MiMedx Group Inc (MDXG) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2011 MiMedx Group Inc. results conference call. My name is Erica and I will be your coordinator for today.

At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Michael Senken, Chief Financial Officer. Please proceed.

Thank you, Operator, and good morning everyone. Thank you for joining us this morning. Before we get into the details regarding the Company's results, I would like to read our Safe Harbor statement.

This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities and 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 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 and filings it makes with the Securities and Exchange Commission under federal securities law.

With that, I would like to turn the call over to Pete Petit, our Chairman and CEO.

Thank you, Mike, and good morning and thanks for joining us for our third-quarter conference call. I have with me today Bill Taylor, our President and Chief Operating Officer, and Mike Senken, our Chief Financial Officer and John Daniel, President of Surgical Biologics. Mike Carlton, our Vice President of Sales, is busy selling and not with us today.

I think we made good progress during the quarter in moving all of our projects along. As you should be aware we are very focused on our amniotic membrane tissue grafts and the numerous applications we see for this innovative technology.

However, we did make some progress with the HydroFix product in Europe, and from a regulatory standpoint in Europe with our CollaFix collagen fiber initiative. Bill Taylor will talk about this in more detail.

Let me again reiterate that our amniotic membrane tissue grafts, or allografts, will prove to be one of our most clinically and cost-effective medical technologies that will find widespread usage in the next several years. A processing technology that John Daniel and Randall Spencer, the founders of Surgical Biologics development, is a breakthrough in the commercialization of amniotic membrane.

To be able to process this fragile tissue so it can be stored at room temperature and have a five-year shelf life and maintain its clinical attributes is amazing. As we expose this tissue graft to physicians at numerous medical practices we are seeing widespread acceptance of this new technology.

As a reminder, the Company has over 30,000 grafts that have been implanted in the eye. We have over 10,000 other graphs that have been implanted in the use of dental procedures, spinal procedures, wound care and other orthopedic procedures. Our amniotic member tissue grafts are truly an amazing new contribution to medical technology.

I cannot say enough other than the fact that our tissue grafts and seeing widespread acceptance around the physician community. Day by day, we hear exciting testimonials as seen in these exciting photographs -- photographic results of patients being treated with particularly wound when care patients, with our tissue grafts. Therefore as revenues related directly to physician enthusiasm, we'd be growing at a much faster rate than we currently are.

However there are two factors in today's healthcare market at slow growth down significantly for our tissue grafts. I want to discuss them with you briefly.

The first relates to obtaining reimbursement from health plans. With any new product, there is an approximate six-month period where health plans will either deny payment or reduce payment to see what they can get by with. During this period of time it is incombitant upon the Company, in this case MiMedx, to have our reimbursement experts working with the hospital physician customers and seeing that they are properly reimbursed. This is a process I'm quite familiar with having dealt with it for several decades.

Other members of our management team have also gone through these processes and in particular, Dr. Don Fetterolf, our Vice President of Medical Affairs and Medical Director, is extremely familiar with the process since he was a medical director with a large health plan for many years. We have our reimbursement experts who are continuing on the phone with our sales representatives and physician practices and hospitals, sorting through the reimbursement issues.

Over about a six-month period of time, these issues will gradually resolve themselves so that our tissue grafts are viewed by health plans as clinically effective and very cost-effective. Once that education process is complete, these reimbursement issues will become routine. However initially these issues do slow down the acceptance of new technology because hospitals and physicians have to be reimbursed, and when they're hassled by the process they become more conservative in the use of technology.

The second issue relates to the overhangs and I am certain it is related to what is generally called Obama-care. This massive legislation and restructuring of the healthcare system has hospitals in a state of confusion. When that occurs they become very conservative, relative to purchasing of anything, particularly new products. The larger hospitals have established -- have generally established new product committees and they slow down the process of new product acceptances.

In the case of our amniotic membrane tissue grafts, we have an extremely innovative and clinically effective product that is cost-effective. And that's most important today. It is cost-effective. It will save the healthcare system significant dollars over our competition.

Therefore, acceptance is taking place, it's just a slower pace than what it have been two years ago. Again we simply must persevere through these early-stage issues and we'll see our revenue jump significant quarter over quarter as we overcome these particular matters.

In January, we expect to see a new reimbursement code for our EpiFix tissue grafts relative to the Medicare reimbursement. At that point we are on track -- at this point we are on track for approval and we expect that to take place. Bill Taylor will give us more information on that in his comments.

I just said this but I'll say it again and I'll say it numerous times in the future. The innovation of John Daniel and Randall Spencer, the founder of Surgical Biologics, created with the amniotic membrane tissue grafts is astounding. Having been in healthcare myself for over 40 years I've seen a lot of healthcare innovation. I believe that the tissue processing techniques that have been developed and the associated intellectual property will prove to be an extremely valuable resource to patients, physicians as well as our Company and shareholders in years ahead.

