MiMedx Group Inc (MDXG) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MiMedx Group Incorporated Q3 2014 Quarterly Earnings Conference 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 introduce your host for this conference call, Thornton Kuntz, Senior Vice President, Administration. You may begin.

Thank you, Kevin. 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 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 Securities and Exchange Commission including our Form 10-K for the year-ended December 31, 2013, 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 in filings it makes with the Securities and Exchange Commission under Federal Securities laws.

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

Thank you, Thornton. Good morning. We appreciate you joining us for our third quarter shareholder call. I have with me today Bill Taylor, our President and Chief Operating Officer; and Mike Senken, our Chief Financial Officer. There are also some other corporate executives with us.

I'll begin by stating that I classify this as an excellent quarter. We significantly achieved the goals, exceeded the goals that we'd set. I'm going to go ahead and highlight a few achievements that I consider very significant.

We had our first quarterly operating profit, and it was 11% of revenues. That's probably more than was expected. We had 11th consecutive quarter of positive adjusted EBITDA, which to me, is a key metric for any corporate entity today because the accounting rules have gotten so complicated that if you don't focus on adjusted EBITDA, you can miss a lot of progress the company is making.

Cash flow from operating activities grew to 8.5 million, considerable achievement, and as we all know, cash is king, so our chief financial officers are ecstatic. Wound Care sales grew about 184%, very significant because of course that's where our focus has been. It's our 12th consecutive quarter, leading or exceeding revenue guidance. That's becoming routine and hope we'll continue that.

Another significant issue, accounting-wise, is our day sales outstanding and accounts receivable decreased significantly from 72 days down to 63 days. That clearly demonstrates our product is efficiently flowing through our channels, and there is no overstocking because people paying in a timely way. Also, there is a credit to our accounting department, their collection activities. Finally, our VA, our federal sales grew 20% quarter-over-quarter. That's just certainly and to spell any miss that we're going to lose market share, et cetera, et cetera.

Now, I mentioned in our second quarter report that we expected to show an operating profit in the third quarter. We've certainly done so with a great start of having operating profit of 11% of revenues. While we gave no guidance on that number, I expect most people thought that number would be coming at a much smaller percentage. However, I've mentioned numerous times that with operating leverage, when we did cross operating profit breakeven, profits would escalate rapidly. We still expect that to be the case.

Now I want to make one strong caveat. We will continue to invest in those corporate assets that give us triple-digit returns on investment and appears to can be as less than a year. That's what is occurring as we've invested in our sales force and certain other product-related assets. Therefore, the operating profit as a percent of revenue may fluctuate somewhat significantly from quarter-to-quarter, but we continue to increase that percentage as we progress.

Additionally, I've given some insight in the way that we expect 2015 to develop such that we would show approximately 15% of operating profit for the 2015 year. We will get very specific on that when we provide our detailed guidance for next year about mid-December after we have our board meeting.

I've been particularly pleased to see our revenues escalate rapidly in the second and third quarter. As you will recall, our first quarter was somewhat light because we did not exceed our forecast. We were in the range but did not exceed. We gave fair warning that because the major Medicare pricing change that was occurring during that quarter, we expected many of the wound care centers will be figuring out billing and not moving to advanced wound care as quickly as ordinarily they would.

That certainly happened, but I think the second and third quarter performance clearly demonstrates the return on investment we've obtained as we brought in these new and very qualified salespersons to organization and have the most effective products in the market and have reimbursement. I hope you got a chance either to be at our analyst meeting two weeks ago. I have taken the time to listen to it on the connection to our webcast. Eight of our executives made presentations, and I think we certainly cleared up many of the miss and concerns related to the company's future. We've had an excellent response from our shareholders, and we detected many understand the company and our future prospects much better.

I want to repeat a couple of very important themes from the analyst meeting. Those are the MiMedx is a regenerative medicine company with a platform technology that will be used in numerous healthcare procedures. The second thing was that all amniotic membrane allografts are not created equal.

Years of effort went into the perfection of the PURION Process, which is used to turn role of amniotic membrane into our single, as well as multi-layered allografts. They are now in proprietary techniques for producing a very effective allografts. Also, we have 17 patents that have issued and are allowed, and we've filed over 70 patents for U.S., as well as international.

Most important, we've now published several scientific papers and peer-reviewed journals that established clearly that our allografts retain much more of the key proteins, growth factors, and cytokines and our competitors allografts have. From the lab tests that were conducted by outside sources on all of these grafts, it is evident that many of them have less than 15% of the growth factors that are retained in our PURION Process grafts.

Why would a customer even pay a lower price when they are getting a graft that is only 15% [of healing power graphic fixed grafts]. The answer we are going to give you today is they will not. Thus, you should clearly view us as a new leader in advanced wound care, and we are taking our platform technology to other areas such as surgical procedures, orthopedic procedures, and sports medicine. We gave considerable backgrounds on those endeavors in the analyst meeting discussions.

