MiMedx Group, Inc

Greetings and welcome to the MiMedx Group second quarter 2022 operational and financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jack Hallworth, Senior Vice President, Investor Relations for MiMedx Group. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Welcome to the Memetics Second Quarter 2022 Operating and Financial Results Conference Call. With me on today's call are Chief Executive Officer Tim Wright, Chief Financial Officer Pete Carlson, President of Wound Care and Surgical, Dr. Rohan Kashyap, and President of Regenerative Medicine and Biologics Innovation, Dr. Robert Stein. Tim and Pete will provide a summary of our operating highlights and financial results for the quarter, And at the conclusion of their remarks, Tim, Pete, and Doctors Keship and Stein will be available for your questions. Before we begin, I would like to remind you that our comments today will include forward-looking statements, including potential timelines for our ongoing clinical trials and FDA submissions and approvals, and expected market sizes for products. These expectations are subject to risks and uncertainties, and actual results may differ materially from those anticipated due to many factors. Actual timing and FDA approval will depend on a number of factors, including the results of our clinical trials, our interpretation of those results, the impact of COVID-19, actions by others that affect our timeline, and other factors that the FDA deems important. Additional factors that could impact outcomes and our results include those described in the risk factor section of our annual report on Form 10-K and our quarterly reports on Form 10-Q. Also, our comments today include non-GAAP financial measures, and we provide a reconciliation to GAAP measures in our press release, which is available on our website at www.memetics.com. With that, I'm now pleased to turn the call over to Tim Wright. Tim?

Thank you, Jack, and good morning, everyone. I appreciate you calling in. I'm going to start off today with five very important news items. Number one, I want you to know how excited I am about the strong commercial momentum. This momentum has led to four sequential quarters of double-digit revenue growth in our continuing portfolio of products. I'm energized about the performance of our commercial team. We are on strategies. and more patients are being treated with better outcomes. Number two, the memetics expanded research and product development team is creating new and novel products to meet the unmet clinical needs of our surgical community. I am very pleased to share that two new launches are on track for September. Number three, we are preparing for the launch of Perion engineered EpiFix in Japan later this year, as early as September. Perion Engineered EpiFix is the first and only amniotic tissue product approved in Japan. And it's important to note that we have first mover advantage in this large and underserved market. Number four, I want you to know that we are on track to enroll the first patient in our knee osteoarthritis clinical trial by year end. I'm confident. that the important recent progress by our clinical, regulatory, and manufacturing teams increases our overall probability of a successful drug registration. And number five, I think it's worth repeating that our business is generating the cash needed to fuel future investments. And I'm bullish about what can be accomplished in the second half of the year. Starting with our second quarter growth, I'm pleased to report fourth consecutive quarter of double-digit revenue growth in our continuing portfolio of products. Tissue and cord revenue grew 11.6% over last year, with a strong performance in our surgical recovery business. Surgeons are incorporating our products to biologically enhance procedures where patients are at risk of potential complications. This can be in surgeries where there are wound-adjacent, for example, podiatric surgical wounds or orthopedic lower extremity procedures, or in areas where we are leveraging our direct and agency relationships to expand our reach and our customer base. We have strong momentum here. I would like to share with you that our two upcoming product launches are on track for full release in September. Innovation is an important part of our near and long-term growth potential. And I'm excited that our research and product development engine is developing new and novel products that meet specific unmet patient needs. In June, we initiated a limited market release of AmbioEffect. And surgeon feedback has been positive. AmbioEffect offers a thicker graft with broad size availability and complements our leading AmbioFix products. and amniocord brands in the surgical suite. Axiophil is a placental collagen matrix product. It offers a flexible form factor that can be easily applied to deep, tunneling wounds or conform to a large, uneven surface. Axiophil has impressive clinical utility and serves as an outstanding platform for further iterations of new products. What I'd like you to remember is that AmnioEffect and Axiophil are the first new important products we have internally developed for use in the surgical recovery market. The importance of these innovative products cannot be understated, as they not only support our revenue growth goals, but they act as important foundations for future product development. I'd like to turn your attention to the upcoming launch of EpiFix in Japan. We are on track for this launch, as I stated. We plan to launch this as early as September. As I mentioned, EpiFix is the first and only amniotic tissue product approved in the large underserved market, and Memetics has first mover advantage in this market. Our dialogue with the Ministry of Health has been productive, and we believe we're in the final stages of the approval process, nearing in on a specific reimbursement rate. We hired a general manager for this market, and last month, an additional 100 physicians in Japan were trained on the proper use and application of EpiFix. The product is in-country and ready for use, and I'm pleased to share that we will anticipate treating the first patient in Japan later this month. Momedics' commitment to engineering new products, expanding our market and customer base, and generating robust clinical, scientific, and economic evidence all position us to achieve our double-digit growth objective in our commercial business in 2022 and beyond. Transitioning to our regenerative medicine and biologics innovation efforts, I think you'll be impressed with our recent progress. We have an upcoming Type B RMAT meeting scheduled with the FDA to review the results from our Phase IIb knee osteoarthritis clinical trial and our protocol for the next knee OH study. We plan to use WOMAC pain and WOMAC function as co-primary endpoints that are on track to enroll the first patient before the end of the year. We selected and engaged a world-class contract research organization, Nordic Biosciences Clinical Development, an image analysis group, an expert imaging company. With their operational support, we can greatly streamline patient recruitment and accelerate study initiation and enrollment in our upcoming knee outlay trials. And I'm honored to have an exceptional industry and academic experts join Memetics, Regenerative Medicine Scientific Advisory Board. These multidisciplinary leaders will provide guidance on our pipeline initiatives and can help us optimize the overall value of our placental-based biologics pipeline. We view our micronized DHACM platform as a significant future year growth opportunity and want to stress how important it is to do things right. These products are one of a kind and I'd like to reinforce that Memetics has more than a decade of experience with these products. I am confident these recent milestones increase our overall probability of successful drug registration. Memetics is growing, creating value and innovating. The commercial business has strong momentum and is growing at double digit rates. I think it's worth repeating that the business is generating the cash we need to fuel investments in our future. I will now turn the call over to Pete.

