MiMedx Group Inc (MDXG) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MiMedx Group first quarter 2014 quarterly earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). I would now like to hand the conference over to Mr. Thornton Kuntz, Vice President of Administration and Human Resources. Sir, please go ahead.

Thank you, Operator. And good morning, everyone.

This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based upon the current beliefs and expectations of our management and are subject to 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, 2013.

We do not undertake to update or revise any forward-looking statements, except as may be required by the company's disclosure obligations in filings it makes with the Securities and Exchange Commission under federal securities laws.

With that, I will turn the call over to Pete Petit, MiMedx Chairman and CEO.

Thank you, Thornton, and good morning. We appreciate you joining us for our first quarter shareholder call. I have with me Bill Taylor, our President and Chief Operating Officer, and Mike Senken, our Chief Financial Officer, Thornton Kuntz, our Vice President of Human Resources and Administration, and some other corporate officers.

First, as our press release indicated, we had a great quarter. Revenue exceeded upper end of guidance and was increased by 69% over the first quarter of last year. We had our 10th consecutive quarter of meeting or exceeding our revenue guidance. We had our ninth consecutive quarter of positive adjusted EBITDA. Our adjusted EBITDA increased by 77% over the quarter a year ago. And we added 47 direct sales professionals during the first quarter. I'm going to reiterate our second quarter revenue guidance at $21.5 million to $23.5 million and our full 2014 revenue guidance of $95 million to $110 million.

Now, I'd like to start by putting a few things in perspective relative to the growth and maturing of the amniotic membrane tissue sector of advanced wound care. I participated in bringing the new health care technology to the marketplace on numerous occasions over the decades. There will always be opportunists who wish to take advantage of new concepts and innovative products. We believe that a well-run business protects their technology through patents, but fights the tactical battles by exerting their leadership in the marketplace. Most of these initiatives must be well planned, coordinated, and managed.

The number of organizations that are attempting to enter the wound care market with amniotic membrane allografts has increased. That activity is attributed to the vision we had three years ago when we brought this innovative new technology into advanced wound care after having supplied it for use [in the eyes] for a number of years.

I'm glad everyone is beginning to see the huge opportunity that exists for certain amniotic membrane products and wound care. However, the majority of these new entrants into this market do not understand the rigors associated with the reimbursement process. To begin with, they must undertake relatively sophisticated clinical and scientific trials and publish the results in peer-reviewed level one journals. After that process is complete, which will generally take at least two years as a minimum, then the process of actually obtaining the approvals from the Medicare, intermediaries and health plans begins. That in itself is rigorous and difficult.

So when you hear about companies entering this market today, look for meaningful revenues from them several years from now. And that's assuming they have strong clinical performance, which is not necessarily a good assumption. Bill's going to talk about this in more detail shortly.

Now, we've been fairly specific about our patents. If organizations choose to bring a single amniotic product to the market with the significant disadvantages that it will have, they may avoid most of our patents. We relish positive professional competition. What we do not tolerate, will not tolerate are organizations that violate our patents and make false claims that relate to our products.

I want to discuss this issue -- the issues associated with filing patent lawsuits against the Musculoskeletal Transplant Foundation, [Laventa] (inaudible) and Medline. Obviously, we've put a lot of time, effort and funding into the development of our patent portfolio. We will continue to make investments in that portfolio. We devoted a substantial amount of staff time and legal time to crafting of our patents, and we've done it very carefully.

We currently have 13 issued patents covered in our amniotic membrane tissue allografts, and we'll have a couple more issued very shortly. In addition, you have over 50 other patents have been filed in this area. We take our responsibilities related to these (inaudible) assets very seriously, and we'll have very decisive -- and we will behave very decisively relative to enforcement of our patents.

We relish good competition because it broadens attention to the attributes of amniotic membrane technology. However, if someone wants to enter this market, then they need to develop their own technology and not steal ours. We'll aggressively file litigation to prevent the theft of our intellectual property. In the meantime, we'll continue to build our organization so that whatever's in the marketplace, whether it's in the marketplace, a federal court will continue to develop the leadership role we have.

Let me take a moment to discuss the volatility of our shares with you. This is primarily caused by short sellers, as we discussed in the past. When they come out (inaudible) they force certain individual investors out of the stock. They are artists and very good at starting a downward movement, and then they exploit it because they work together generally in groups.

The basics of this, the management of public companies has (inaudible) increased corporate value and see the stock go up accordingly. Short-sellers have (inaudible) pushing the stock lower in the short term. Those two offsetting forces should be healthy. However, they are not governed by the same laws and regulations. If a management company puts out misinformation, they're subject to litigation and prosecution. Short sellers have no such constraints. Therefore, they're free to do whatever it takes to create a wave of concern and hysteria and push the stock to lower levels.

This is the real issue the company has with trying to balance out the effects that short sellers have in the short term. What a company can effectively do is to continually provide shareholders with goals and objectives and relentlessly meet or exceed those goals. At this point, MiMedx has an excellent track record from that standpoint. We've had 10 straight quarters of meeting or exceeding our revenue estimates. Most of those have been cases where we have exceeded -- in most those cases, we've exceeded the estimates.

We've only had one surprise so far, and that was related to the [FDN title] letter. We're working through those issues. Therefore, what your management can effectively do is to continue to meet and exceed our goals, and the stock price will take care of itself.

