are getting very close to being self-sustaining on our cash flow, which is a major event for any young fast growth corporation.

I want to make it clear, though, that 85% growth we had in revenues from first quarter to second quarter, we certainly can't duplicate that from second to third, but it should still be quite robust.

Relative to other key assets, I would point towards our management team. Anyone that knows my background in the health industry knows that I've been involved with numerous fast growth business entities over the decade. I will have to say that the management team that we have at MiMedx Group and Surgical Biologics is better than any team I've had assembled with other business entities at this stage of the business's growth. We have an extremely experienced and talented group of individuals, even though we are still relatively a small Company from a revenue standpoint.

I expect our mistakes as we go through this rapid growth period will be minimal, and I know that we will maintain our leadership role in amniotic membrane tissue.

Let me stop there and throw the call over to Bill Taylor, our President and Chief Operating Officer.

Thank you, Pete, good morning, everybody. I will start off talking about the regulatory initiatives.

We have announced during the quarter that we received clearance for our HydroFix Ortho Shield device, which is indicated for the management and protection of tendon injuries in which there has been no substantial loss of tendon tissue. It is designed to minimize tissue attachment to the device when in direct contact with the tissue. As Pete indicated, HydroFix has not met our earlier expectations, but what we are finding is that it is a niche product with some very strong proponents in those niche areas.

We have another application in development that we expect to be the largest opportunity for HydroFix, and once we get closer to market availability, we will share more. We remain very optimistic with respect to our various CollaFix opportunities but are disappointed with the delays we continue to face in the US regulatory process. We expect that we will prevail, but it will take some time.

Because of these challenges we are focusing more energy on Europe and on our tissue. Our CollaFix mash is still progressing through the process in Europe, and we expect the CE Mark later this quarter. Once we receive this initial CE Mark, we will be filing for a scope extension to use the same mesh as a tendon protector, where we expect to have the bulk of our initial sales of this initial configuration. We are targeting this submission to be accepted in the fourth quarter of this year. As you can imagine, this is a very complex process, but in Europe it is indeed more predictable than in the US.

That said, timing in Europe for a class 3 product is a bit of a challenge to predict, as it can fluctuate depending on the notified body's workload and the expert reviewer's schedule.

Changing subjects now, by the end of this quarter we should complete our full consolidation of our facilities into Kennesaw, Georgia, just north of Atlanta. Surgical Biologics had a very nice space in Kennesaw, comprising of two suites in a one-story commercial office building. We recently leased the office space in between their two suites and now occupy about half of this building. As we were planning the consolidation of our Tampa and Marietta spaces into this Kennesaw facility, we found that we could have located nearly all of our needs into this space, but we would have no room for growth. Subsequently, we leased a building nearby and are moving CollaFix and HydroFix production into that separate building.

I mentioned earlier that we are shifting a large portion of our development efforts towards various applications derived from the Surgical Biologics tissue. As we have discussed before, the tissue we process are not devices but, instead, are considered transplanted tissue by the FDA, so we can therefore quickly develop new configurations to address specific clinical lease. We launched AmnioFix Nerve Wrap last quarter, and we expect another AmnioFix launch later this quarter, this one focused on pain management applications.

We continue to be amazed at the stories we're hearing from the field regarding the performance of our tissues, particularly in the areas of wound care. We routinely are hearing stories from key opinion leaders who are trying EpiFix for the first time, and the stories are usually something like this.

I had a patient with a diabetic foot ulcer for over six months. I've tried all of the methods available to me, including Apligraf and Dermagraft, yet I couldn't get the wound to close. So I thought I would try EpiFix.

One week after the application, the wound closed by over 50%. After four weeks it completely healed. On some of my other patients it might take five for six weeks. Sometimes it takes another application or two, but it works and it works very well.

Another example is a hospice nurse who applied a graft that we donated to a patient with a pressure ulcer, and it was healed in just a few weeks. These stories go on and on.

These testimonials are a great start, but what we really need is application-specific clinical data, and that's precisely what we are working on. There's a substantial amount of clinical data regarding amnion as an anti-scoring agent, a barrier, an anti-inflammatory agent, etc.