Along those lines in the third quarter, we announced a private label partnership with Zimmer, one of the largest device manufacturers. We previously announced our private label relationship with Medtronic, the largest device manufacturer in the world. We are providing Medtronic AmnioFix products for use in spinal surgeries, and the Zimmer for using spine, orthopedics, and sports medicine. So we definitely have a good start developing the other opportunities for our regenerative with the allografts.

Also, I now want to emphasize the fact that two of the largest device manufactures in the world have signed private label agreements for our technology, which should be a clear indication to our shareholders that our technology and our business process and procedures are mature and can withstand their due diligence examinations.

One other point I would like to make clear again is that the financial guidance we provided you previously and reaffirm today assumes a worst-case scenario relative to our Micronas product and those related FDA issues, and any of our products that may have any issues with that matter. We have been conservative with our forecast, and that is why we have a track record of meeting our forecast. That conservative philosophy will remain intact.

I will remind you one more time that a forecast that management has provided are not going to be achieved then we will always give you plenty of notice so that as a quarter progresses, please know that no news is good news. This means that the company is progressing on plan, and we will show revenue and profits in the range that we are providing.

One of the other things from analyst meeting was that we have a very detailed five-year business plan and we are executing on it. That plan shows very clearly where we would be in terms of our leadership in the advanced wound care area. It all says a very specific goal for other areas of regenerative medicine, where our tissue will be used in surgical procedures and orthopedic procedures and in sports medicine.

With that explained verbally, as well as it's about published scientific and clinical publications, which of course are most important, that all amniotic membrane allografts are not created equal. MiMedx knows more about amniotic membrane allografts than anyone else, and we will continue to build and explore that knowledge.

As I mentioned in the analyst meeting, if we focus on our future beyond these particular therapies, then we must necessarily focus on stem cell therapy. I pointed out that the major problem with stem cell therapies today is a problem of engraftment. This means that stem cells do not remain where they are placed long enough to achieve their potential impact. In layman's terms, injected stem cells are here today and gone tomorrow.

We mentioned our PURION Process amniotic membrane doesn't deposit fragile, weakened cells, harvested from external sources on or into a sight, but instead uses potent natural biologic active allografts to track robust stem cell populations from nearby tissues, and then circulating blood in a balance regenerative process. This works extremely well as our clinical studies and scientific studies have demonstrated. We hope to be able to part of some of the most successful stem cell companies to assist with their technology in achieving some of their goals if they are falling short because of the engraftment issues.

Now, I'm going to let Bill Taylor discuss some of the operating aspects of our quarter and some of other business issues. Bill?

Thanks, Pete. Good morning, everyone. Our momentum continues as was evidenced by our very strong third quarter, both in terms of revenue growth as well as bottom line growth. It was an excellent quarter on all fronts. The new sales personnel that we bought in early in the year have been stepping up and delivering as we anticipated. We have strong growth in commercial Wound Care as well as strong growth in federal sales. The group of sales professionals we bought in late first quarter have generally ramped up strong, and our recent hires in the third quarter have started quickly.

We continue to make progress in many other areas such as commercial EpiFix coverage with multiple new plants covering EpiFix including Cigna. And we progressed several clinical studies forward with one very strong, multi-center DFU trial that we expect will be published in the next few weeks.

I'll go into more of the detail in several of these areas starting now with sales. Like last quarter, I want to highlight our quarter-over-quarter sales growth. We had an incremental $7.9 million in growth quarter-to-quarter, which is more than our entire revenue just eight quarters ago. This is a testament to our technology and team because, believe me, this kind of growth is not easy in terms of new sales hires increased from about 128 at the time of our Q2 shareholder call, it's up over 150 today, and we are on track to be at 160 or more in our field sales organization by yearend. Most of these new additions have been targeted and are in the process of being hired.

The vast majority of the sales reps hired earlier this year are focused on Wound Care. Now many of the new hires we are currently bringing on board will begin to build our expertise in some of our other specialty areas not just Wound Care. I won't go into detail on which especially we are hiring in right now but I will do so at a future date.

At this stage, I also want to highlight one of Pete's comments. Now that we've achieved our first quarterly operating profit, it's important to note that we will likely have fluctuations in our operating margins as we continue to grow aggressively particularly when it comes to our sales expenses.

While we try to hire on a recently consistent ramp rate, the reality is that our hiring can be a little bit lumpy with larger 10- or 20-person hiring classes at a time. And because we are focusing these efforts and we want to leverage our competitive advantage, we tend to hire groups of sales professionals at any given time. So this will create some quarter-to-quarter variations, but generally speaking, over several quarter period of time, we expect to see the operating margin grow.