Thank you, Tim, and good morning, everyone. Before I begin, unless otherwise specified, all results referenced in my prepared remarks are on a second quarter 2022 versus second quarter 2021 comparison basis. As Tim mentioned earlier, we had strong revenue growth in the quarter, once again outperforming our expectations in our continuing portfolio of products. I want to highlight that we now have a full trailing 12-month basis of revenue since the end of enforcement discretion. And going forward, total net sales comparisons on a quarterly basis will fully reflect our continuing portfolio of tissue and cord products, along with the new product launches in the U.S. and our international expansion. I hope you agree this simplifies our message and that our business trends will be easier to understand. Over the last 12 months, ended June 30, 2022, we reported net sales of $256.3 million in including $253.8 million representing our continuing product portfolio. This represents growth in that portfolio of over 12.5% compared to the 12 months ended June 30th, 2021. For the second quarter of 2022, we recorded net sales of $66.9 million. a $1.3 million decrease from 2021. I want you to remember that the prior year period included net sales of $8.2 million of Section 351 products sold in the United States. As you know, these products can no longer be marketed domestically following the end of the FDA's period of enforcement discretion on May 31, 2021. Our tissue and cord products grew $6.9 million, or 11.6%. This fourth consecutive quarter of double-digit sales growth was primarily driven by our strategic focus in the surgical recovery market, along with the results from our prior initiatives to expand, train, and realign our sales force. Gross margin was 82.3% compared to 81.3%. In the current quarter, lower than planned production levels negatively impacted gross margin. In the second quarter of 2021, gross margin was impacted by similar negative production variances higher than planned compensation and reserves recorded for products affected by the end of enforcement discretion. Selling general and administrative expenses, or SG&A, were $55.8 million compared to $53.6 million. I want to draw your attention to the fact that the current year quarter included $2.2 million of bad debt expense and a $2.1 million expense related to the company's annual meeting of our shareholders. As a reminder, our SG&A expenses in 2022 and 2021 were negatively impacted by $2.1 million and $3.8 million respectively as a result of a shareholder activist's actions. The net effect was a reduction of $1.7 million between periods on a comparative basis. Additionally, SG&A results reflect increases in sales commissions driven by growth in the surgical recovery area and increased travel expenses compared to 2021 levels. I'd like you to remember that after the end of the FDA's period of enforcement discretion, we made the strategic decision to maintain staffing levels, including our sales force, to support our commercial growth objectives. This results in a higher level of SG&A expenses as a percentage of net sales compared to our historical trends. We expect that level to decline over the remainder of 2022, reflecting our continued anticipated revenue growth as we put the revenue loss of Section 351 products behind us. Research and development expenses were $5.5 million compared to $4.1 million. The increase reflects clinical research efforts connected to our commercial and late-stage pipelines, as well as increases in development and testing costs. Investigation, restatement, and related expenses were $3.2 million compared to a benefit of $2.1 million. The prior year benefit reflected funds received from certain director and offeror service insurance policies, as well as negotiated reductions in previously recognized legal expenses advanced on behalf of certain former members of management. Net loss was $10.9 million compared to a net loss of $1.8 million. Adjusted EBITDA was a loss of $1 million compared to a gain of $3.1 million. As of June 30th, 2022, the company had $72.5 million of cash and cash equivalents compared to $87.1 million as of December 31st, 2021. The decrease reflects payments of annual employees incentives as well as payroll taxes previously deferred under the CARES Act. For the six months ended June 30, 2022, adjusted EBITDA was a loss of $2.7 million, including the annual shareholder meeting costs mentioned earlier. Capital expenditures and patent acquisition costs, the other components of free cash flow, were $601,000 in that period. We continue to expect to be free cash flow neutral for the full year 2022. We also expect overall revenue to return to pre-enforcement discretion levels during that period. Looking forward to revenue growth for the full year of 2022, I want to share that we are maintaining our expectations of 11% to 14% growth. This includes the anticipated full launch of AmnioEffect and Axiophil during the third quarter of this year and our current expectation of the timing of the launch of Epifix in Japan later this year. Let me remind you that the growth percentage is based on our continuing portfolio of tissue and cord products, which generated $240 million in revenue in 2021. Importantly, I want to reemphasize that we remain well-capitalized to invest in our growing commercial business and deep, innovative R&D pipeline. I will now turn the call back to Tim.