Where we need incremental data is in specific clinical applications using amnion that is derived from our Purion process. Therefore, we have a series of clinical studies that are underway or in the planning stages that will generate objective data to further support our clinical messaging.

This, then, leaves the big question, which is reimbursement. Great outcomes mean nothing if you can't get paid. We have been working very hard on reimbursement and expect to have a pass-through CMS code for wound care by the first of the year and additional codes thereafter.

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

Bill, thank you. We will toss it to Mike Senken, our Chief Financial Officer, now. Mike?

Thanks, Steve. For the quarter ended June 30, 2011 the Company recorded revenues of approximately $1,929,000 as compared to approximately $322,000 in revenue for the same period in 2010, which is a six-fold increase of $1,607,000 versus the prior year. It is also an 85% sequential quarter-over-quarter revenue increase of $866,000 as compared to the first quarter.

Continued strong demands for our amniotic tissue platform from existing Surgical Biologics and MiMedx customers as well as new customers added in the second quarter contributed to the increase. Demand in the ophthalmic, spine and orthopedic markets was strong throughout the quarter.

Now I would like to take you through the GAAP income results for the quarter and year-to-date, which will then be followed by a summary of our adjusted EBITDA numbers, which are a better reflection of our cash burn, which is critical at this stage in the Company's development. The net loss for the quarter was approximately $2,504,000, representing an $844,000 improvement over the first-quarter loss of approximately $3,348,000, and an improvement of $193,000 as compared to a net loss of approximately $2,687,000 for the quarter ended June 30, 2010.

The sequential quarter-over-quarter improvement was driven by increased revenue and improving gross margins while continuing to maintain tight spending controls despite the significant increase in revenue. Reported gross margins in the quarter were 59.1% as compared to 36.9% in Q1, driven by increased sales volume. We expect this trend to continue in subsequent quarters.

Spending reductions were reported in research and development expense, primarily in the HydroFix and CollaFix areas, somewhat offset by increases in costs for clinical studies supporting our amniotic tissue platform. Selling, general and administrative expenses increased only 3.6% while supporting the sales revenue increase of 85% over the first quarter of this year. For cash flow modeling purposes, please note that the reported selling, general and administrative expenses include approximately $993,000 in the second quarter of this year and approximately $1,932,000 for the six months ended June 2011 in non-cash related depreciation, amortization of intangibles and share-based compensation.

Also included in our reported net loss is approximately $61,000 for the quarter and $134,000 for the six months ended June 30, 2011, a non-cash debt discount related to the beneficial conversion feature resulting from in-the-money conversion options.

As we stated during the first earnings call, due to the significance of non-cash related expenses included in reported net loss with a Company goal of becoming cash flow positive in the third quarter of this year, management has established an adjusted EBITDA target which allows operational 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 a non-cash expense included in our selling, general and administrative expenses. Included in today's press release is a supplemental disclosure which reconciles our reported net income to adjusted EBITDA.

Adjusted EBITDA for the second quarter of 2011 was a loss of approximately $1,423,000 as compared to a loss of $2,321,000 in the first quarter of this year and a loss of $2,114,000 in the second quarter of 2010. Adjusted EBITDA for the first six months of this year was a loss of approximately $3,751,000 as compared to a loss of $4,186,000 for the same six-month [period] last year. Included in the June year-to-date 2011 results were one-time legal, accounting and audit costs of approximately $236,000, specifically related to the acquisition of Surgical Biologics.

Turning to the balance sheet, cash on hand was approximately $1,614,000 at the end of the quarter. During the quarter the Company raised an additional $2,421,000 through a private placement and drew down an additional $500,000 from a secure line of credit with our Chairman and CEO. It should be noted that this line of credit remains available to us until December 31, 2012, and as such is reported in long-term liability.

As of June 30, 2011 the Company reported approximately $5,564,000 in current liabilities, which included $3,850,000 in the first-year earnout liability related to the acquisitions of Surgical Biologics, assuming certain revenue objectives are met in 2011. It should be noted that the earnout liability is payable in MiMedx's common stock in Q2 of 2012. Current liabilities net of the earnout reflect cash-related liabilities of $1,714,000 as compared to our current assets of $3,623,000, resulting in a current ratio of 2.1.