Therefore, I think as we move forward and have additional short selling (inaudible) which I'm sure will come, I would recommend you listen to the group of people who have a significant legal overhang if we miscommunicate. That's the management at MiMedx. [Bloggers] have only one thing in mind, and that is to drive a stock price down temporarily and make a quick profit.

Also want you to keep in mind that MiMedx is a type of corporate entity that at some point will become part of a large health care organization. There will be a point where some corporate entity makes our board of directors an offer we cannot refuse. Now, on that day, if the short sellers are still involved, they will have a very bad day. Therefore, understand management is doing all the things that are legally possible to reduce this volatility. However, we're a top performing company with a lot of visibility, which makes us an ideal target for this type of short-selling activity.

I want to also bring up an issue to you that I think you'll find of interest. Yesterday at our board meeting, we presented our board a copy of a company's first-year, five-year strategic plan. With all my previous organizations, we've always had a five-year plan that was management's and the board's guide to our future. This plan was updated annually at our December board meeting, where we also thoroughly vetted the subsequent year's budget.

We will not discuss many aspects of this plan, because there are numerous competitive issues involved. From time to time, we'll provide some insights into our specific market opportunities, generally when we're about to enter a new market. Based on our five-year plan, we expect rapid revenue growth in our wound care business in 2014 and 2015. We'll project that during 2015, revenue from a number of the opportunities we have in the surgical and sports medicine area will begin to develop rapidly. Therefore, if we can execute our plans as we currently envision them, we believe we will continue to have a robust growth rate through 2018. At that time, the company will be many times larger than it will be this year in terms of revenues. We're certainly going to keep you informed as these events unfold.

Now, let me take a moment to give you some insight in how we feel second quarter will unfold. There are a number of significant issues which we think will be resolved and should provide comfort relative to our future growth possibilities.

First, we certainly hope to have some news relative to our [mechanized] tissue from our activities at the FDA. We will be providing additional data to the FDA staff during this quarter, and I hope this will be sufficient (inaudible) to complete the plans for our first [BLA] and (inaudible) transition agreement, which will delineate the regulatory possibilities of our [mechanized] product in its various forms.

Second, we're optimistic that the results of the rapid increase of our sales force and clearing up the confusion relative to the new CMS reimbursement policies will be evident in our second quarter results. We saw significant revenue momentum in March, and that certainly continues in April. The April revenue results have continued to be very strong. If this trend continues, we will provide a new second quarter forecast if the results warrant.

Third, we expect to announce the publication of some additional clinical and scientific papers during the quarter. These will continue to add to the body of evidence we have compiled on our amniotic membrane allografts. All of this work started many years ago and is beginning to show results now very rapidly.

Fourth, on a personal note, it looks like I will have my SEC trial this quarter. This will be nice to get this five-year issue resolved.

Let me make a comment about a trade show that's currently going on. It's our SAWC -- Society of Advanced Wound Care is taking place in Orlando, Florida. We've noticed that there's a significant difference this year in the booth placards and the literature being displayed by (inaudible) small competitors.

Because of our leadership role with amniotic membrane tissue, we've necessarily been very prolific with our scientific and clinical publications. Our competitors that ignore those [requirements] (inaudible) [credibility], however, we've noticed this year that everyone else has tried to get in on the clinical and scientific credibility bandwagon.

It is interesting to watch when you -- in this leadership you're your competitors are trying to emulate your successes. This new focus on clinical and scientific rigor is very good for the advanced wound care sector of health care. This is a type of leadership we've been trying to provide for the last three years.

I'm now going to turn the comments over to Bill Taylor. Bill?

Thanks, Pete.

Well, the first quarter played out essentially the way we projected it to, or slightly better, in terms of revenue. We successfully dealt with the confusion regarding the (inaudible) substitutes in the hospital outpatient setting. We significantly ramped up our sales and reimbursement organization. We had our first [pre-IND] meeting with the FDA. We received additional CMS [MAC] coverage. We saw two new peer-reviewed studies published, and we had a record revenue in the month of March. We had an excellent quarter by all reasonable means.

Regarding reimbursement, I spoke at length during the February and March shareholder call about our progress in educating facilities about CMS's new payment methodology, so I won't go into detail again here. The bottom line is that we believe most of the issues related to the change in methodology will resolve by late February, and the sales in March and so far in April reflect that. Sales this month are strong, and we reiterated our guidance of $21.5 million to $23.5 million for the second quarter.

Our focus now in terms of reimbursement is to build additional clinical data to gain additional commercial health plan coverage [to allow us] to continue differentiating (inaudible) from the competition in the advanced wound care space.

We're also building our scientific and clinical data for (inaudible) and various surgical orthopedics and sports medicine applications and the potential associated reimbursement. On the clinical front, we're called (inaudible) seven center [EpiFix VLU] or (inaudible) randomized control trial with 90 patients in it that has recently finished enrolling, and we expect to complete this study this quarter and then submit for publication.

The interim data with roughly 75% of the patients' data complete was presented at the SAWC yesterday, and it showed a statistically significant improvement over standard of care with a P value of 0.0023. Nearly 64% of the EpiFix group exhibited greater than a 40% wound closure at the four-week time point compared to only 25% in the standard of care group.