Tim? Thank you, Pete. In closing, I want to reiterate the five very important news items. Number one, I'm excited about the strong commercial momentum in our four sequential quarters of double-digit revenue growth in our continuing portfolios. We are on strategy. Number two, I'm pleased to share that two new launches, AMEO Effect and Axiophil, are on track for September. Number three, we're preparing for the launch of Purion Engineered EpiFix in Japan, which we anticipate as early as September. Number four, we have an FDA scheduled meeting in the third quarter and are on track to enroll the first patient in our knee osteoarthritis clinical trial by year end. And five, the business is generating the cash to fuel future investments. I look forward to your questions. Operator, will you please open the lines?

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Anthony Petrone with Mizuho Group. Please proceed with your question.

Thanks, and congratulations on a great quarter here. Good to see the traction and the positive announcements in the quarter. I'll have two up front, and then I'll circle back with a follow-up. The first, Tim, you mentioned, you know, Japan is on track, Epifix, for a launch in September. I'm just wondering if you can give us an update on timing around reimbursement specifically. I know there's a lag between product clearance and reimbursement, so an update on timing on Japan reimbursement would be helpful. And then the second question would be around the FDA announcement here. Meeting is set. in the next month or so. So can you walk us through what your expectations are, uh, for the phase three protocols? You know, what will those look like? How many patients would be targeted for enrollment? And then maybe even as you look deeper into the calendar, what would be the projected timing, uh, to file a BLA? And then I'll have one follow up.

Okay. Uh, thanks for joining the call. I think the questions, uh, first on Japan, we do know that the, um, The government took a look at our application yesterday, and we think the reimbursement in Japan is imminent until we have the official word. We can't make any commitments on that, but certainly it's a very positive sign that EpiFix is being reviewed for reimbursement. So let's be a firm reimbursement and let everyone know. I do, Rohit, I do believe that once we do have reimbursement, there are several things that we'll be able to get done in preparation for our launch.

That's correct. Like you said, we believe reimbursement is imminent, but having more definitiveness around that allows us to also formalize some of our partner relationships that are essential in making sure that we can commercialize in Japan. But over the last... couple of quarters as we have been waiting for the flow of our reimbursement application. We've been preparing and working with local societies and KOLs in establishing ourselves, making sure we have about 250 trained customers in Japan by the society, which is a requirement, and feel that we are well positioned to take advantage of bringing the first of its kind amniotic product to the market in Japan. and creating a whole new set of options for treatment of the diabetic foot ulcers and lower extremity ulcers patients that we will be able to access once this reimbursement is finalized, which we expect should take place soon.