Moving to other significant balance sheet items, accounts receivable totaled $1,213,000 as of June 30, 2011, as compared to $162,000 as of December 31, 2010, with the increase the result of the increased sales volume. Inventory as of June 30, 2011 was approximately $561,000 as compared to $112,000 as of December 31, 2010. The increase is a result of the planned ramp-up in production based upon anticipated demand for our amniotic tissue platform.

Turning to non-current liabilities, in addition to the line of credit mentioned earlier, there is also an additional earnout liability related to the acquisition of Surgical Biologics payable in MiMedx stock in the second quarter of 2013, assuming revenue growth objectives are met. The estimated amount as of the date of the acquisition was approximately $3,555,000. There is also a convertible note due in 18 months from the date of acquisition whose face value is $1,250,000. This amount is payable either in cash or MiMedx stock, common stock, as decided by the note holder.

With that, I would like to turn the call back over to Pete.

Thank you, Mike. Let me make a couple of comments on Mike's presentation. First of all, over the last six or seven years that accounting rule changes and accounting pronouncements have made it very, very difficult for a Company to present a profit and loss statement that is really easy for a shareholder or, for that matter, sometimes even a CEO with an MBA degree in finance to understand. That's why I stressed with my previous companies as well as MiMedx Group our production of what is called a non-GAAP adjustment so you can understand, because there is so many non-cash charges that get dropped into a profit and loss statement today that are basically, from a practical business standpoint, irrelevant to what is happening with the business.

The non-GAAP presentation we will continue to make to you is pretty close to cash flow -- cash in, cash out, what is the business producing in terms of real cash development as opposed to non-cash-related charges that roll through the P&L. So you will continue to see us do that. And I would ask you to keep up with that as opposed to some of the published numbers, which, of course, we have to be able to continue to do. But we will try to give you some insights into what the business is really doing from a P&L standpoint and a cash flow standpoint through our non-GAAP schedules.

Also, I think another important point is gross margins have moved up dramatically from first to second quarter. They will continue to do that as our revenues go up. You have heard us talk about having gross margins, we feel, of about 80%. And you have seen a dramatic jump from the 30s to the 50s, and that will continue to go up as we increase our revenues.

All right, let me stop there and let's hear from Mike Carlton, our Vice President of Sales. Mike?

Thanks, Pete. As you are aware, we spent 2010 setting up US distribution for our HydroFix product. We also initiated some activity in Europe and began to produce results toward the latter part of 2010. We obtained many of the top sales rep groups in the US and also some major stocking distributors last year. When we combined with Surgical Biologics in early January this year I was able to offer their tissue to all of our sales rep groups and distributors. To say their reception to this new and exciting technology was enthusiastic would be an understatement. We reached the point very quickly where it was evident that we had to change our exclusive relationships with the majority of these sales rep groups and allow a number of other groups to join in the distribution activity.

As it turned out, this was the right thing to do. We have been able to help all of our sales rep groups and distributors maintain current ordering patterns while, at the same time, take advantage of the numerous new opportunities through nonexclusive relationships moving forward.

One interesting reflection of kind of where we are now is we're averaging two to three new inquiries per week on the website. Some physicians, even themselves, have expressed interest in amniotic tissue membranes with direct inquiries without representation. This is very new to me, having a surgeon e-mail the Company directly.

And just last week, we hosted a new distributor group in our office that drove five hours just to be here at our facility to tour the processing capabilities of Surgical Biologics. They are also developing, in this case, a focused, totally focused amniotic strategy with their group. And as an example of the power of this tissue, they are actually expanding from 16 reps to 30 and covering eight states. And again, their entire business model as one group is 100% focused on just amniotic tissue membranes.

A final comment -- we, for the first time, have had a number of surgeons directly e-mail for new applications. They are using their creativity and thinking about the membrane and where it can apply. We had a surgeon last week e-mail our director of sales in the West on a bariatric application which should be exciting and new for us as well.