We continue to do some very sophisticated clinical testing on our amniotic membrane graft and allografts, because this enlightens us to other opportunities which will open up as a result of those clinical tests.

I want to discuss with you an opportunity we've mentioned here previously and is related to MiMedx group doing a reverse stock split so we can be listed on a more mature stock exchange. In order to be listed on either NASDAQ or AMEX we must have our stock trade at a certain price for a certain period of time. Actually that period of time has gone from 10 trading days now to 30 trading days. And it happened recently, and we're told it's been caused by some issues associated with some of the Chinese companies that had some issues on these exchanges.

We are working towards being able to announce our clear direction on this project in the very near future. Once we have our stock traded on a more robust exchange there are a number of opportunities that will be available at the MiMedx Group.

In particular, we can begin to call on institutional investors who focus on microcap and small-cap companies in the med tech space. I am certain the MiMedx Group will be an extremely interesting investment to many of these institutions. However without having a stock trading in a different price range and on a different exchange, most of those institutions will not be able or interested in making an investment.

Once the institutes and investors have an interest in MiMedx Group, we will begin to see our values go up as our financial progress from growing our revenues and profits takes place. So we're looking forward to taking this next step in your Company's maturing and developing.

Now finally, relative to our financial progress, I'll state the most obvious. We're very focused on achieving positive cash flow and EBITDA and then earnings per share. Again, today, earnings per share has so many non-cash charges associated with it that I tend to not focus on that in my running the MiMedx Group and/or in my investment decisions. So I focus on EBITDA and cash flow.

We have an internal goal for achieving this in the very near term. We had a breakeven in the month of September. However please note that does not mean we'll hit breakeven for the next three months together, meaning we will have breakeven in the fourth quarter. But I can certainly tell you we are trying. Generally, this is driven by revenues. At just above $1 million in revenues per month we will be breakeven with 80% gross profit margins, $1 of revenue drops almost $0.80 to the bottom line. So it doesn't take much in revenue increases to increase our profitability and pass us through the breakeven point.

Of course, profitability puts us in a very different category and assures our shareholders that our future activities will not be as dilutive in nature because we'll have our own cash flow and we'll only raise capital when we want to, not because we need to.

Let me toss it to Bill Taylor now, and he'll discuss some of our operating progress.

Thank you, Pete. Good morning, everybody. I'll start with our consolidation of our facilities into Kennesaw. You'll recall that we had facilities in Marietta, Tampa, and Kennesaw, and we transitioned all of our facilities into the Kennesaw area, and it was completed in the third quarter and we're just now finishing the requalifications of our manufacturing equipment.

We now have almost all of our people in this building that we are in today and the balance are just across the street in another facility.

Changing gears to HydroFix and CollaFix, as Pete mentioned we made some progress on the HydroFix product line, particularly in the cranial application. We are targeting a European launch in the first quarter for our cranial application for HydroFix, which would be used in craniotomies, craniectomies and so forth. We continue to have significant interest in this very specialized application as was evidenced at [Euro's] fine conference trade show last week.

Relative to CollaFix, in our CEMark application which will allow us to sell our collagen fiber into Europe, we were told on Monday that our summary evaluation reports should be delivered shortly, which we expect to be this week. And as I understand it, this is the last step before they will issue the CEMark. So the CEMark should be forthcoming very, very soon.

This has been a long and challenging process. We're very happy to be near the end of it for our first collagen product in Europe. As you will recall, this first commercial application that we would be selling in Europe will be as a tendon protector followed by other versions of our CollaFix at that time.

We are very busy on the tissue side of our business where we are gaining significant amount of momentum. Last month you may recall that we announced that our EpiFix tissue received at the APMA -- that's American Podiatric Medical Association's seal of approval, which was a significant event for MiMedx. This seal is only granted when evidence of safety and effectiveness has been established by an appropriate laboratory or clinical investigation.

Also just two weeks ago we were at the SAWC, which is the Symposium on Advanced Wound Care. And we had a tremendous amount of interest in our EpiFix tissue. We sponsored the first day's CMA, or (technical difficulty) continuing medical education program, where two prominent physicians gave a lecture regarding amniotic tissue in wound care.

The program was sold out and had a long waiting list. Over 200 clinicians attended and we were the talk of the Symposium. Our booth was constantly busy, at times stacked three and four rows of people deep. We received a large number of leads, some of which actually scheduled a procedure with our tissue right there on the exhibit floor, which was amazing.

As I mentioned in the press release, we also launched our AmnioFix injectable during the (technical difficulty). This is a very innovative solution requiring only room temperature storage, providing a simple shelf-ready supply of injectable Amnion. We initiated a limited launch to a select group of interested physicians.