Additionally, we have two more DFU, diabetic foot ulcer, studies underway, one of which we estimate will finish enrollment this quarter. Also, a second multi-channel [VLU] study has been initiated.

We reported last quarter that all [eight MACs] would provide coverage for EpiFix, assuming, of course, that it was determined to be a reasonable and medically necessary procedure, which meant coverage in all 50 states. One development at the end of March has occurred with Novitas, which covers both jurisdiction H -- otherwise known as JH -- which includes Texas, Oklahoma, Louisiana, New Mexico, Colorado, Mississippi, and Arkansas -- and jurisdiction L, or JL, which includes Washington, D.C., Delaware, Maryland, New Jersey and Pennsylvania. Novitas issued a draft local coverage determination, or LCD, on February 6th that was to go into effect on March 27th for both jurisdictions H and L. That policy allows for payment of any [skin substitute cuco] product, including EpiFix, if the [case met the] usual medically and reasonable -- reasonable and necessary criteria.

In what appears to be a very unusual move, on the day this new LCD became effective, Novitas pulled it, which caused a great deal of confusion, as you can imagine. A few days later, they instructed that coverage would revert to the old LCD. After multiple requests for clarification by physicians and our reimbursement group, JL, the one on the East Coast, confirmed they will continue to cover EpiFix as they have over the past year or so. But JH, the one in Texas and Oklahoma and so forth, is operating on the old LCD, which does not include EpiFix. Rather, it is limited -- it has a limited group of products that it covers, mainly the two that drive a large amount of wastage, namely [aplograft] and [dermagraft], because they are single-sized products 10 to 20 times larger than the median diabetic foot ulcer.

So at this time, one of the jurisdictions within the [MAC] -- within this [MAC] covers EpiFix and the other jurisdiction does not. We're working very hard to get this turned around. Now, that said, we are still very confident we can meet our second quarter guidance of $21.5 million to $23.5 million even without this issue being clarified, and thus we've reiterated our guidance.

I'd like to also note that since this new LCD was to go into effect March 27th, we did not hire very many people in the JH region. Only about five of our recent additions were effective in this region, so those people are now focusing on [DRG surgery] cases and federal accounts. So this has been taken into consideration as we reiterated our guidance.

Now, switching gears to the sales front, our organization continues to grow. As you know, we had 76 sales professionals at the end of last year and 122 at the end of March. We're up to 128 today. And they're doing a very nice job getting up to speed on our technology and getting through the various value analysis committees.

You will recall that our estimate for them to get to 85,000 a month or $1 million in annual run rate is in six months. It's a little early to tell about this last group, [but joined at the February or later], but so far it looks like this group is on track so far with our projected [ramp rate].

So we expect our hiring rate to slow down a little bit now as we frontloaded the earlier part of this year. At this stage, we still expect it to end the year with 130 to 150 sales professionals in our direct sales organization.

Now, regarding the FDA and our efforts on the BLA, we gave a detailed update on our interim shareholder call at the end of March. To recap, we had our first FDA meeting related to our first BLA for [micronized] and we felt it was a very good meeting. The overall tone and tenor of the meeting was positive, and it was apparent that the FDA team genuinely wants to see [micronized] amniotic membrane products go successfully through this BLA regulatory process.

We're pleased with our efforts and direction so far, and we look forward to the next steps. The FDA has now assigned a project team -- and our team members will interact with them as we compile our [IND applications]. We expect a few more exchanges of dialogue in information with them before we will further our discussions related (inaudible) possible transition plans.

Next, I'm sure many of you are wondering whether our first Medtronic shipment occurred in the first quarter. It did not. I am happy to say, however, that we've received our first purchase order, and the first shipment is going out today.

As mentioned before, the initial stocking orders for their limited launch and their full launch will occur after their June national sales meeting. We are very excited about this relationship and look forward to seeing it develop. As a reminder, this is a non-exclusive agreement whereby we supply amnio (inaudible) Medtronic as a private-label (inaudible) applications.

Now, regarding our patents, earlier this week, we had two more amniotic patients issued, and we expect more in the coming weeks. Also, as you've seen by the press release on Tuesday, we initiated our first patent lawsuit, as well as additional false advertising claims. The most egregious among the false and misleading representations are statements suggesting that clinical results (inaudible) products, process, using the MiMedx [perion] process are the results of clinical tests on products -- process by [MTS] and marketed by [Laventa] and Medline. These misrepresentations also must be stopped.

MiMedx has spent millions of dollars on product development and the clinical effectiveness of our allografts is supported by numerous clinical and scientific peer-reviewed published studies. Since our allografts are the only tissue products on the market process using our patented [improved perion] process, it is misleading for [Laventa] and Medline to suggest that the clinical effectiveness of their products is the same as ours.

Now, I'd like to take a brief moment to discuss the MiMedx [process tissues] like EpiFix and AmnioFix versus other amniotic tissues that have been making some noise lately. The process used to clean and make human tissue safe for transplant, yet retain key elements such as [psyochines] and [growth factors] is critical. Not all of these processes are created equal. Many are quite harsh to the tissue and fully or mostly (inaudible) the tissue. This is a very important distinction, very important.