Now, I'd also like to point out the growth of our federal business, which increased 20% quarter-over-quarter. We've expanded our federal business, and it continues to be strong. Although we have heard some noise from competitors in these accounts, they're not having a noticeable effect on our overall federal business. So while this business can be somewhat be seasonal, we do expect for it to continue to grow over the coming quarters.

Regarding clinical and scientific studies. Recall that we have announced two scientific publications and one clinical publication during this past quarter. One of the scientific studies showed a competitive comparison of our PURION Processed tissue versus competitive dehydrated amniotic tissue. Essentially, it shows our grafts have about 20 times of cytokines as compared to the tested single layer competitors.

The other scientific publication highlighted the cell recruiting ability of our allografts. And on the clinical front, we're the first among all of our competitors to have a peer-reviewed publication of a multicenter, randomized controlled study of our amniotic tissue using, used with venous leg ulcers. We're very pleased with the results and the study's publication in wound care repair and regeneration.

Also, as you heard at our analyst meeting, we have a large number of additional clinical studies underway, and in fact, our latest multicenter DFU RCT is expected to be published sometime in the next several weeks. So stay tuned on that one.

Also as we discussed at the analyst day, two weeks ago, the FDA has accepted our IND application, and we're moving forward with a clinical site selection in preparation for the initiation of our plantar fasciitis clinical trial related to our first anticipated BLA.

I'd like to point out that we're able to go through this process and get the FDA's go ahead in 30 days, which for our first IND was a major accomplishment for our team. We're very proud of our scientific and clinical teams, as many companies in our first time position would likely have been on clinical hold at that 30-day period until they were able to address the FDA's issues. So I'd also like to applaud the FDA staff that our team interfaced with as they were very supportive when we had questions and issues arise.

So one final point here, we mentioned previously that in this process, we expected that because of our commercial and clinical experience with the micronized product, we expected that we would be able to move relatively quickly through the process. This first IND study is classified as a 2B study. Because of our safety data in clinical experience, we were able to skip the Phase 1 and Phase 2A studies. So we're quite pleased with where we are related to this progress on our first BLA.

Now, changing subjects to the IP front, at the last shareholder call, we were up to 15 issued patents, and since then, two more have been allowed and should be issued soon. We continue to be very focused on developing additional IP to build upon our market-leading amniotic tissue patent portfolio. As we mentioned in our press release last week, both of our current lawsuits are in the discovery phase and then in the claim construction phase, which is progressing as we anticipated. We also outlined the expected next steps in the process. So as the cases progress, we will give updates periodically.

And as we've said many times, the market is quite large, so there is room for good competition. We just want everyone to make their own innovations and not try to copy ours.

Now, related to that topic, I want to highlight something we discussed at length in our analyst meeting. Some of our competitors claim they are "just like EpiFix." Well, none of these competitor companies have data that supports that claim. They may try to copy us, but our data, as well as our external lab data, as published in peer-reviewed index journals, proved that none of our competitors can match our tissue in terms of our overall growth factor, cytokine, and chemokine content. In fact some of our competitors have tried to intimate or imply that their tissues are better than ours, yet they never actually reference which specific product they're comparing to. Frankly, that approach is just not good science, and why not clearly identify the product they're comparing to. The answer is very simple, they just can't compare to our products.

We chose a very simple approach, a much simpler approach. So whenever we show data comparisons, we will simply tell you who and what we're comparing to. Sure, some competitive products may have a higher level of a few growth factors, but PURION Processed tissue has a higher content on the vast majority of those tested in our internal studies as well as those results that were confirmed by external lab testing.

In every study we performed and is confirmed by these external labs, PURION Processed dHACM, dehydrated human amnion/chorion membrane, tissue, as a whole, has substantially more growth factor, cytokines, and chemokines than all the other amniotic tissues that we've tested by far. On top of this, we're the only amniotic tissue company with multiple published RCTs with reproducible market-leading results in several more RCTs to come.

Another point relative to what we discussed at the analyst meeting, we announced additional sizes of EpiFix for 2015. We are expanding our offering. And starting later this quarter we'll have five sizes under the 2015 bundled rate plus four additional larger sizes in the hospital outpatient setting. A couple of other notes, we're adding a 2.5 square centimeter disk as well as an 8 square centimeter graft.

So recall that 80% of our EpiFix units are 6 square centimeters or smaller disk. So by adding the 8 square centimeter graph, we expect to capture approximately 85% to 90% of our units with that 8 square centimeter or smaller graphs. All which are priced below the bundled rate for next year. This means that even without the pass-through status, 85% to 90% of hospital outpatient procedures will make money with EpiFix. And our analytics group has modeled this, and the bottom line is we expect that our new size in pricing will be very favorable to us in the coming year.

