PolyNovo Limited (PNV) Earnings Call Transcript & Summary

Well, welcome, everybody, to the PolyNovo H1 FY '22 results. I can't actually see how many people are on the line, but I'm expecting a big number. And I think you can see on your screen, there are 4 people: myself as Chairman, David Williams; and at the top of my screen, probably yours, Jan Gielen, the CFO of PolyNovo; Max Johnston, under him with the glasses, acting Interim CEO and previous Board member; and in a dark suit with the blue shirt, Ed Graubart, who's in charge of our U.S. operations, and I didn't ask you, Ed, but probably in from California. So I'm going to top-and-tail this as I normally would. I'm going to hand it over to Max for some comments. So, no doubt, also at an appropriate time just ask Ed to say a few words about how the U.S. is traveling, and also hand over to Jan. I'd say some editorial comments at the end, and then we'll open up for some questions. So welcome, everybody, in any case. I thought a little bit about what I was going to say in the last half an hour today because it seems, notwithstanding that our short sellers are up at about 9% at the moment, that people aren't really taking that much notice or not as impressed as we are with what we see as outstanding sales results. And unfortunately, the half year results, which you're going to see, are going to be peppered with growth rates on month-on-month, on quarter-on-quarter, on half-on-half. And from our perspective, the growth rates, especially in the COVID environment, we're not making any excuses for that, are outstanding by anybody's standards. So I've got one key metric I'm going to give you to think about because I'm not sure that you're as impressed as we are by the fact that the Q2 sales in the U.S. were a record $8.06 million, up 105% on same time last year, which was $3.92 million. I think that's outstanding. People don't seem to be as impressed by the fact that our sales for December were a record $3.4 million, up 76% on same time last year, which was $1.93 million. Before I sort of give you the metric that I wanted people to just concentrate on, that momentum that we saw in the last half and in particular in the last quarter but into December has carried on, and Ed might say something about this in terms of where the U.S. is going. But let me just say that in January alone just finished, the U.S. had another record January '22, $3.7 million, up 96% same time last year. And the group recorded BTM sales of $4.05 million in January '22, again, the first time ever for the company over $4 million per month. So for those of you doing a little bit of mental arithmetic in terms of what our run rate is at $4 million a month in a January, where a lot of people have acquired a year, you can start to get a much better feel for where our sales are going. And in addition to that -- will be more on this when Jan talks to you. But in addition to that, the implications of that for where our cash is and where our cash will be this year, and we've made a couple of comments that we should be profitable by the end of this year, and there should be cash running off this business, which is a very good thing, and it goes to the issue of capital raising. There's one metric I just want to give you because I'm -- if you're getting bored with all that, and you can't see the wood for the trees in terms of the sales and how outstanding they are, I've made the point that we've really effectively got a cookie-cutter approach to this. This is a product that now this little bit of our product, as you can see, is a very malleable foam. This is a product that they are selling to USD 900, making us a 95% return. And one of the things we said at the last time we talked was that we just need more people on the ground. It's as simple as that. And so what you'll see is we've now got 40 people on the ground in the U.S. Ed will tell you, the leashes have been taken off, and he's aiming, I'm hoping, for 54 by the end of March. But the one metric I want you to think about is this just to prove my point, in January alone, the average salesman in the U.S. sold $118,000 worth of product. The average sales, $118,000 worth of product. Those salespeople, we're paying roughly $100,000 per year, per year. And so a little bit of role play. Ask me the question, David, if an average salesman can make over $100,000 worth a month, average, but in that 40, we've probably got half a dozen that have been there for a very short period of time, so they're still building up their network and so forth. But if a salesman can generate over $100,000 a month, month-on-month and you're paying a salesman $100,000 a year, then why not put on more? Well, the answer is we are putting on more. And we have taken off the leashes for people like Ed to really push this. So the success of this business over the next 6 months and over the next 6 years, is going to be getting from the small number, 40 people, by the way, in the U.S. on the ground to 100, 150. I've made the point before that we're well on our way to having 5 in Australia at $1 million each a year. And if that's the case, we can easy have 100 in the U.S. So that's the vision. Forget about all the percentages you're going to hear. If you get lost in the trees, don't worry about it. The fact of the matter is that we put on new salesmen and they sell and they make a very profitable business for us, and consider this a business that hardly had a product 3 years ago and by the end of this FY, we should be cash flow positive and profitable. We are, by the way, significantly profitable in the U.S. already, for those of you who want to delve into the accounts, and we hit them up for some charges to pay for all of us, our people back here in Port Melbourne. That's some little editorial comments just to give you some different figures. And those figures, I want you to concentrate just on my cookie-cutter approach for the average salesman's ability to sell right today in the U.S., and to increase that. And that's going from 40 to 54, hopefully, in the next 1.5 months in the U.S. We're continuing to add clients because that's what you would expect if you're seeing what's happening to our sales. So we're now 164 hospitals in the U.S. that we're supplying. But each salesperson we bring on is expanding that as they go. So welcome, and let me introduce you to Max Johnston, and thank you. Max?