Our view is that the clinical success of amniotic tissue is a result of the combination of the layering or the configuration of the membrane, such as amnion only versus amnion and [coreon], as well as the method that's used to process the tissue. The multi-layer construct provides a thicker [collagen scaffold] compared to single-layer constructs.

Also, when amniotic tissue is fully or mostly (inaudible) the vast majority of the [growth factor] cytokines, enzyme inhibitors, and so forth are removed from the tissue. This leaves the tissue at the center with [just a collagen scaffold], or ECM, [extra cellular membrane]. Not much different than other types of [collagen scaffolds].

The literature shows that products that are only [collagen scaffolds] generally do not have the clinical performance of other more advanced therapies that do have the vast amounts of growth factors and other constituents like EpiFix does.

Now, you don't have to take my word for it. I suggest you look at peer-reviewed published data to make your own conclusions. We have a comprehensive list of MiMedx tissues related studied on our website. We have 14 peer-reviewed and published scientific and clinical articles on our patent-protected amniotic tissue. Most of our amniotic tissue competitors do not have any published studies.

We also have another three or four peer-reviewed scientific and clinical articles that should be published very shortly. Now, among the upcoming new publications is a characterization of the embedded growth factors, cytokines, et cetera, of our tissue. We also expect a comparative tissue publication to occur shortly. All of the processes used to process the tissue were obviously different, but what we've seen scientifically is that the [de-cellularized] de-hydrated single-layer amniotic material out there tends to have about one-twentieth or less of the growth factors, cytokines, et cetera, as our [tissue].

So not only is the process important, but our multi-layer aspects also provide meaningful differences because they significantly increase the (inaudible) [matrix elements] of the graph at sort of a deeper repository of the growth factors.

As a frame of reference, our multi-layered tissue has about five times the cytokines and growth factors of single-layer amnion when both are processed by our proprietary [purion] process. So that gives you frame of reference.

And as [is becoming] quite evident with the publications focusing on our [purion] process tissue, these growth factors are a critical element in the tissue's function in helping to heal chronic wounds. Here's one example. Many of you have heard about a new entrant to our field, [Elegua]. They have a single-layer, de-cellularized, dehydrated amnion tissue called [biovenes]. Actually, it is not new. They licensed it from Celgene, who used to be in the amnion business a number of years ago and discontinued it.

Based on what we've seen scientifically with single-layer, de-cellularized amniotic tissue having one-twentieth (inaudible) growth factors and cytokines compared to EpiFix, our scientists and clinicians postulate that a tissue like [biovenes] would only marginally be better than conservative therapy. In fact, a published paper in the wound care journal in April of 2009 highlighted a small study of [biovenes] used in diabetic foot ulcers. The results of that small study indeed came out as we would have predicted, whereby only four diabetic foot ulcers out of 14 were healed in 12 weeks. That's four out of 14. It's about 29%. This data speaks for itself.

So [did ours]. Only our studies show a much, much higher success rate. So like I said earlier, [process amniotic tissue] is not all equal. Most competitive processes are [very harsh] to the tissue in that they remove the vast majority of the elements that play a role in helping wounds, particularly chronic wounds, heal. Our patent protected tissues preserve these characteristics and generate clinical results that are world-class.

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

Bill, thank you.

Okay, it's Mike Senken's turn. Mike?

Thanks, Pete.

The company recorded revenues for the first quarter of approximately $19.6 million, an increase of 69% or $8 million over prior year first quarter revenue of $11.6 million. Beginning with the first quarter 2014 (inaudible) be reporting revenue in two, rather than three revenue categories as we had in the past. The first is wound care, which now includes both the [sheet and powdered] versions. The second category is surgical, sports medicine, and [OEM], or SSO, for short, which includes our amnio [fix sheet] and injectable version, our OEM products for spine, orthopedics and surgical applications, as well as [abomic] and dental applications. As a reminder, MiMedx decided to exit the [hydrafix] business in Q4 of 2013.

Based upon this new reporting format, wound care revenue represented 75% of total revenue at $14.7 million, with the SSO revenue coming in at $4.9 million. Wound care revenue growth was driven by increased penetration in commercial accounts, as well as continued growth in government accounts. Gross margins for the quarter were 85% as compared to 84% in the first quarter of 2013. Improvement in growth margins was driven by both products and customer mix.

R&D expense for the quarter were approximately $1.4 million, or 7%, of quarterly revenue, which represents an increase of 11%, as compared to prior years. The increase in R&D spending is driven primarily by increased investments in clinical trials. Selling, general and administrative expense was approximately $50.9 million for the quarter, or 81% of total revenue. The increase in spending reflects the accelerated build-out of our direct sales force.

In the first quarter, the company added 46 new direct sales associates, bringing the total to 122, while also adding an additional 11 reimbursement associates to provide assistance to customer claims staff. The company reported positive adjusted EBITDA of approximately $2 million for the quarter ended March 31, 2014, which is a $900,000 improvement as compared to an adjusted EBITDA of $1.1 million in the first quarter of 2013.

It is the ninth consecutive quarter of reporting positive adjusted EBITDA. Year-over-year improvement in adjusted EBITDA is a result of higher sales volume and improved gross margins. Included in this morning's press release is a reconciliation of adjusted EBITDA to reported net loss.