We've had an incredible 2014, so far, this year and we expect to finish the year strong. We've accomplished a great deal in a shorter amount of time. As we enter into our planning process for the next year, I can't help that it'd be excited about how we're going to continue to evolve as a company. I expect significant growth in our Surgical, Orthopedic and Sports Medicine business next year while with extremely strong growth in Wound Care. It's very exciting time to be at MiMedx.

And with that, I'll turn it over to Pete.

Thanks, Bill. Well, it's Mike's turn.

Thanks, Pete. The company recorded revenues for the third quarter of approximately $33.5 million, an increase of 108% or $17.4 million over prior year third quarter revenue of $16.1 million.

On a market segment basis, Wound Care revenue was $26 million, which represents a 184% increase over prior year and 26% sequential growth. Growth was driven by market share gains as well as increased revenue to existing accounts.

Surgical and Sports Medicine and OEM revenue was $7.5 million, which represents an 8% increase over prior year and 52% sequential growth. Please remember that year-over-year comparisons will be impacted slightly by the inclusion of total micronized revenue in 2013 in the Surgical and Sports Medicine and OEM segment, whereas in 2014 EpiFix micronized revenue was included in Wound Care, and AmnioFix micronized revenue was included in Surgical, Sports Medicine, and OEM revenue.

On a customer segment basis, commercial revenue was $22.7 million, which represents a 232% increase over prior year and 37% sequential growth. Federal revenue was $10.8 million, which is a 17% increase over prior year and 20% sequential growth. Growth was driven by penetration into new accounts as well as increased sales at existing accounts in both customer segment.

For the nine months ended September 30, 2014, we reported revenue of $78.7 million, which is a 91% increase over prior revenue of $41.2 million. On a market segment basis, Wound Care revenue was $61.3 million, which represents a 170% increase over prior year.

Surgical and Sports Medicine and OEM revenue was $17.3 million, which is a decrease of 6% as compared to prior year. The decrease is due to the previously mentioned micronized revenue reporting change.

On a customer segment basis, year-to-date commercial revenue was $49.7 million, which represents a 206% increase over prior year. Federal revenue was $29 million, which represents a 16% increase over prior year.

Gross margins for the quarter were 90% as compared to 87% in the third quarter of 2013 and 89% in the second quarter of 2014. On a year-to-date basis, gross margins were 88% as compared to 85% in the prior year. Improvement in gross margin was driven by both products and customer mix.

R&D expense for the quarter were approximately $2 million or 6% of quarterly revenue as compared to $1.3 million in Q3 of 2013. On a year-to-date basis, R&D expenses were approximately $5.2 million, or 7% of revenue, as compared to $3.5 million for the same period in 2013. The increase in R&D spending is driven primarily by increased investments in clinical trials.

Selling, general and administrative expense was approximately $24.2 million for the quarter or 72% of quarterly revenue as compared to $12.7 million or 79% of quarterly revenue in 2013. On a year-to-date basis, SG&A expense was $61.2 million or 78% of revenue as compared to $31.9 million in 2013.

On a sequential basis, SG&A expense increased in absolute dollar terms by approximately $3 million but declined as a percentage of revenue from 83% in Q2 to 72% in the current quarter. The increase in spending reflects continued investments in building out our direct sales force.

By the end of the quarter, the company had an additional 12 new direct sales associates on the payroll, bringing the total to 139. The company reported a positive adjusted EBITDA margin of 22% or $7.3 million for the quarter ended September 30, 2014, which is a $5.4 million improvement as compared to an adjusted EBITDA of $1.9 million in the third quarter of 2013. It is the 11th consecutive quarter of reporting positive adjusted EBITDA. The improvement is driven by increased sales volumes, improved growth margins, and the corresponding operating leverage.

As a reminder, total adjusted EBITDA for the quarter of $7.3 million was more than the entire 2013 year EBITDA of $5.5 million. Year-to-date adjusted EBITDA margin is 15% of revenue or $12.2 million, which is an increase of 194% or $8 million as compared to prior year. Included in our press release is a reconciliation of adjusted EBITDA to reported net income.

The continued revenue growth with strong growth margins in the aforementioned operating leverage has resulted in the company reporting the first quarterly net income in our history. The company reported net income for the third quarter of $3.7 million, which is 11% of revenue and $0.03 per basic and fully diluted common share, as compared to a net loss of $300,000 in the third quarter of 2013. For the nine months ended September 30, 2014, net income was $2.4 million or $0.02 per basic and fully diluted common share as compared to a net loss of $2.7 million, or $0.03 per basic and diluted common share for the comparable period in 2013.

Turning now to the balance sheet, the company continued to strengthen its balance sheet with strong cash flow driven by improved working capital management. The company reported approximately $77.3 million in total current assets, including $47 million in cash, $23.3 million in accounts receivable and $4.7 million in inventory.