There's a lot of talk today about amniotic membrane tissue in different applications, and the reasons are quite simple. First, a physician can quickly see the results of the graft by noticing enhanced healing on the spot, reduced inflammation and reduction of scar tissue formation.

Secondly, from a sales perspective there are a number of medical disciplines that have an interest in this tissue, and therefore it's attracted by having a group have multiple call points with very few restrictions.

With that, I will turn this back to Pete.

Thank you, Mike. Let me summarize by making some comments about something that I did this weekend. I curled up with a book that was given to me by one of my shareholders. It's called The Miracle of Stem Cells -- How Adult Stem Cells Are Transforming Medicine. A very enlightening book, it covers a lot of activity on stem cells, which you're going to ask, well, what's that got to do with amniotic membrane tissue?

Well, you will find out as time goes by and we publish some studies that we think that our product acts as an enhancer to the stem cells in the body. I want to read you a couple of things real quickly from the chapter on wound care.

Quote, there is hope for nearly 35,000,000 patients worldwide who suffer annually from chronic wounds as well as the estimated 6.5 million with burns severe enough to require professional treatment. Significant treatment advances have occurred through the use of anti-invectives, skin ulcer management, moist dressings, pressure relief including negative pressure, and biological dressings. These technologies help and drive double-digit growth in a wound care market set to hit $12.5 billion, $12.5 billion by 2012.

One other comment deeper into that chapter is commenting on stem cells and some of their disadvantages. It says the following -- however, even with the best freezing techniques, there are still limitations to delivery -- meaning those stem cells. The ideal cell-based product would have the following specifications -- and there's five of them here -- one, biologically active at room temperature. That's exactly what our and the out at membrane tissue is -- containing all necessary growth factors for wound healing -- we have those -- deliverable in a variety of formats -- we have that capability with the number of products we offer and the sizes -- scalable, able to be quickly reproduced in large amounts -- we certainly have that with our production facility -- and product under good manufacturing practices, GMP conditions -- which is what we operate under with the 361 regulations and FDA oversight.

Interesting comments, stem-cell related but they relate exactly to what we have.

Okay, I will open the call up for some questions than answers.

(Operator instructions).

Operator, this is Mr. Petit. Normally, our shareholders and analysts are quite inquisitive. I want to be sure there's not a technical issue developing here.

Stephanie Haggerty, Register Financial.

Good morning, guys, it looks like a good quarter. I just wanted to see if we could get kind of a pro forma picture of what the balance sheet looks at the closing of the $5 million private placement.

Well, that was basically done at the end of the second quarter, June 30.

All right, that's what I wanted to clear up. Okay.

So that's -- the June 30 balance sheet is pretty well it.

And are the warrants that are issued, that are shown -- are these -- this includes everything from the private placement? Because I have 3,272,000 warrants.

If you're talking about the contingent warrants, they would not be shown because they are contingent.

All right, and they are contingent on revenues?

They are contingent on revenues in 2011 of -- well, 25% of the total, or 50% of that number that you gave us is contingent upon us hitting a revenue number of $11,500,000. And the other half is contingent upon revenue hitting $31,150,000 in 2012.

Okay, can I just ask one more question? What's kind of the order of what you expect your big products to be, looking over the next 12 to 24 months? (technical difficulty) strongest, or the strongest may come later; I don't know.

Stephanie, I think there will continue to be very rapid revenue growth with our amniotic membrane tissue. We're seeing it used now in a lot of different surgical procedures. And, in wound care, we are just really breaking into the wound care use of the product. We brought into the Company a gentleman by the name of Frank Burrows who has spent his 20 years in this industry all predominantly focused in wound care. He started with Johnson & Johnson. He is very well known, and he has been very instrumental in getting us positioned quickly there.

So we are seeing growth in a lot of the surgical procedures, and we will see wound care beginning to develop some revenue growth here this quarter and ongoing.

Now, relative to the other two products, HydroFix will continue to plug along and generate some revenue, but it's never going to be a product line that has huge revenue potential. It's a very interesting product line that's quite interesting to certain physicians, and they use it and are passionate about it. But it's never going to be the size product line that CollaFix is.