The net loss for the first quarter was approximately $900,000, or $0.01 per diluted common share, as compared to the reported net loss of $1.6 million or $0.02 per diluted common share for the quarter ended March 31, 2013. It should be noted that the 2013 first quarter net loss included financing expense of approximately $1.3 million related to the debt discount on our senior secured promissory notes.

Turning now to the balance sheet, the company reported approximately $67.9 million in total current assets, an increase of approximately $2.5 million as compared to $65.4 million as of December 31, 2013. The increase includes $2.9 million in accounts receivable due to higher sales volume, as well as an increase in prepaid expense and other current assets related to trade shows, sales support and training activities, somewhat offset by a decrease in cash of $1 million and a decrease in inventory of approximately $241,000. Total assets were $87.3 million, an increase of $2.7 million, as compared to December 31, 2013.

The company reported $9.6 million in total liabilities with zero debt on the balance sheet, which is unchanged from year end. The current ratio improved to 7.9 as of March 31, 2014, as compared to 7.6 as of December 31, 2013. Total stockholders equity increased by $2.7 million to $76.2 million as compared to $73.6 million as of December 31, 2013. There were approximately 105.8 million shares of common stock outstanding, 258,000 warrants, 17.1 million stock options, and 900,000 restricted stock units outstanding as of March 31, 2013.

Turning now to cash flow, the company reported negative cash flow from operating activities of approximately $1.6 million for the quarter as compared to a negative $2.1 million for the quarter ended March 31, 2013. The negative cash flow from operating activities for the quarter was driven mainly by an increase in working capital as a result of our sales growth.

Cash used in investing activities in the quarter included capital expenditures and patent application costs of approximately $634,000. Capital expenses included IT infrastructure and production processing equipment in support of our continued growth. Cash flow from financing activities for the quarter were approximately $1.2 million, primarily from the exercise of stock warrants and options.

The company did not draw down on its working capital line of credit during the quarter. And finally, total headcount at the end of the quarter was 288 associates, which represents an increase of 66 as compared to December 31, 2013.

With that, I'll turn the call back over to Pete.

Thank you, Mike. Let's throw the call open now to questions.

Thank you. [Operator Instructions] Our first question comes from the line of [Bill Plaganick] from Canaccord.

Great, thank you. Good morning. Can you hear me okay?

Yep.

Yep.

Morning, [Bill].

Morning. So I apologize if it's noisy. I'm actually at the SAWC. My question is, first, you know, you had a very strong quarter in the wound care, if you look at that year-over-year increase, and I'm trying to get a handle on, you know, the only hole I can poke in this is your surgical -- your SSO division was a little lighter than we're looking for. And I'm wondering, about how much revenues did you shift from that -- that division as it was measured under the old way to the new way (inaudible) wound care? So from (inaudible) just to kind of help me work through my numbers.

And then my second question is, with all these reps coming on, I think historically it's taking 6 to 9 months. You know, with the last batch, how quickly did they ramp up to that $1 million run rate? And do you think that this next group would be any different from the last batch?

[Bill], if we look at this year versus last year, of course, last year, we had said very often on these calls that we've reported all of our injectable as part of (inaudible) as part of the surgical and sports medicine group.

And then over the course of last year, we introduced SKUs specifically for wound care applications, but we did continue to report the [micronized] and surgical and sports medicine for consistency's sake.

We have also said on calls that in trying to go back and determine how much of the [micronized] was being used in wound care applications, we did some analysis on our TUR cards, our tissue utilization records, and in that analysis, it appeared as though almost 50% of the [micronized] product was actually being used in wound care applications.

Is there an impact -- if you compare year-over-year and the fact that, you know, the numbers would show a $500,000 decline? The answer is yes, because now we have what we're calling our powdered product, which is the [micronized] product, in wound care. But to quantify it specifically, that's difficult.

Now, that all being said, I think one other comment on the first quarter in terms of the SSO group, keep in mind that that group includes a distributor sales. And, you know, over our history with distributor sales, we've seen them move up and down, so they're lumpy. We had a very strong fourth quarter in terms of distributor sales in the AmnioFix platform and the injectables related to that. And it was not as robust in the first quarter, but that's normal. It has -- it was no indication that there was any softness coming from the SSO group.

And I'll add also in there, just if we were -- and I don't have the exact numbers in front of me -- but if we did look at these numbers like we did last year, when all of our [micronized] were in the wound care, which -- that's why we've changed it now -- or, excuse me, we're in surgical and sports medicine rather than wound care, the -- if we (inaudible) obviously, our wound care numbers would be down and our surgical and sports medicine would be up, because everything was in the surgical and sports medicine section.

So moving on to your next question on the reps, we are seeing -- I think our last batch on average, we're looking at that right around six or seven months to get up to the $1 million run rate. This batch of people, I think, are looking very similar to that. We do have a few glimmers that are actually people that are actually quicker than that. It's a little too early to give you kind of an estimate on what we think the whole group's going to do.

I think what I can say, though, is that based on what we've seen so far, we still feel very comfortable with the six-month estimate. We don't see anything that's going to drag out to be longer than that, based on what we can see right now. A few people have actually gotten off to some really, really quick starts, which is great.

And then for clarity, you know, Mike, I don't know if you have this on your fingertips. Maybe you can look through and give (inaudible) but what would the wound care (inaudible) if you reported the numbers the same way in Q1 as you did all of last year?