For the second consecutive quarter, the company recognized significant improvements in day sales outstanding, which is a measure of how long it takes for the company to collect our accounts receivable. Day sales outstanding were 63 days as compared to 72 days in the second quarter. Inventory has increased approximately $500,000 as compared to the previous quarter in anticipation of continued revenue growth.

The company reported $14.4 million in current liability with quarter-over-quarter increases in provision for payroll costs, sales commissions, bonus expense, insurance costs, and bad debt due to increase in headcount and sales volume. Please note that there is zero debt on our balance sheet.

Total stockholders' equity was $81.3 million and there was approximately 106.9 million shares of common stock, 205,000 warrants, 16.9 million stock options, and 1 million restricted stock units outstanding as of September 30, 2014. The company repurchased approximately 160,000 shares in the quarter under the previously announced share repurchase program, bringing the number of treasury shares to approximately 944,000 shares as of September 30, 2014.

Turning now to the statement of cash flow. The company reported positive cash flow from operating activities of approximately $8.9 million for the quarter as compared to $1.7 million for the quarter ended September 30, 2013. The positive cash flow from operating activities for the quarter was driven mainly by an increase in adjusted EBITDA and improved working capital management.

Cash used in investing activities in the quarter included capital expenditures and patent application costs of approximately $873,000. Capital expenditures included IT infrastructure and production processing equipment in support of our continued growth. Cash flow from financing activities for the quarter were a negative $68,000, including approximately $750,000 in share repurchases, somewhat offset by stock option and warrant exercises. Also, please note that total headcount at the end of the quarter was 334.

Turning now to our guidance, earlier this month, guidance was provided for the fourth quarter of 2014 and preliminary guidance for the full year of 2015. Final 2015 guidance will be provided in mid-December once the company has completed and reviewed its full detailed budget with the board. The company is guiding fourth quarter revenue of between $37.3 million and $38.3 million resulting in full-year revenue guidance of $116 million to $117 million. So, fourth quarter revenue growth is expected primarily in the Commercial Wound Care segment. Please note that in the fourth quarter, there are less than two implant days due to the holidays and additional three less implant days for doctors practicing at VA facilities due to the Desert Foot Conference.

In terms of 2015, the company has guided revenue of between $175 million and $185 million and an operating margin of greater than 15%. Growth is driven by continued market share gains in both the Medicare and commercial paid segments of the Wound Care market. There is modest growth included in the plan as a result of the previously announced OEM agreements with Medtronic and Zimmer. Included in the assumptions on operating margin, our product gross margins in the mid 80% range increased investments in the direct sales force ending the year with over 200 sales reps as well as increased investments in clinical trials.

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

Thank you, Mike. Just prior to the call beginning, I was reviewing some of the reimbursement information, and I think it might be pertinent to mention it to you. We've already disclosed our beliefs that we have commercial health plans of over 100 million nationally. And reviewing the progress we're making on some other activities, I would say that we have the potential to double that in the next couple of quarters. So, we are very focused on the reimbursement piece of this business, and I've told you at the analyst meeting how complex it is, but we've been very successful in bringing over a 100 million covered last in the commercial side and expect to be able to double that in a couple of quarters.

All right. Let's roll the call open to questions.

(Operator Instructions) Our first question comes from William Plovanic with Canaccord Genuity.

Thank you. Good morning. Can you hear me okay?

We can, Bill.

Good. So my first question is very strong quarter, you already preannounced this, but the Surgical and Sports Medicine and other business was up 50% sequentially, that was a pretty big number. Some of the questions we've gotten is, is that related to Medtronic or Zimmer already stocking in? Or how would you characterize the sales, kind of what drove that such a big jump sequentially?

Yes, that was very little from that. We have not started shipping Zimmer yet. So it's really more of timing with these distributors and just the way it flowed over the quarters, not really much other than that.

Mike, I don't know, if you have anything to add?

Yes, I think we mentioned on prior calls that in terms of our mix, if you go back to the first couple of quarters, the distributor revenue was lower on a percentage basis than what we had seen coming out of 2013, and it's picked up again a bit in the third quarter.

And then when would you expect to see Zimmer start contributing in Medtronic in a meaningful fashion?

That would be sometime, I think, in 2015. For Zimmer, we're hopeful we'll be able to start shipping this year, but I think for planning purposes we're planning first quarter. The activity is moving a little bit faster than some of the other folks, but that's what our current plan is. But in terms of a ramp-up, we think it's going to take a few quarter to get towards the sizable number.

Great, that's helpful. And then the gross margins you're guiding to a mid-80s yet you just put up a 90% gross margin, I'm trying to kind of understand what's going cause literally a five-point drop in margins, why would that happen?

Conservatism.

If this mix of the business stays the same, is there any reason to believe that margins would not stay at current levels? Is there -- does the pricing changes or extra unit sizes you're putting into place for 2015 have a significant impact on your gross margins?