Yes. Thanks, David. Just as David has said, we're extremely proud of the sales result that we've got in the first half. Given the environment that all medical device companies have been operating under. Growth of 44.6% across the group in our BTM sales, we think, is an outstanding effort. Great to have Ed on the line today. 57.9% growth in the U.S. And we've got to remember that the U.S. was very, very badly hit by COVID, and top marks to Ed's team for being able to generate that sort of sales in a lockdown environment. We're also very pleased to report that our partnership with BARDA remains extremely strong. BARDA had been a great partner throughout this journey with us. First half this year, they spent a further $1.83 million in our business, up 34.8% on the previous period, and their investment in our partnership continues to grow quarter-on-quarter, month-on-month, and they continue to ask us for what other projects they can partner with us, a tremendous partner and good to see also their continued growth into our business. Total revenues, up 41.9%; including the BARDA revenue, $18.5 million, an increase of over $5 million half-on-half. And we continue to invest in our business. In terms of customers, we've now grown our customer base to 361. That's up from first half in '19 at 123. So consistently, we continue to grow the number of hospitals that we service. In terms of employees, total employees now at 122. We started in first half '19 at 41. And I can remember when I joined the Board, we actually had 3 employees. We had Dan and Tim, who are still with us, and a financial controller. That was the staffing way back when I started my journey with PolyNovo, now up at 122. Most of those heads are deployed in sales and marketing and increasingly, within R&D. We're investing in our sales and marketing team to expand our intensity in sales and our geographic spread. We're investing in R&D teams for product innovation and commercialization, and we'll expand the footprint that our technology could have across many, many different indications in the health care area. What I'd like to do now is to pass over to Ed so that Ed can give you a little bit of insight into our U.S. market. Ed represents 90% of our volume at the moment. He and I have become very close because he's the difference between happiness and sadness in a month. And I've got to say, over the last 3 months, a record November when I first arrived, a record December on the November and a record January over the December. So Ed, thank you, and if you'd like to just take us through the U.S. market.