And then, have you seen any impact from the FDA discussions about the [micronized] version, you know, impacting that business with your customer base? And that's all I have, and congratulations on the good quarter.

I'll comment on your last question. We have necessarily been very conservative with the way we've shown our [micronized] in the marketplace, our conversations with the FDA, I think, as Bill said, are going very, very smoothly. And we're doing things that a prudent management group would do under the circumstances.

We have not really been aggressive in terms of promoting our [micronized] version of the product, because of -- until we clear that hurdle with FDA, we don't expect and want to do that. So that's kind of the...

If I could (inaudible)

Go ahead.

Okay. We don't advertise on the [micronized]. Now we're just letting the orders come in, as they have (inaudible) haven't pulled them back, but we're not incrementally doing any advertisement.

Okay. And on your other question, [Bill], quite frankly, you know, we've resisted reporting any numbers on [micronized] really for competitive reasons, but let me give you a different perspective on this. You know, we said coming into this year a significant amount of our growth is going to come from commercial wound care. And on the commercial side, in terms of wound care, that is primarily in the sheet form. That is not in the powdered form. And the growth in the first quarter was very significant on the commercial side.

Great, thank you very much.

Thank you. And our next question comes from the line of [Matt Hewitt] from Craig-Hallum.

Good morning, gentlemen. Congratulations on the great quarter.

Thanks, [Matt].

Thanks, [Matt].

As I look at the trajectory over the last couple of quarters and your progress on the profitability side, how should we be thinking about when and -- well, when over the near term you may hit actually positive GAAP EPS? Is that something that you foresee here in the second quarter, just kind of looking at the way your revenues have grown? And I acknowledge that you've been ramping up sales and marketing with some of the other infrastructure to support that growth, but will you break even here in Q2?

Let me answer that, [Matt]. I'll start by saying this. Everyone should understand that our business focus has been on building the footprint in wound care as rapid as possible because of the significant weakness of our primary competitors. When you have that kind of weakness, you exploit it.

We had an opportunity to bring a number of excellent people in, primarily sales to organizations in the first quarter. We now have to let them exploit their expertise and establish their presence in their respective markets. So wound care revenue has been our focus, but I also know and we all know that the question you just asked is going to begin to be one of the primary questions we have to deal with.

I believe, if you examine our private law statements, you know it's not going to take much in the way of revenue to continue to build EBITDA as a percent of revenue strongly. And then it's going to [pop operating] profit and then after tax profit.

So you can do your math. We don't expect to see any major change in our [gross profit margins]. And it's all revenue-dependent. And the issue is simply this. When we do pass through operating profit break even, from that point forward, our operating profits will increase very rapidly as revenues go up. That's the operating leverage we have, and that's the beauty of our financial model. And the nice thing to have play out when you're exhibiting the kind of gross profit margins we have.

So we're not going to give you an answer, because we don't know the answer, but we'd simply say that, when you get to the revenues we're projecting for second quarter, we should be getting fairly close. And, again, once we pass through that breakeven, the numbers are going to increase dramatically or fast.

Maybe I can inject one other point specifically on the second quarter, and that is, [Matt], you know, obviously, we added a lot of people in the first quarter. You know, a number of them over the course of the quarter, and so they didn't start on January 1. And so you should expect, you know, absolute dollars of SG&A to increase in the second quarter just because you're going to have a full quarter's worth of run rate in terms of expenses. Now, how much that is in relation to -- to our revenue and our margins will certainly dictate what the -- what falls through the bottom line.

Okay, all right. So -- and I guess the follow-up to that -- and I realize that -- especially as we get into later this year and more importantly into next year, as you start working through some of those biologic licenses and the necessary trial work.

But as far as once you do break through profitability, is it your expectation or intention over the near term to just kind of maybe spend the overage so that you're covering -- you know, kind of hovering around breakeven? Or once you break through, even though you're going to be, you know, investing a fair amount in some of the biologic license initiatives, will we still see a pretty nice progression in your operating income and net income, for that matter?

[Matt], to be frank about it, which we generally are, once we break -- you look at the operating leverage we have, once we break through the revenue levels, it'll start giving us operating profits, it's going to move very dramatically regardless of what we do.

Okay.

We won't be able to -- we [won't spend] that dramatic. And, you know, we've analyzed this around every week. So once -- we shouldn't be too concerned about this company producing operating profits and after-tax profits. It's going to happen. When it happens, it's going to be very dramatic.

We're doing some things now that prudential management would do, but Bill Taylor and I -- and for that matter, Mike and the rest of the execs around here -- we understand cash is king. We'll continue to grow cash. We're going to be very profitable, unless something dramatic happens that [curtail] revenues, and we don't see that happening at this point.

Okay, maybe just two follow-ups or two additional questions, anyway. Picked up last night that your partner for the government side, [Afcare], was awarded $150,000 purchase contract for the injectable EpiFix and AmnioFix. And I'm just curious, you know, the award looks pretty clear. It must be FDA approved. But I'm curious if that gives you some leverage when you're meeting and talking with the FDA, saying, you know, here, the U.S. Army wants to use our products, we should be allowed to continue selling this while we work towards a biologic license. Or am I reading too much into it?