Bill, maybe I can add something to that. We haven't given the detailed breakdown on the growth for next year. We have alluded to the fact that we're moving into some other surgical indication, those would have a different margin profile than Wound Care, and Wound Care from a direct sales model perspective. But as Pete mentioned, at this stage, as we're still flushing that out, we thought we would take the conservative route and keep it in the mid-80s.

Okay. And last question and then I'll jump back into queue. As we look at the 2015 guidance, what are you contemplating for Zimmer and Medtronic in that guidance?

Bill, be patient here till mid-December, I will give a significant detail at that time. But at this point, I don't think we're ready to give specifics there.

I mean recognize, Bill, we're also gathering more information from those two entities, and there are meetings coming up between now and the end of the year that will give us a better feel for what is a realistic target there. As we said in the analyst day, we took a very conservative approach in coming up with the guidance of 175 to 185, but that's one of the areas that we'll refine when we get to mid-December.

Great, I'll jump back in the queue. Thank you.

Thanks, Bill.

Thanks, Bill.

And next question comes from Mike Matson with Needham & Company.

Hi, thanks for taking my questions. I guess the cash flow was just outstanding this quarter. So it's a good problem to have, but I am just wondering where do you expect to deploy the cash. I noticed you did it buy back some more stock in the quarter, so what's left under that authorization? And do you expect to continue to buy back stock obviously depending on the stock price, but ...

Mike, yes we still have, I think, about 4 million, and we discuss that at the board meeting yesterday [and left that] proposed buyback. We're just at the stage where the company will continue to build cash. We're not being really inquisitive with other opportunities. We've got a great platform here, and we're very busy building it. But that's one question we really can't answer very effectively because -- and it's a good problem to have, but we don't have a total solution for it.

Okay. And then Organogenesis, I mean you've talked about them struggling, but I guess I'm just wondering, what do you think the impact would be if they did manage to launch smaller sizes of their product? And then to what degree would something like that be sort of reflected in the guidance. If it happened next year, do you think that's accounted for in your guidance?

Well, I've said publically at times that was a solution to their problems, but I'm not sure if that's in their plans. But, anyway, the longer this goes on, the harder it's going to be for them to recover. That's pretty evident and that's just the world of business.

Our grafts are much more clinically effective. They are much more cost effective, extremely cost effective relative to the Apligraf product because of the wastage factors. So even -- if they produce a smaller one, then that will change some of that dramatically, but it will probably also affect their gross profit margins.

And there is huge logistics advantages, too, for our products compared to those even if they do have a smaller size. On Dermagraft, you still have the cryo-preserved product with a six months shelf life or whatever, and the Apligraf products have a couple of weeks shelf life, and a narrow temperature range that needs to be used. Ours are easier to apply. As Pete mentioned, we've got better clinical and cost effective results.

And, again, I have said previously numerous times that 10 years ago, they contributed immensely to advanced wound care and taken it from where it was to where it was for the last decade. But the product is old technology and it's not as efficient and certainly nowhere near cost effective. So, things are going to play out I am afraid pretty much as I have this year for them.

But just hypothetically, if they were to launch the smaller size the next year, I mean do you think that's without the risk to your ability to hit your guidance or just the impact wouldn't be that. I mean I know your guidance is obviously very conservative, but do you think it's conservative enough to count for something like that?

No, I think by the time they would bring a product to market, we would have had our footprint every major and middle-sized market out there and physicians' offices where they have had some strength. And I don't think people will turn away from our product to start using their product again. That's -- my business instincts tell me that.

Okay. And then just with the Medtronic deal, I was wondering, is there discussion with any of the other -- that's limited to the spine, I guess. So, have you had discussions with any of their other segments? And then I guess since they're doing this deal of Covidien, have you had any discussions with Covidien because they are in a lot of surgeries as well, I guess, so?

I don't think it's appropriate to comment on that. But we have a great respect for Medtronic as an entity and their people. It dates me but I went to college with Bill George, which dates Bill, too, and he is retired. And I also know the previous CEO. So we do know Medtronic well, I think, and we've got a nice relationship developing.

All right. And then just one final question. Michael, you gave the inventory increase, I guess, on a dollar basis. I was just wondering if you could give us the -- in terms of the inventory days, what are your inventory days or where your inventory days at the end of the quarter versus last year and versus the prior quarter?

Well, I can speak to it from a churn's perspective. Our churns increased slightly. I believe it was 2.7 and moved up to 2.8; so quarter-over-quarter increased. I would say we're -- I am guessing a little bit -- I don't recall off the top of my head, but we were in that range coming out of last year, maybe even slightly lower than that because we were building inventory in anticipation of increased demand due to the reimbursement change. And so, we were starting to add excess inventory at the end of the year. So, off the top of my head, I want to say it was 2.5, but I'll have to follow up with you on that.