CollaFix will start to develop in revenues in Europe here shortly, as soon as we get this first approval. It's a game changer like the amniotic membrane is, but it's going to take longer because of the FDA approval and EU approval processes for it to really begin to develop any rapid revenue growth.

So it's pretty much going to be all amniotic membrane and where we focus in orthopedic surgical procedures and some other areas. We mentioned in the press release wound care and burns.

Have you got the overseas distributors lined up or pretty much in place?

Yes, we have. For a company our size, we have got, I think (multiple speakers) a viable international distribution group already. And we are dropping the tissue in there as fast as we can. We have got three places in Europe that we are getting ready to develop tissue revenues from this third quarter. So in a matter of six months, we have gotten those kind of things done, plus there are some other places outside of Europe that are going to produce some tissue revenues for us.

Well, I was just going to say, good luck. You have got so many opportunities in front of you it's got to be hard to decide which one you want to focus your resources on.

Well, you know our maturity here. And we know the disciplines associated with getting to disperse with your management team. We are very focused on the tissue side of it. The other piece is, we just have to be patient in terms of bringing them along, in terms of approvals.

But tissue is our focus. We live and breathe it every day here, and the developments are rapid. And I think that the management team here is very capable of managing this growth that we think we have ahead of us.

Good luck.

Chris [Murray], Mellon Strategic Consultation.

Chris Mellon -- just a quick question on the collagen fiber, to try to clarify. It sounds like great news in Europe next quarter. Is that going to help us, in the United States, get approval?

Generally speaking, it should, but not necessarily. It just depends on certain clinical aspects of what's going on over there and how we gather our post-market approval data and so on. They should reinforce each other, but you can't always count on it.

So it's still kind of an open-ended time line in the US, then?

I'm afraid that is the case.

Okay, thank you.

(Operator instructions) Chris Laffey, Gilford Securities.

Congratulations. What is the -- could you explain maybe a landscape of how you go around or avoid being over sought by the FDA, where they are looking into your different applications and how you can continue to navigate that?

Well, Chris, let's break that down into two conversations, one associated with here in the US our pursuit of 510(k) applications for CollaFix and HydroFix; and, two, our tissue. I am --

I was referring to the tissue, Pete. Sorry; I wasn't clear.

That's why I want to make it clear. We do everything by the book here, to say the least. But I'm going to let Bill Taylor cover the tissue side of it with you and make it very clear again that we are staying very much with all the rules and regulations that we're supposed to. It's just from a philosophical standpoint, the FDA over the decades has basically said, in the way of allografts, tissue coming out of the body going back into the body, as long as you don't overly manipulate it and you use it for the same uses that it was being used for in the body, it doesn't require a device approval. But let me let Bill explain a little more deeply.

Right, just to reinforce what Pete said, we are following all of the FDA's regulations as it relates to tissue as well as the AATB, the American Association of Tissue Banking. But essentially what the FDA has said is that tissues are regulated separately from medical devices so long as you do two things. One is minimally manipulate the tissue; and, two, you promote it for homologous use.

So the minimal manipulation means that you can cut it, you can slice it, you can do various things to it as long as you don't fundamentally change the physical characteristics of that tissue. And we clearly do not do that; we may put it in a different size or something like that, but we maintain its fundamental structure.

Now, homologies use means that as long as you promote it for use that's similar to its function previously in a body for it was transplanted -- so, for instance, with amnion it's clearly documented and the FDA has recognized that the amnion is an anti-scarring agent that is a barrier, that it is anti-inflammatory in properties in is anti-immunogenic. And that's the way that we focus our marketing efforts and the way that we are explaining to physicians and so forth.

We do not get into specific indications. This says that this is going to very specifically create an outcome like a medical device. Now, there are applications that down the road we will file for a 510(k) because there are several things that we are looking at that would bring it into a medical device classification rather than a tissue application. But that is quite a ways down the road. So we are fully compliant, and we have regulatory opinion letters that support our position that we are fully compliant with the current legislation.