Well, [Matt], you've given us a little bit of a surprise. I got a phone call this morning from the principal of [Afcare], which I didn't have time to take because of this call. So maybe he's passing something onto us that you picked up before we have, but it sounds like it's good news. We just don't know it -- don't about it at this moment.

All right. And then maybe one last one. And this is probably a little bit more for Mike. As far as with this -- with the announced lawsuits, how should we be, you know, thinking or modeling legal expense going forward?

Well, that's a good question. I think if I was in the management of these other companies, I would probably do what prudently they should do, is I'd just back off. There's not a lot of revenue yet in any of these organizations. And in the case of [MTF], they had a $26 million patent infringement suit they lost about three years ago.

And I don't know whether we want to go down that path again. We're just going to have to see. But we certainly have the capital to pursue this to any degree we desire. And I hope that these people will be reasonable and we'll -- they'll respect what we've done here in terms of our patent portfolio and notifying them of the violations. But we'll see what plays out. There will be a legal process back and forth on that.

Yeah, I don't think we foresee it as having a material impact on our results, [Matt].

Perfect. That's what I wanted to hear. All right, great. Thanks, guys, and congratulations again on the success you've been having.

Thanks, [Matt].

Thanks, [Matt].

Thank you. [Operator Instructions] Our next question comes from the line of Bruce Jackson from Lake Street Capital.

Good morning. If I could follow up on the reimbursement comments that you made in the 8-K with the Blue Cross Blue Shield plans, can you just remind us how many covered lives that those 23 Blue Cross Blue Shield plans address? And then, also, if you could remind us, what percent of the wound care market is Medicare versus commercial pay?

Bruce, it turns out [Debbie Bean], who is the executive, will have that right off the tip of her tongue, is not in the room with us. I have actually some of that on my desk, but I don't have it off the top of my head, either. Neither does Bill or Mike.

So ask another question. I'll depart the room and try to come back with that document.

Okay. Next question is about the Medtronic shipment. So that went out today. Can you just tell us a little bit about the -- sort of how this thing is going to calendarize over the course of the year? So we've got the first stocking order going out this quarter. Then when do you think the sales are going to kind of fall into a more normalized rate for the OEM shipments?

Okay. Well, let me just kind of rehash what we've said before. Previously, we've indicated that we had in our plan roughly $1 million this year in our budget for that. As a frame of reference, we disclosed it last year, one of our large -- or, really, our largest [surgical and sports medicine] distributor last year was roughly $6 million in revenue, and they're a regional supplier of metal and so forth, spine surgery and other types of surgeries. They both -- purchase both the [sheet form], as well as the injectable form, and they were about $6 million last year. So that gives you a frame of reference in a small, regional company versus a large company like Medtronic in the long term.

In terms of the build-up here, this initial order was kind of -- the initial order for their [limited locks] that they're doing right now with a few of their distributors, and then they expect to do the full launch after their June national sales meeting. Their fiscal year, I believe, is May 1st, if I remember correctly, through the end of April, so they have a little different fiscal year than the calendar.

So we expect then through the back half of the year that those numbers will build. But, again, I think the first few orders will be kind of stocking orders. It'll take probably another month or two after that to see how it levels out and see what kind of normal [overing patterns] are going to be for them. So I think by the end of the year, we should have a little better visibility to what those normal patterns look like.

Bruce, I have the document in my hand that should be reasonably accurate. In terms of the Blue Cross Blue Shield or the other health plans that we currently have coverage with, it looks like about 51 million-plus covered lives. You know, the largest of those we've announced previously is [HCSC]. There's about 14 million lives there.

So -- and the rest of this sheet is some of our goals, and we finish out all these large health plans, the rest of the health plans, should be about 215,000 covered lives, so...

Million.

Million, excuse me. Million, million. So...

Incremental.

So we're probably -- got a ways to go, but we're quite busy, and I'm very focused [on throwing in the] rest of these health plans.

Okay. And then can you remind us just what percent of the market is Medicare on the wound care side?

75%.

That's 75%. Okay. Then last question, just on the process with the FDA, do you have the next meeting scheduled yet? Will there be any meetings after the next meeting? And when roughly do you think you might have resolution on these issues?

What I've said is that I hope to have resolution for shareholders second quarter. So everybody can figure out what that date is.

Okay. Thank you very much.

Thank you.

Thanks, Bruce.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of [Siraj Kalya] from [Northland Securities].

Good morning, gentlemen.

Morning.

Morning.

So, Bill and Mike, I just -- let me start out with a couple of financial questions. I guess at -- you know, your guidance for the year, the midpoint is $100 million. And Q4, you know, roughly, our math indicates it has to come close to $30 million. And if you choose the top end of the guidance, the math indicated it would have been plus or minus $40 million.

I guess I'm just curious how you're seeing the progression, what you're factoring in from Medtronic contribution, and, you know, you obviously have worked out the math. And I'm curious, you know, your internal analysis for Q4, specifically, you know, as we are going to anniversary the reimbursement, current reimbursement and then people are going to start preparing for the new reimbursement landscape?

Okay. Really, you know, the midpoint [actually] we've adjusted our numbers [of 95 to 110 for the midpoint, 102.5]. And our progression, I think we have a very strong progression. Just to get to that midpoint, though, I think the progress is not quite as high as what you just indicated. I think based on our numbers, I think the fourth quarter is more like in the low 30s. Third quarter will be in the high 20s. And that would get us to roughly 103, if you look at the midpoint. So I'm not exactly sure where you got the -- such a high number there on the [40 side].