This is a pragmatic launch designed to match up our capacity build along with our ongoing clinical evaluations. It's initially being used in tendinitis applications and we are evaluating other therapeutic uses of this configuration at this time.

Changing gears to reimbursement, as Pete mentioned we continue to expect our Medicare C code for EpiFix to be in place by January. The C code will allow us -- allow reimbursement in the ambulatory surgery centers and hospitals. That code will not allow for reimbursement in the physician's office. But that will be in our next code that we are targeting, either a J or Q code, for 2013. So we are progressing very well on that front.

We are also now in the final protocol stages on three additional and separate clinical studies, two of them for EpiFix and one for AmnioFix. The EpiFix studies will be multi-center studies in wound care, and are designed to augment our reimbursement and clinical efforts. The AmnioFix study is for specialized surgery where scar issue is generally an issue, and the study will evaluate the effect of AmnioFix related to minimizing that scar tissue.

Last quarter, I shared an example story regarding the use -- one of the uses of our tissues. We continue to get stories like that very routinely.

And here is a short example that we received on Monday. A patient in Kentucky had a diabetic foot ulcer for a year and a half and was treated with multiple therapies. Eight wound vacs, four allografts, one Oasis, and one graft jacket to no avail. And ultimately had the amputation of two toes and still had the open wound. The physician was very concerned about further amputation. After only 35 days and two applications of EpiFix, the wound closed completely and further amputation was averted.

That's just one example of stories we are getting as I said on a very regular basis here, it's very powerful and we are very pleased with those results. With that, I'll turn it back over to Pete.

Thank you, Bill. Obviously you can tell our focus is on our amniotic membrane tissue grafts, or allografts. And the focus is there because that's where we are getting a lot of interest from physicians, hospitals and where our revenue is coming from primarily.

This doesn't mean that we have turned our days totally away from our CollaFix product or HydroFix product. However, we do have regulatory issues in both cases there, and we have to -- it's time-consuming. Whereas with our amniotic membrane tissue, we have a whole different regulatory situation and it allows us a great deal more flexibility.

Let me stop there and now open the call for -- excuse me. Our CFO is waving at me. I was about to leave the most important part out. Mike?

Thanks, Peter. For the quarter ended September 30, 2011, the Company recorded a revenue of approximately $2,152,000, a 12% increase over second quarter revenue of $1,929,000, and a nearly 20-fold increase of our prior year revenue of $108,000. Revenue for the nine months ended September 30th, 2011 was $5,125,000 as compared to revenue of $545,000 for the nine months ended September 30, 2010. The continued sequential quarter-over-quarter revenue growth was driven by increases in both wound care and the spine market.

As we did in the previous quarter I would like to take you through the GAAP income results, generally accepted accounting principle results, for the quarter ended and year-to-date which will then be followed by a summary of our adjusted EBITDA numbers which excludes all non-cash related expenses and is a better reflection of our cash burn.

The Company recorded a net loss of $1,766,000, or $0.02 per diluted share for the third quarter, a $738,000 improvement over the second quarter net loss of $2,504,000, or $0.03 per diluted common share. And a (technical difficulty) $[1,088,000] improvement as compared to a net loss of $2,854,000, or $0.05 per diluted common share in the third quarter of 2010.

Earnings before interest, taxes, depreciation, amortization and share-based compensation, which we refer to as adjusted EBITDA, for the third quarter of 2011 was a loss of $934,000, a $489,000 improvement as compared to the second-quarter loss of $1,423,000 and a $1,306,000 improvement compared to a loss of $2,240,000 in the third quarter of 2010. The sequential quarter-over-quarter improvement was driven by increased revenue, improved gross margins, and reductions in R&D and selling and general administrative expenses.

Adjusted EBITDA for the nine months of this year was a loss of approximately $4,675,000 as compared to a loss of $6,425,000 for the same nine-month period last year. A 27% reduction in loss is driven by increased revenue and reduced R&D spending, somewhat offset by increased spending in sales and marketing.

Included in the September year-to-date 2011 results were one-time legal, accounting and auditing costs of approximately $236,000, specifically related to the acquisition of Surgical Biologics. In terms of overall results, reported gross margins for the quarter were 60.8% as compared to 59.1% in Q2, driven by increased sales volume and a more favorable product mix. We expect this trend to continue in subsequent quarters.

R&D spending declined $177,000 or 27% as compared to the second quarter, and $358,000 or 42% as compared to prior year. Spending reductions in research and development expense were primarily in the HydroFix and CollaFix areas.

Selling, general and administrative expenses decreased 14.4% as compared to the second quarter due to lower salaries, contract labor, travel and share-based compensation expense, somewhat offset by increased spending for our sales and marketing staff. Selling, general and administrative expenses increased $897,000 as compared to prior year for the nine months ended September 30, 2010. The increase was driven by increased investments in sales and marketing, the addition of Surgical Biologics staff and share-based compensation expense.