Chris, I know you're questioning, well, it's hard to understand the difference between a medical device and tissue, but it's really simple. If you're taking something out of a human body that our creator put there that has a function, the FDA, I think wisely, decided not to step into the issue associated with, well, we are questioning what our creator did for us. And we're putting it back in the body to do the same thing. So that's a simple way to, perhaps look at it.

Okay, but if you have, say, whether it's (multiple speakers) [expandable] tissue being used for certain, I don't know, processes, can you overlap and steal their thunder by virtue of this being a human product?

Well, I think each of those is going to be judged clinically by physicians on their own merits. We compete with our amniotic membrane with certain xenografts and so on that come from other tissue, animal tissue, etc. And we just have to compete with those on the basis of our product -- or our tissue is more clinically effective and cost-effective.

So each of those things has its own regulatory pathway as it's brought to the market as a product. In our case, it's a separate pathway, although our processing, believe me, is not simple, to do what has been done with this Surgical Biologics Purion process to bring a natural amniotic membrane through the process, and out at the other end comes a product that still has the majority of the healing qualities and anti-immunogenic qualities and so on that it has to start with is no simple matter.

If I could comment, this Mike Carlton. In addition to that, from a sales perspective, if you are a distributor rep in the medical device industry, it is very appealing to have something like this, the amniotic tissue membrane that does in some cases compete with a xenograft, a product that is FDA approved for application that might come from bovine or porcine sources.

What the advantages for a local distributor is that they can have this tissue competing with an FDA-approved tissue, but they can also present their doc, their surgeon, an opportunity to use their clinical skills, to use the same tissue for other applications as they see fit understand the properties of the membrane.

So that's the beauty of the kind of niche we are in right now with this amniotic story. It's very appealing to docs. And I've been in medical devices 20 years. Never have I been in a situation where you mention regenerative, biologic and just tell the scientific story. You get their attention. This is a new area of medicine. There's a lot of interest, and that's why we're getting a lot of e-mails inquiries directly from surgeons.

Okay. Well, you could send me a packet of that stuff, if you would like. (Laughter). I would (multiple speakers) use it like a blanket.

We will put you on the mailing list.

Thank you.

(Operator instructions). Stephanie Haggerty, Register Financial.

Okay, we'll you've been -- Stephanie, sounds like you've got another question.

Stephanie Haggerty, Register Financial

One more time -- what's the thinking at this point of a reverse split?

We still think we need to do that, and fairly straightforward thought there. This fall we would like to begin to present the Company to institutional investors. As I think most of you recognize, the majority of our shareholders, or pretty much all of our shareholders, as far as we know, are individuals, many of which are high-net worth individuals. We really have no what I would call traditional institution investors in the Company. Some of that has to do with the fact we have not exposed the Company on that basis.

Number two, when stocks trade below $3 [as often] $5, as a limit, institutional clients cannot buy them. So I think it's in our shareholders' interest to, clearly, do a reverse split, do that in the right way so there's no aftershock in terms of loss of market cap and that kind of thing. I think we are for a capable of doing that, particularly in this growth mode we are in.

And we are also, as we have clearly signaled to shareholders, trying to work our way up to other exchanges that give us a little bit better trading and also visibility to our trading. So we are still pursuing those kind of goals aggressively.

I'll take one of the packets, too. (Laughter)

(inaudible) okay, you go on a mailing list right below Chris Laffey. Thank you.

There are no further questions at this time. I would now like to turn the conference over to Pete Petit, Chairman and CEO, for closing remarks.

Thank you, Erin. Well, I think we've got a good call. I think a lot of information has been exchanged. Consult our website for other information as you see fit. And I thank you, as always, for your interest. We have a very interesting Company here, and it's entering its growth phases. And I would suggest, just keep in tune. We will keep you advised as quickly as events occur.

We will be spending a lot of time and some of our dollars now on doing additional clinical evaluations of our amniotic membrane tissue, to decide to help physicians and clinicians decide on the other potential uses. But we will announce those studies as we complete them and we have the data.

Thanks so much, and we will be in touch.

Thank you for your participation in today's conference. That concludes the presentation, and you may now disconnect. Have a great day.