That's fine, but generally speaking, it's within the range you've normally sort of been on?

Correct.

All right. That's all I have. Thank you.

Thanks, Mike.

Thanks, Mike.

(Operator Instructions) Our next question comes from Matt Hewitt with Craig-Hallum Capital.

Good morning, gentlemen.

Good morning, Matt.

Good morning, Matt.

Hey, Matt

At the analyst day, you had mentioned that you had recently hired someone to help on the regulatory and reimbursement side for international opportunities. I was curious, have you pinpointed a couple of specific countries that you are going to initially target? And if so, how should we be monitoring? Or what kind of impact do you expect us to have as we get into FY 2015?

Okay, good question, Matt. We're just really starting our evaluation. You may remember that a few years ago when we still were promoting our HydroFix technology, we did get into a few countries with our amniotic tissue, but it was very small amount of business. So we're kind of relooking at those relationships. So I can't give you too many countries just yet because we're in that analysis mode.

Our real expectation is that this international focus really won't impact our revenue much until 2016 and beyond. There is a lot of hoops we need to jump through to get into some of these countries. We've got to figure out our distribution strategy whether we partner with a larger company or a smaller distributor company, or if we even set up our own office. So there are a lot of things that we need to determine.

I think in many cases, we will be doing some distribution relationships internationally. But we are a little early to give you the answers you are looking for there. But in 2015, I would not count on any kind of meaningful revenue.

Okay. And then maybe one more from me, obviously, you've got two phenomenal partners in Zimmer and Medtronic. Have you had discussions? Are you looking for additional partners?

I don't think we're ready to comment on that.

Okay, fair enough. All right, thanks. Thanks again. Great progress, guys.

Okay.

Thanks, Matt.

Thanks, Matt.

(Operator Instructions) Our next question comes from Bruce Jackson with Lake Street Capital.

Hi, if I could follow up with the FDA. So you've got the green light to go ahead with the BLA study. What's the status on the transition letter? And when do you think you might have that in hand?

Well, we discussed that at the analyst meeting two weeks ago, and there is nothing new. We've had some communications. And let me just kind of reiterate, we're communicating telephonically, we've had meetings, and we're doing our utmost to bring that to conclusion. So we know exactly where we stand and what we're going to do in terms of the micronized or something similar, product offering, and we're having discussions with them, and final decisions have not been made. We will keep you very informed when they are. And I'll reiterate another aspect of that, and that is the guidance we've given for 2015 and fourth quarter takes into account basically the worst-case scenario for, if it's a micronized product or anything else we are dealing with. So we try to be very conservative in terms of what we are giving you and always, of course, meet or exceed those estimates.

So I don't have any news. As soon as we have something that can be definitive, we will get it out to you.

Okay. Then moving over to the gross margins, which were really, really good this quarter, how are you guys set for manufacturing capacity? Do you have enough to hit your targets for next year? And do you have to do anything like expansion or adding shifts to meet that capacity or the targets?

Just as a brief reminder, too, from a facility standpoint between our current facility that we moved into middle of last year and our previous facility, which is still our kind of a backup disaster recovery as well as excess capacity facility, we have the capacity in both these facilities to have in the neighborhood of 500 million revenue with some increases in efficiencies we might be able to do a little better than that. In order to achieve that, that is assuming a two-shift operation. At the moment, we are only doing one shift in one location.

So I would expect that sometime middle of next year we will either open up a second shift or we will begin processing in our second location on the first shift sometime in the middle of next year. In terms of we have enough facilities. We will have to add a little bit more equipment, but the equipment we have to add is more modular in nature and not that expensive. So, we're in a very good shape to position ourselves for our growth next year.

Okay, great. With the DFU studies that's about to be published, what's different about this study compared to the ones that you've already published?

Well ...

We're all smiling here. We just ask you to wait a couple of weeks here. We will -- it'll be good news, very good news, but we will ask you to wait for a couple of weeks here to -- we can publicize it.

Yes. And I think the only thing I can say is there -- I've told you that we've done consistent results on our studies. I think you will see that and you might see something new, too. So we will see.

Something new?

Maybe.

Okay. Then last question on the balance sheet. Nice job at the working capital, by the way. So you're building cash right now and you're going to have quite a lot of it here fairly soon, just philosophically speaking, how do you view your capital deployment decision? And how do you balance among investments maybe stepping up the share buyback program or doing acquisitions? And then you do want to get into acquisitions, what are the types of things that you might be looking at?

Okay, well, this is Pete. I've probably got more experience in this than anybody in the room, so let me give you our philosophies. Number one, building cash is going to continue to make Mike Senken happy. He seems to never have enough cash. We have plenty of cash. The needs of the company in terms of our internal growth with the five-year strategic plan we've talked about is more than sufficient.