Sure. I think David has pretty much covered it. I got a great spokesperson there for the U.S. in David. But as David said, our first half, we were up 58% year-over-year with $14.2 million. Our December sales were a record at $3.4 million, up 76% on the same time last year. And we had what -- something that I've been striving for since I got here, we had our first $2 million month, and we exceeded that easily in the month of December. We've got strong quarter-over-quarter momentum with Q2 sales, as David said, at $8.1 million and -- up 31% over the $6.1 million that we did in Q1. So -- and the good news is as a follow-up to that strong first half and Q2 performance, we had another record month in January with sales of $3.7 million, up 96% over the previous January. So a lot of things that we've been working on are starting to finally come to fruition, and the -- with COVID still in the background and sometimes in the foreground. So as we continue to build out the U.S. sales team or any team member, really, the focus is on high-performing people with a track record of success. Our commitment continues to be on new account acquisition, going deeper in current accounts with expanded indications across multiple specialties and driving growth within our GPO and IDN partners. So with that, we've hired an additional Sales Director, 10 additional sales representatives and a sales associate. And we've added 2 additional sales associates so far this year. And as stated, we had 40 selling team members at the end of December. We've since added to the team in January and February, and we're on our way to plus 54 as quickly as we can build out the pipeline of candidates and move on with the high-quality people. The idea is that we get the right people in the right places, and we won't hire somebody until they are the right people. I'm very happy with the team we have right now. So as important as adding sales staff is, we need to drive the level of accountability we desire, and we need to add support staff as well. So staff with roles and responsibilities to increase their clinical and technical acumen and skills with the end goal to shorten the time of effectiveness in the field and driving revenue earlier in their tenure. Keeping that in mind, we've added a new Director of Marketing, promoted one of our Sales Directors to our VP of Sales in the U.S. and another to the Director of Strategic Accounts, who will specifically focus on our GPO and IDN integration. We've also added roles specific to our clinical team and now have a dedicated team member focused on sales training and development. Our ambition is to have every territory manager capable of handling a minimum of 10 accounts and generating at least $1 million a year in revenue. And we do have some far exceeding that, $2.5 million, approaching $3 million a year now. So at the end of December, we had 154 active accounts. We added 35 in the first half, 16 in Q1, 19 in Q2, and we maintained a robust pipeline of new customers in development and we're on track to meet those numbers again in Q1 -- or Q3. So as you can read on the slide and as David mentioned, the U.S. business is profitable on a stand-alone basis, and we expect the sales and profitability will continue to grow. As we do that, we will also be expanding our markets, and the next market I expect to be able to talk about this summer will be our entry into Canada. So with that, I'll turn it back over to you, Max.

Thanks very much, Ed, and thank you so much for the effort that the guys have put in. It really has been an outstanding end of the first half and start to the third quarter. What I'd like to now cover off is Australia and New Zealand. Australia and New Zealand, we were down on the previous year around about 25%. It was long lockdowns first half '22, canceled elective surgery and an unseasonally wet season. So there was very, very few of our normal burn season activity. We had a very, very strong recovery post the lockdowns when they lifted in January. We're 6.5% above our target and 72.5% up on January of the previous year. So very, very much a very strong recovery coming back into Australia. We're back to return to in-person meetings and attendance at conferences. We've got a large repeat customer base of 149 hospitals and selling into multiple verticals. And I think that, that's something that we feel very proud of. Of the 149 hospitals that we've taken on in Australia, we have not lost an account since we started entry into the market. So extreme loyalty from people who have started using BTM. We've got increased usage of BTM in smaller burns, which are the more frequently occurring burns. And sales of small devices, almost miniscule ones for us, now represent over 50% of the total units sold, providing a more stable base in orders and reducing our reliance on the burn season. We're adding 3 additional sales personnel in sales support roles. That's to grow the existing business. And Ed mentioned that, in the U.S., we're aiming to go from an average of 4 accounts per territory manager to 10. Well, Lyndall in New South Wales, she actually handles now 27 accounts. And so we see the opportunity now to further develop the tail of the accounts within the Australian market and increase the lift from 149 to beyond into other clinical areas. U.K./Ireland, we probably couldn't have wished for a worst scenario to launch the U.K./Ireland business into. Pretty much