Yeah, thank you, Rohit. The other question on our plans with the FDA, just going into this meeting, it is a Type B meeting, and it is an RMAT meeting. So there's a lot of consideration around that, Usually in these meetings, particularly the RMAT, you get more attention from more people from the FDA. So we're looking for a big crowd there, which is being helpful. This isn't our first interaction with the FDA regarding our biologic innovation program, which includes knee osteoarthritis. We've had several meetings. Dr. Stein and I in particular have had several meetings with the FDA regarding this. various approaches. And I'll let Bob go into that a little bit more deeply, Anthony, if that's good with you. Thank you, Tim. Hi, Anthony. Yeah.

Hi. How are you? As Tim articulated, we do have an RMAT Type B meeting scheduled. It will be an opportunity for us to review the Phase 2b data and why we're enthusiastic about the initial result there on reduction in pain and improvement in function while the investigational product was still potent. We also will be reviewing with the agency our planned registrational trial, which we expect to start before the end of the year. We're still on our timelines for filing a BLA in late 2025 with an expectation of potential registration in 2026. Likely in the latter part of the year, but because of the RMAT designation, we may have some opportunity to move that forward with the agency.

That's very helpful. And one quick follow-up would just be to pivot to surgical recovery. It looks like some good traction in the quarter there. So a couple of questions here. One would be, is the sales force fully staffed and trained at this point, or is there still some building blocks that have to go in on that front? And then, you know, as you look deeper within to recovery, you know, which surgical categories are you seeing the most traction in? Thanks again and congratulations.

Thanks, Anthony. Great questions on that. On the Salesforce side, in terms of servicing the surgical recovery market, we use both our direct sales team as well as our agency partners in order to serve the market. We continue to evaluate and adjust staffing levels in order to meet the needs of the market on both fronts. direct as well as on the agency side. As far as getting trained and being ready, we obviously invest a lot of time and energy in making sure that our sales team is proficient with both the clinical needs as well as the value our products bring to the market and the clinical data and value that we can communicate. But honestly, as a leader, I can't say that I'm always ever satisfied completely with it and continue to invest more time and energy in that process. In fact, we are making a lot more effort and energy training some of our agency partners with our product and technology at a much higher level than we have done in the past. So that effort continues and will impact us going forward as well. With regards to the types of procedures, again, our technology, as we have communicated many times, is a platform. And it has application in multiple procedures around surgical recovery. Just to recap quickly, Within surgical recovery, our products are used in situations where you require augmentation or closure or barrier function. In complex patients or complex procedures, the patients can be complex depending upon their comorbidities, whether they're obese, whether they have diabetes or smokers, as well as some of the procedures can be complex based on the location of the procedure and the risk associated with that. We currently target multiple specialties across the spectrum with our product, and we are seeing traction in multiple areas. Some of them are wound adjacent areas like lower extremity, limb salvage situations, and so on, like trauma associated in the lower extremities. But also we have seen good traction in other specialties, including neuro spine and OBGYN and general surgery related procedures. So we are invested and committed to further develop the portfolio. At the same time, also further generate data that will allow us to get more precise in our efforts of the kind of procedures we want to really focus a lot of our energy on as we generate that data.

Thank you very much.

Thank you. Our next question comes from the line of RK from HC Wainwright. Please proceed with your question.

Thank you. Good morning, gentlemen. Congratulations. Looks like a a great first half and looking for an even more exciting second half here. On Japan, let me just start off with Japan. So it looks like from Rohit's comments that your initial target is about 250 positions or so. What's the total target over there in Japan? And what's the commercial strategy in terms of Will it be a slow and a concentrated start, or is it going to be a larger initiative right from the get-go?

Yeah. Go ahead, Rohit.