Your numbers seem too high, [Raj].

I'm just factoring in based on, you know, the progression guidance for Q2, factoring in Q3, but I guess, irrespective, you know, of 30 million or 32 million, I guess what I'm trying to understand is, is -- you know, we're going to see a significant step up. Q4 is going to be quite a bit of -- at least we would think a quarter in flux. And I'm just curious, you know, how you all are thinking about Q4 from a Medtronic perspective and, you know, and in the market in general perspective.

Yeah, on the wound care side, really, the flux really doesn't come into consideration on the wound care side unless there's a big change, like there was this year, and that flux happened actually in the first quarter, not the fourth quarter last year. So, you know, we expect that in -- in July, we'll hear from CMS if they are planning on making any changes to the reimbursement. And, again, we've mentioned it before that [with the large change] they made this year, typically they don't make another very large change.

It doesn't mean they won't, but typically they don't. We expect that they'll probably make some tweaks to it, and as we've mentioned before, we gave them data, met with them a month or two ago, and made a suggestion to them to add another tier for very large wounds, because we think the data leads to that kind of conclusion. We presented that to them.

So in terms of the tail end of the year, we do expect that we'll start having some building revenue from Medtronic, and potentially, you know, other [ads] you mentioned before that we're -- we cannot commercialize [this technology] on the surgical and sports meta side -- medicine side only on our own, so we continue to have conversations with companies, as well.

But on the -- on the wound care side, I want to focus on that. We've added now over 50 people since the end of last year. Most of them were added between February and April. So over 50 sales reps now added between February and April. If you just do the math out on them, when they are projected to hit their $1 million run rate six months from, say, March, puts you into a very sizable fourth quarter.

So I think that should help you kind of see how the progression builds. And, again, I'll remind you that we only had 76 people at the end of last quarter, so we've increased the number of salespeople by more than -- more than two-thirds, so it's a huge difference.

Let me make a quick comment about Medtronic. Again, we've been very conservative with our discussion about where that private-label contract can go and which will remain, because we don't have the insight yet. But I don't think Medtronic -- and the largest device manufacturer in the world -- is going to come to Marietta, Georgia, and negotiate with a company of our size without having some significant ideas about the size of a marketing (inaudible) product.

They have 40% of the U.S. [fine] market. And our product will [ride in] with a lot of those procedures. So we expect to see some robust growth. We just don't know exactly when it will come, how fast it'll develop, because we don't think Medtronic would have come here with, you know, small niche market in mind without having some clearly robust plans.

Fair enough. Pete or Bill, you know, one of the other callers earlier asked about profitability. Let me kind of rephrase that question. How do you see leveragability in this model? You know, you all have done a phenomenal job so far in terms of bringing people on board, capitalizing on competitor [woes], and, you know, on growing the market for yourself. And, Pete, you right said, there will be a certain point.

I guess I'm just trying to understand, you know, if I -- I don't remember correctly, if you all have ever said about [comp structures] for reps, but from the current level of SG&A, how do you see it playing out over the next, I would say, 24 months that would give us some sense of, you know, okay, now, you know, EBIT margins are going to start moving up? You know, it's -- because the [gross margins], to us, it seems like it's relatively going to flatten out. They don't have too much room to grow. And what's going to happen in the OPEX line, you know, at least from a qualitative perspective?

Well, I think you're absolutely correct. Gross margins are probably going to be stable in this range. And, you know, over next several years, we might have some downward pressure on them.

But a company that has this kind of operating leverage, gross margins where they are, the kind of product we have and the markets we serve, we're going to be an operating profit company of 30%. And I'm not going to [talk today] about when that might occur, because I don't know, or I can tell you. It's the kind of companies that Bill Taylor and Pete Petit have run before. With this kind of operating leverage, we ought to get there.

We focus -- have been focused very much on EBITDA margin, because there's a lot of accounting noncash charges that get dropped in on our [private loss] statements. So, you know, we're passing through EBITDA margins at 10%, 20%, 30%, and beyond, and operating profit will follow, you know, right behind that. So we will be a nicely profitable, high operating profit company. Whether it's 12 months from now or 24 months from now, that's going to begin to show itself.

And there's not much we can do about it. You cannot -- you won't be able to spend -- and it wouldn't be prudent to spend, in terms of just expenses -- unless we have the kind of opportunity we just had in wound care. We've been, I think, very, very prudent in the way we've reached out and taken market share because of some weaknesses. It wasn't because of our necessary all of our strengths. It's some competitive weaknesses. We've taken advantage of that.

But as that -- as that begins to play out, the operating profits will show themselves, and they'll be very -- once they show themselves, they'll develop very strongly and gradually.

Fair enough. Gentlemen, thank you for taking my questions.

Thanks.

Thanks, [Raj]. Appreciate it.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back to management for any concluding comments.

Well, thank you. I think we had an excellent Q&A session, and the key questions are getting answered, hopefully, and you're getting some comfort around those. We appreciate your confidence in the company, confidence in the management, and we look forward to continuing to provide you with informative press releases as information becomes available. Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.