from the beginning of when the business started, they have had rolling COVID lockdowns, and it's been very, very difficult to actually expand the business. Total sales first half '22, an impressive percentage increase but still a very, very small number of $369,000. That was significantly less than the original target that we've put in place for the U.K. But encouragingly, they also are getting back to normal in terms of the marketplace. First half '22, as I just said, affected very much by Omicron and not being able to get into hospitals and the cancellation of surgeries. Customer engagement was maintained mainly by digital and off-site meetings, resulting in a strong account acquisition. The most encouraging number I see is that we've increased the NHS accounts that we hold from 23 at the end of the first half to 38 first half '22. That's a huge jump in terms of the number of accounts that we're covering. And we see that we should be able to get to 150 accounts within the U.K. within a reasonable period of time. Sales of small and medium BTM devices represent a large proportion of the sales and continue to increase, with medical staff and new accounts gaining confidence in BTM use. We've added 2 sales reps in London already, and we're recruiting for Scotland. That will mean that we'll have good coverage not only of London and greater U.K., but also into Scotland, which is a particularly strong medical device market. We have employed a clinical trainer. He was added in Q2, Ross, to assist with clinical support and start to build a more robust KOL program over there. And we've got increased focus on generating more sales from the lucrative burns market. We're not a burns company, but we are famous for burns. And that's our heartland, and that's where surgeons get their confidence working on large burn cases in our product. In terms of our distributor markets, primarily in Europe, sales growth to distributors was flat compared to the same time last year. Omicron impacted Italy and our larger market of Germany, Austria and Switzerland. However, we did see good growth in some of our smaller markets, Finland being a standout, with very, very strong reoccurring sales. We made first sales to Denmark and Cyprus in first half '22 and Poland, potentially another large market coming onstream in January 2022. Both India and Taiwan placed orders, which was encouraging. However, initiatives to improve the effectiveness of our distributor model have been undertaken. We haven't cracked the distributor model yet, but we're getting much closer to it. I think distributor models always will take your product to the purchasing office. It's getting it from the shelf into the theater, which remains our responsibility, and we are improving on that as we speak. In terms of new products, and I think this is the exciting thing, matrix. We've got a product called matrix, broad applicability for single-stage grafting in burns, chronic, surgical and deep tunneling wounds, to provide increased treatment options and better outcomes. We believe it has a total addressable market of around USD 750 million. And the product really comprises of our BTM foam without temporizing film on the top. Now you might say that seems like a very, very simple innovation. Actually, it makes the product perform without the stability of the temporizing film in a very, very different manner and broadens the application in many other uses within the market. We're expecting to make a 510(k) submission, launch that with the FDA in first half calendar year '22. Another exciting opportunity is SynPath. Unique sizes and shapes of NovoSorb BTM for the U.S. alternate care market, a market we estimate to be worth $400 million, and is primarily an outpatient market, which is a whole new area for us to explore. The DFU, or diabetic foot ulcer, and venous leg ulcer reimbursement study is in progress. We enrolled first 10-patient trial. We completed that with very good results, and that gave us the confidence to go into the next phase of recruiting 138 patients for the major trial commencing in April 2022. We will launch once we have reimbursement, and we expect that to be late 2023. I think the SynPath product is particularly exciting, and it's exciting not only from the huge commercial opportunity that it represents for us in the USD 400 million market, but it's something which I didn't realize before I studied it. Diabetic foot ulcers and venous leg ulcers can result and usually result in about 30% of the patient cases having an amputation. That, to me, was a stunning statistic and gives us a huge opportunity to improve so many patients' lives. The story, however, only gets worse since COVID happened and people have less access to good patient care for the care of these indications. It's now lifted to 50% of diabetic foot ulcers and venous leg ulcers result in an amputation. So a very important product for us commercially but even more important, a very, very important unmet health need. Syntrel. This is our expanded approach to hernia market. After learning quite a lot from the first hernia development, we are now in the process of validating 4 design options for the various hernia types which need to be treated. The 4 designs are being developed simultaneously. We don't expect them all to be successful, but we do expect that we will get 2 products at least from the 4 designs. And most importantly, we're learning a lot more