So, the next question is, are we inquisitive? Are we inquisitive relative to acquisitions? Well, in my previous organizations, I think, it was a total of 47 acquisitions over the decades. Majority of those were very successful. I think only one was something we had to sell back to the position owners.

But anyway we know how to do acquisitions. We are familiar with the process. But at this point, we don't see technology or other organizations that would fit with what we think is a very solid five-year business plan. If we do, we'll certainly be aggressive as we run our venous activities that way and inquisitive and [move], we did that when we acquired Surgical Biologics.

At this stage, it's a good question. It's something that this management team does not have all the answers for in terms of what are we going to use that cash for. It will continue to build. We'll see how the board feels about buybacks. It was obvious when we initiated the first buyback program that it was something that should have been done.

I can tell you my experience over the years is most boards don't like buyback programs, but ours did at least to the point where we brought it to them and they agreed. So, we will have some answers for you, but it's a nice problem to have, and we will develop some strategic and tactical solutions to it. But in the meantime, we don't have the answers you are looking for, I'm afraid.

All right. Thank you very much. Nice quarter.

Thanks, Bruce.

Thanks, Bruce.

Thanks, Bruce. I appreciate it.

Our next question comes from William Plovanic with Canaccord Genuity.

Hi, great. Thanks. Just on the use the cash kind of topic capital structure, you have a lot of shares outstanding. Any thoughts on a reverse stock split given I mean your real company with revenues and profits, and growing profits?

We discuss at our board meetings generally every quarter, and we're in a different situation now than we were previously, and that's certainly something that should be considered. Let me just say that, Bill.

Previously, we were a little concerned about significantly reduced market cap, et cetera, et cetera, and I've done this before very successfully with one of previous companies. But now there is going to be people on any board that says, well, the published paper say that when you do a split, market cap goes down (inaudible) because companies have operating problems when they do splits, and that's why everything continues to deteriorate. So it's a good question and it's something that we'd be prudent to do. So we'll keep you informed.

Okay. And then just looking at the quarter, you go -- looking sequentially, literally, 7.5 million on the top line or 8 million on the top line, you brought almost all of that, about 4 million down to the operating line, so 50% positive drop through even with hiring reps. If you look at the business going forward and if I run the guidance of 15% next year, I mean basically, you're assuming a little less than that in terms of the 2015 sales and operating margin of at least 15%. Given that your 85%, 90% gross margin product, I mean, do you think that this is something that could actually see positive drop through greater than 50%? Or should we think about it, I mean that's a pretty aggressive number kind of think about it at that level for now?

Well, I've tried to be subtle in my comments the last few months about operating leverage. When you have an organization and a profit and loss statement, it works like ours, thus we are very, very blessed and fortunate, and that operating leverage is going to end up, I think, bringing more than that down. But right now, we've given 15%.

I've said -- when I had similar question at this company ought to be kind of organization produces 30% of operating profits and I've done that with previous companies. But I also can say that it doesn't always continue to escalate because then you've grown into a larger company and then the infrastructure has to increase, et cetera, et cetera. But we will be a very profitable organization here going forward, and we'll be filled in cash and (inaudible) to do it.

Okay. And then the last question is, I think, one of the comments was that depending on the pace of sales hires that could cause some fluctuation in the operating margins on any given quarter, how should we think about -- how are you thinking about 2015 in terms of adding your distribution going from that 160 to that 200 number? Is that front-end loaded in the year? Is it kind of equal over the quarters? Just how should we think about cadence for 2015?

Bill, I'd ask you to be patient and let us get our mid-December press release out. We'll try to give -- have to put that out on the calls and some real details in terms of some of those parameters, but we just are not -- haven't done enough of our homework there, and we will before present it to the board, of course. And we'll be able to give you, I think, some insight, so please be patient with us there.

Okay. And since I have the mike, I will ask one more question, which is, the gross margins had a pop from 85% level to 90% from Q1 to Q2, and then Q2 to Q3 stayed, went up a little bit, about 70 bps. Was there something specific that happened between Q1 and Q2? Is that just the mix of the commercial business taken off driving it? Or is there something else from manufacturing standpoint, anything that you can kind of point to?

No, it really was the pop on the Commercial Wound Care side; Direct Sales, Commercial Wound Care. Again, first quarter was a little bit slow in getting started because of all the changes in reimbursement, and then second quarter really kicked in especially since we had hired all of those sales folks around the mid to late first quarter. So it really was that as opposed to anything in terms of operationally on the efficiency side.

Great. Thank you very much.

Thanks, Bill.

Thank you, Bill. I'll just end the call by saying we'll be talking to you about mid-December as soon as we have our budget approved by our board, filling all those details that you're seeking, and we look forward to talking to you then and stand by. Thank you so much.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.