Thanks, RK. Again, you're right. We're very excited about the opportunity in Japan. The target wounds for lower extremities is about 100,000 wounds that we are targeting. In terms of the number of physicians, the 250 or so physicians that we have mentioned, there's a requirement based on our regulatory approval and establishing of reimbursement as it comes through that clinicians need to be trained by the society in order to first utilize our product. That's the physicians that we have already trained. The exact number of physicians we will be targeting will go through phases of preliminary market, the Tier 1 market versus Tier 2, and so on. And in terms of our commercial strategy, a big part of our effort in Japan will include developing a KOL network. As I've just mentioned before, this will be the first product of its kind in the market The first effort in developing kind of the biologic space in Japan, so we know we have to make besides the KOLF, but a lot of market education about our product and the value, but also just the broad category itself. And in terms of our sales efforts, we plan on partnering with a distributor. Now that we are closer to finalizing the exact parameters of our reimbursement, we can finalize Some of those discussions, as Japan is a complex market with the dealers and distributors and all of that, but in order to formalize those relationships, you have to have clarity of reimbursement. I'm very excited that we're coming to the imminent stage of that, which is essentially bringing to closure probably a four to five-year effort in trying to get there.

Yeah, in addition to what Roland said, I think our regulatory team did an outstanding job in negotiating the labeling here, which is a bit broader than what we have in the United States, and we're positive about that. But all hands are on deck to have a successful launch of that, and I appreciate all the efforts of the team.

Yeah, yeah, absolutely. And then, Tim... over the last 12 months, as Pete put it out, you almost wiped out whatever revenue loss that you could incur from Section 351 products. So in general terms, what are the factors that actually helped you to grow? What part of it is organic growth and what part of it is price increase? And from what you have done in the last 12 months, what are the learnings such that you can at least sustain that growth, if not improve on what you have achieved so far?

Yeah. Our ability to sustain growth is based on three factors. Number one, our clinical data. Number two, our economic data. Number three is the medical education that we're providing in concert with a well-trained sales organization. Look, there's a lot of headroom here for future growth in the wound care setting as well as in the surgical recovery setting. As you recall back in December at our Investor Day meeting, Rogue had laid out what our pillars for growth would be, wound care, surgical recovery in Japan, and we're right on track with that. The launch of AmnioEffect and Axiophil really says a couple things for me. Number one, our innovation engine is starting to produce products that we need. We have a goal of generating not only two new products every year, but also the data that should accompany those products. Growth can be inhibited by the lack of clinical data or safety data and by the lack of pair response to that data. As you recall, in February of 2020, AHRQ, which is a government body, evaluated, did a very extensive meta-analysis on this, and frankly, memetics won in several categories here. It's all based on the pioneering work that was done in randomized clinical trials. So we have a dedication to continue to generate data that is meaningful for the physician, for allied healthcare workers, and also payers. So that's been our strategy, is to Focus on things that really move the needle with our products. We're in great markets. When you combine the wound care and the surgical recovery market, it's over $2 billion addressable market there. Then you add Japan in there. We think those are really the strong elements for growth here. Downstream, as you know, NeoA could have explosive growth there, but we need to get through the clinical trials there and really stay focused on getting that done right.

One last question from me before I jump back into the queue. Tim, you've been stating for more than a year now about two products every year, and you are delivering on that right now as we speak. But again, how do you define two new products? Are you defining them as really novel products and independent from the ones that are already released into the markets? or are these going to be iterations of the products such that you can use it for more indications?

Yeah, I think there are a couple things here. One, if we see an opportunity, an unmet need, where we can modify our product to serve that need, we'll do that. Where we see a need where we don't have, if you will, a platform to develop a product, we will, I think when you look at our efforts in research and product development, we'll develop a novel and new product in those categories. As you know, we want to stay in, frankly, to a large extent in this 361 area, but also I envision 510Ks that we would have pursued there. So those are things all organically that we'd be developing, but we have a, if you will, long-range portfolio that we've laid out of products that we're going to develop over time. Some are iterations of existing products. Some are completely new. It doesn't rule out. Given that Memetics is a pioneer in this area, we get a lot of inbound calls on new technologies, whether that's in an academic center or from a company that has a technology or has a product, but they don't have a, if you will, a commercial or distribution channel. So we have been entertaining over the course of the last year or so new product opportunities that would come to us in a form of a licensing type of agreement.

Thank you, Tim. Thanks for taking all my questions and good luck.

Thank you, RK.

Thank you. Our next question comes from the line of Carl Burns with Northland Capital Markets. Please proceed with your question.