about the design of products which go in the body as opposed to products which are used on the body. We anticipate filing for FDA clearance in calendar year '24. NovoSorb, the project to develop products to a breast construction is being conducted now in-house after having completed our partnership with Establishment Labs. We now have employed dedicated marketing resource to look at the market. We have a project team established, and surgeon engagements are underway. And we expect to leverage the processes that we are using to develop the hernia devices for this market as well in the soft tissue support area. In addition to the work that we are doing internally with our R&D team, we have established partnerships. The partnership which we have at the moment is with Beta Cell. We're supplying them BTM product for use in their trials. They control the trials. They generate the trials. Beta Cell are ready to commence human trials in Adelaide. The reason we're excited about this partnership is it's our first entry in looking at how our product could combine with the pharmaceutical and become a drug-eluding product, so an important partnership for us to follow. Clinical trials. We have the BARDA pivotal trial underway. The pivotal trial is open for recruitment, and screening of eligible patients is in progress. During first half '22, 5 patients were recruited, and this has now increased to 10. We have 25 U.S. sites live. 5 Canadian sites are being enrolled. And we expect patient recruitment to increase as more sites are activated. This trial will be a total trial of 120 patients, so a very large trial. Second half '22 and FY '23, we'll see higher BARDA income commission with the patient recruitment, and BARDA is committed to $15 million towards the trial. BARDA is a very valued partner, and we maintain a strong relationship, and we're continually looking at further opportunities to participate with them. The other major clinical trial which we have underway. We completed, as I said before, the 10-patient diabetic foot ulcer pilot study successfully on chronic wounds between 1 and 25 centimeters. Mean time closure was 6.25 weeks, with the fastest being 2 weeks. 7 out of the 10 ulcers had complete wound closure within 12 weeks. The remaining ulcers that did not achieve wound closure did show a significant reduction in wound size. Results will be submitted via a poster at The Symposium on Advanced Wound Care in the fall in October 2022. And the study protocol for the RCT, comparing SynPath with collagen allogeneic dressing has been finalized with the goal of 138 patients in 2 equal groups. Recruitment for this trial is also to commence in April 2022. Results of this study will be used to support the U.S. reimbursement of the SynPath product to manage chronic wounds in the outpatient setting, and we anticipate U.S. market entry circa late 2023 with reimbursement. I'd now like to pass over to Jan to take us through the financial results. So thanks. Jan?

Great. Thanks, Max, and good afternoon, everyone. Group highlights on revenue for the period. Total revenue up 41.9%, as Max mentioned. BTM product sales up 44.6%. We recorded $16.3 million in sales for the half. So record results. We turned over or had sales of over $3 million in the U.S. for the first time in December. And as a group, we had sales of just over $4 million in January. Market highlights, as both Max and Ed have already mentioned but we're covering again, U.S. BTM product sales were up 57.9%. ANZ was down 25%, for reasons we know why, we have endured long lockdowns. And as a result, there's been less trauma, elective surgeries and the burn season, they got pushed back. But pleasingly, recovery in January was 6.5% up on target, and we're up 72.5%, up from January last year for Australia, New Zealand. U.K./Ireland, up 254% from a low base and impacted by Omicron. Distributor sales flat with mixed results. The DACH region, Germany, Austria and Switzerland, impacted by lockdowns and so forth. Finland had strong recurring sales. We've got a great distributor up there. And we also had first sales to Denmark and Cyprus in the half, and recently to Poland in January. A really great number to see is the amount of accounts we've added in the half, 66 new accounts in our direct markets, increasing 295 customers to 361. Just moving on to operating expenses. So as expected, the bar chart has gone up because we're trying to grow our business. So operating expenses up 53%. We continue to invest in growth. A large part of that increase is due to the increase in head count, growing by 34% from 91 to 122. A large portion of those are sales reps, and they're having the desired effect on revenue as you saw in the previous slide. We also had the impact of annualized hires coming through from the prior year. In that, there's a really significant number of recruitment fees, and that's a one-off cost. That's close to $500,000 for the period. So that does have an impact, and it's not recurring. And we also expanded regional operations for the period in the U.S., EU and Australia. All this resulted in a net loss after tax, excluding noncash items, so share-based payments, unrealized ForEx gain. The net loss came in at $2.5 million. I guess the number to focus on is the EBITDA number, excluding noncash items, which was negative $1.4 million. So we did break even last year for FY '21. And in the half, as planned, we had an acceleration