For cash flow modeling purposes, please note that reported selling, general and administrative expenses include approximately $718,000 in the third quarter of this year, and approximately $2,650,000 for the nine months ended September 30, 2011 in non-cash related depreciation, amortization of intangibles, and share-based compensation expense. Also included in our reported net loss was approximately $86,000 for the quarter and $220,000 for the nine months ended September 30, 2011, in non-cash net discount related to the beneficial conversion feature resulting from in the money conversion option.

Turning to the balance sheet, cash on hand was approximately $637,000 at the end of the quarter, and on October [20] (technical difficulty) the Company received a $1.5 million line of credit commitment from our Chairman and CEO to fund working capital growth. As of September 30, 2011, the Company reported approximately $6,828,000 of current liabilities which included $3,850,000 for the first year earnout liability related to the acquisition of Surgical Biologics, assuming certain revenue objectives are met in 2011.

It should be noted that the earnout liability is payable in MiMedx common stock in the second quarter of 2012. Current liabilities net of the earnout reflect cash-related liabilities of $2,978,000 as compared to our current assets of $3,003,000, resulting in a current ratio of 1. It should also be noted that the current liabilities include a convertible note related to the Surgical Biologics acquisition, which is due on July 5, 2012. The note is payable in either cash or MiMedx stock at the election of the noteholders.

Moving to other significant balance sheet items, accounts receivable totaled $1,502,000 as of September 30th as compared to $162,000 as of December 31st, with the increase the result of the increased sales volume. Inventory as of September 30th, 2011 was approximately $609,000, as compared to $112,000 of December 31, 2010. The increase is the result of the planned ramp up in production based upon anticipated demand for our amniotic tissue platform.

Turning to non-current liability, in addition to the line of credit mentioned earlier, there is an additional earnout liability related to the acquisition of Surgical Biologics payable in (technical difficulty) stock in the second quarter of 2013, again assuming revenue growth objectives are met. The estimated amount as of the date of 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 in either cash or MiMedx common stock as decided by the noteholder.

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

Thank you Mike, and sorry I almost missed you. I think I want to leave you with the simple thought that there's some very exciting times ahead for your Company. There's a great deal of passion for management and the employees, which is partially driven by what we are doing to improve the quality of life of individuals -- namely, our patients.

The things that we see coming out at us every day, photographs, phone calls and e-mails, are quite stimulating and rewarding to see what happens with our amniotic membrane tissue. And cutting through a lot of the numbers that Mike had to give you, positive EBITDA is looming in our future, hopefully very soon, and I would encourage you to judge us on EBITDA performance, which is what I judge any company on at this stage of the way the accounting systems have to be reported. So, positive EBITDA is a very key goal for us and we are getting close to it.

Let me stop there now and open the call for questions and answers.

(Operator Instructions). Bruce Conway, MiMedx.

Hi Pete, I love those words breakeven. I want to ask you, though, with the likelihood of getting the CE approval of collagen, will that have any impact whatsoever on the bleepity bleep guy at the FDA here in the United States? And if we have to keep waiting for him are we going to launch in Europe before the US?

Bruce, first of all, it's been 1974 since I ran a company that wasn't at breakeven. So I am as anxious as everybody to see that happen here at MiMedx Group and we're working very hard on having that happen.

Relative to the FDA, the things we accomplish in Europe will have some impact. It's hard to tell. But most American companies today are just going to Europe. We hear continually from other companies in our situation where they're doing the same thing we are doing.

We will progress our sales with our collagen fiber through the process there in Europe, with the first product, second product and third product approvals. We will continue to push here in America on the Food and Drug Administration. I just have to say it's just a different atmosphere in terms of going through the approval in Europe than it is here and that's why we do it. Bill, you had a comment?

One of the things relative to Europe versus US, just the fact that we are on the market in Europe will not help in the US. But what we can do is collect clinical data in Europe while we are on the market, and feed that into the FDA and that kind of information can help the filings in US. But that takes time obviously to develop and gather that kind of clinical data. So that's essentially where and how it can help.

And I would just add, we are very, very blessed to have allograft tissue in our portfolio. And very, very blessed that the tissue that we do have is having exciting results that it's having for us.

Thank you, thank you.

(Operator Instructions). We have no further audio questions.

Okay. We've taken up 35 or so minutes of your time. We appreciate your joining us for the call. You know the management is generally available for questions. If you have them, pick up the phone and call us. In the meantime we are quite, quite, quite busy with moving the exciting things going on with this Company along. Thank you very much, we'll be in touch with you with other developments as they arise.

Thank you for your participation in today's conference video presentation. This concludes the presentation. Everyone may now disconnect. So have a great day.