Thanks for the question and congratulations on a strong quarter. Just a couple things here. Do you have any guidance with respect to gross profit margin trend in terms of what you anticipate in the second half of 22? And then also, I think you recorded around $3.2 million in investigational fees in the quarter, which was up sequentially. When do you anticipate those fees to be eliminated in the near term or whatever guidance you can provide there? And then I have one follow-up as well. Thanks.

Good morning, Carl. It's Pete. I did point out in my prepared remarks a couple of things that were in the gross margin line. We continue to think that 82%, 83% is where gross margin will play out. Our product mix moves it a little bit, but I think that's a pretty good range to work with. On the investigational side, as we disclosed in our 10-K, there are really one remaining prior executive that these costs relate to. That process can continue for some time, but we don't control the timeline. We continue to see it as being a small, single-digit million a year, really throughout most of the rest of the year, and we anticipate that that situation should wind itself down within the next six to 12 months.

Great, thanks. That's helpful. And then just one quick follow-up. I mean, considering the strength of the beat in the first quarter and the second quarter, did you see in those periods any benefit from warehousing of patients that had deferred procedures for COVID or any other reasons that may have benefited those quarters? And if so, do you still see a potential benefit from a bake-off of warehouse patients, or is that not something that was a factor at all? Thanks. Thanks.

Carl, it's a great question. This is Rohit. I think it's hard to clearly identify which patients were coming in with deferred treatment as a result of COVID versus patients who were new. I remember a lot of patients that we treat, especially in the wound side, are chronic patients, and very often they've had wounds for several years. So it's very hard to bifurcate the two. We definitely think there has been impact in the flow of patients from the impact of COVID and closures. At this point, it's become very patchy all over the place to kind of really pick out a nationwide trend in terms of the implications. We still continue to see pockets where there's impact from COVID where facilities limit access and otherwise. So we continue to navigate our path through that. I think what benefits us in that situation is our strength in multiple channels. That includes hospital, the outpatient hospital setting, typically the wound care clinic, as well as the private, because patients find a way of getting treatment if it's important and critical in one of those settings, and we find that we are typically there to help them should our products be the appropriate products for use. And again, there are other factors as well that weigh in in terms of the flow of patients currently with a shortage of staffing or vacations between patients as well as that with the opening up of the travel plan. So we continue to see what I would say is not completely predictable trends in patient volume over time. from a month-to-month and even from first half of the month to second half of the month kind of basis as we go through in managing the business. But our effort is typically to be there ready to serve the patients wherever it might be across the care settings.

Great. Thanks. That's very helpful. Again, congratulations. Thanks, Carl.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of John Vandermosten with Zach. Please proceed with your question.

Thank you, and good morning. I wanted to ask about the RMAT pathway and what benefits you might be taking advantage of by using that in the KOA trial.

That's a good question, John. RMAT... as you know, offers us more access to the agency, whether it's a Type B meeting or otherwise. I also think the attendance at the RMAT meetings is broader, so it includes professionals from the agency that have definitive subject matter expertise, for example, manufacturing expertise, or they have clinical trial expertise, or they have statistical expertise. In addition to the product reviewer, you get a lot of adjacent reviewers, which helps in the review process. It helps eliminate some of the surprises that you may encounter. It also helps in the approval process as well. Whether that can be expedited or not, it's all based on your data and their confidence in the data. That data ranges from your clinical data as well as your frankly, your chemical or your chemistry manufacturing and control data. So it's very advantageous to have this. I think for the last couple of years, the agency has been so full of addressing some of the COVID types of questions they were getting and approving vaccines that they put RMAT on the side, but it's back on track now. Dr. Stein, do you have any other comments you'd like to make on RMAT?

I think that covers it very well. We are excited that the meeting that we have upcoming is a Type B meeting with RMAT aspects. Having the designation as a regenerative medicine advanced therapy is a very useful aspect. As you mentioned, you get more attention from other ancillary experts at the FDA. You also have the opportunity to interact with them and ask questions, and sometimes it's more interactive than the standard interactions.

Yes. I'm really pleased, John, the response that we've received from our colleagues at the FDA. They're very interested in what we're doing, how we're approaching the development of not only the NeoA program, but as you know, we've said it before, the way we produce our tissue is unique, unique to our Purion process. We're looking to advance that process in different ways. relative to our injectable products, which have very broad utility in other indications that we would like to explore, and we've certainly had some of those discussions with the agency as well.

Okay, great. Thanks, Tim. And I have a couple of finance and accounting-related questions as well. Regarding your debt, you know, looking forward, does that seem to be about the appropriate amount you'd have going forward, or does it make sense to alter that if your growth trajectory continues, and how do you think about that in terms of capital structure?

Carl, it's Pete. I'm sorry, John, it's Pete. Yes, we think that that's fine. It allows us the flexibility to have cash to invest in these businesses, both sides of it, the commercial resources that Roget and team need to continue these strong sales growths. as well as the trial work that Dr. Stein is doing. The opportunity for us is that our business will turn the corner here in the second half of the year on generating cash. And we will be positive generators of cash. So the debt is interest only. We don't use cash on the debt until 2025 from that standpoint. The one aspect I would say is at some point we might want to invest in our manufacturing capabilities, and we would look at ways to do that, but that would be about a growth opportunity for the company in supporting this long-term growth of 11% to 14%. Again, the team needs resources. And as we've talked about, but I would remind people, is that 11% to 14% reflects the two products that we're going to launch here later in the quarter. As we develop new products next year, going back to the earlier question, that's on top of that 11% to 14% growth. And if we do identify in-licensing type opportunities, that's on top of it. And so those are items that have opportunity for future growth. But our debt levels supporting the businesses are fine.

Okay, great. Yeah, so it sounds like that's going to continue going forward, even after 2025. And on SG&A, you identified a couple items, about $4 million worth. Should we expect those to – could we subtract those, I guess, sequentially for SG&A in the third quarter and come up with a good estimate of what that line item might be?

You certainly should isolate those as not being something that you would expect to occur in the third quarter. And again, the other part I would say is, yes, I think otherwise, you know, our run rate of expenses is there. As we have revenue growth, there's obviously a little bit of growth on direct expenses from that. But overall, our SG&A is a good number to use.

Okay, great. And last one for me, Pete, for you, is just can you walk me through from net income to cash from operations. It looks like I was estimating about a $7 million difference there. Just where that difference came from between those two?

Sorry, it was between which two numbers?

Just net loss and cash from operations or free cash flow. Because you had a big benefit there, a big difference between those. I was wondering what the major factors there that were driving that difference in the second quarter were.

We define free cash flow as adjusted EBITDA less the capital expenditures and those patent acquisition costs that I mentioned. Between cash flow from operations and net loss, you've got obviously the non-cash items of amortization, et cetera. Outside of free cash flow, it's the debt service and costs for the indemnification or those investigations, as well as just changes in working capital. That's what's outside of the free cash flow number.

Okay. Great. Well, thank you, Pete. Appreciate it. And thank all of you for taking my question.

Take care, John. Bye, John.

Thank you. Our next question is a follow-up from the line of RK with HC Wainwright. Please proceed with your questions.

Thank you. Thank you, folks, for taking my follow-up. This is on the KOA, the study which is going to be on the KOA. So, Dr. Stein, you know, with almost all pieces in place and also having almost about a year or longer to reflect and dissect, you know, the last clinical trial and with the SAB in place, what are the things that you're focusing on now and going into this meeting with the FDA in terms of how to plan for the study and what are the things that you're trying to make sure that you don't have to face at the end of the study?

Thank you for the question, RK. We're very encouraged by the earlier result when the product that was tested was still fresh enough. And so we've made changes to how we make and store the product and how quickly we will use it in this upcoming study. We plan to have some discussion around that with the FDA. And we want to review our protocol in terms of the endpoints that we think they'll agree to, our plan for dosing the patients, and the number of patients in our statistical analysis plan. So we want to make sure that they're bought into the approach that we're taking, and we are optimistic that that will go smoothly. As was stated, we do expect to enroll a patient before the end of the year, get the study launched, and still on track for BLA filing in the second half of 2025. with approval in the second half or perhaps earlier in 2026. So our biggest objective is to make sure that we recapitulate the positive result in the initial part of that other study and make sure that it carries through the entire study this time.

Thank you.

Thanks for taking my question.

Take care, RK.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Wright for any final comments.

Thank you for the great questions. Just in summary, I'm proud of the progress Memetics has made over the last four quarters. We still have a lot to do, yet I'm bullish about what we can get done in the second half. I appreciate your support. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.