of sales reps being hired, mainly in the U.S. The increase in head count is having that desired impact on sales, with a record sales result in December in the U.S. and January, and we've also increased our customer base significantly. As of today, we're up to 164 customers in the U.S. You'll see a pattern recurring. We're in the same place this time last year where we have loss for the half. We invested in the half. We hired more reps. And we came home strong, and we had an underlying breakeven for the full year. For this year, we expect profitability to improve, and cash flow to improve significantly in the second half as we get a return on investment for the reps we put onboard and they start to get traction in their relative territories. Moving on. Cash flow. Cash flow from operations for the half was negative $3.3 million. And again, just talking -- going back to what I just mentioned, the investment in growing sales team and expanding the business and also including R&D. Cash on hand into the $3.3 million at the half, but it's exactly where we thought it would be in our budget plans we're forecasting. So no surprises at this end. CapEx continues to reduce. We completed our brand new clean room last year during the calendar year. And as a result, we're not expecting to spend anything significant for some time on CapEx, just incidental requirements. So for the half coming up, we're looking at about a couple of hundred grand just for incidental needs, which are completely discretionary. The subsequent event that's occurred just recently, which help our cash on hand situation, which is not a situation in my view, we've got an offer of $6.35 million for the sale and leaseback of Unit 1 Lorimer St., Port Melbourne. We have 2 adjoining units. And in those units, we have our manufacturing facility and our corporate head office. We paid $4.6 million for the building back in February 2019. So it's a good return. But we're not in the property business, so best to put the money back into growing the business, which is a better idea at this point. The sale is conditional on due diligence ending, which the earlier of 14 business days from the 28th of Feb for the exchange of contracts, and that's underway at the moment. The lease term is for 10 years, with a two 5-year options with a yield of 4.3%. And our existing lease on the adjacent building will be synchronized to match the new lease. So with the funds, $3 million of the proceeds will be used to reduce debt, which is our equipment finance facility, and that will actually free up $750,000 in repayments each year. In addition, we get to keep the balance of the proceeds, so add another $3 million to the existing $3.3 million and that cash on hand is starting to look really good. Just moving on to the net effect of all of the above, the P&L. So our product sales, as I mentioned, up 44.6%. Total revenue, including BARDA, up 41.9%. And the really pleasing number is product sales gross margin actually increased by 1.5% from 93.1% to 94.6%. We've had further improvements in the manufacturing process and the yield. What the guys are getting down there is fantastic. So well done to them. Employee-related expenses up 45%. But as I mentioned before, we had $440,000 in recruitment fees for the period. They're one-off. Corporate admin and overhead expenses are up. The business has expanded, but we are enduring still logistics fees, which have been higher than normal prior to COVID, insurance and so forth. R&D spend is up 86.3% as planned. We've expanded the team, and we're working on multiple hernia devices. We've got a number of trials running, including DFU trial, and other projects the R&D team is working on. We actually had a net profit after tax accounting aspect for the period, but that does include the reversal of $4.7 million in share-based payments. It's just a book entry with regards to share options, and that's as a result of the CEO and COO resigning last year. So net underlying loss for the period, excluding noncash items, was only $1.7 million. We're looking forward to a strong half and ending the year FY '22 on a really good note. So I'll hand that back to you, Max. Thank you.

Thanks, Jan. The 5 things that we're concentrating on, having completed the commissioning of the plant and most of our major capital works, is to increase the sales team to intensify sales efforts in our direct markets. That's paying dividends, and we're seeing an increase in both intensity and productivity in our existing developed markets. Optimize our distributor model and emerging markets model. We have negligible sales in those areas. We're going to optimize those models. Expand our geographic footprint, expand our key opinion leader program, especially in the U.K. and EU; and focus on product development and faster commercialization. 5 very focused efforts that we're going to concentrate on. We have a very, very strong growth at the moment. We see that continuing to increase, and we're very optimistic about the following second half period that we're entering into. So thank you very much, and I'll pass back to David.

Yes. Thank you, Max. Thank you, Ed, for staying up to be online. Thank you, Jan. That's great stuff. Look, we're very excited about the growth in this business. And so what can you expect? All of those 5 things that Max just talked about, really important. But the key message is a salesman in the U.S. can sell $118,000 worth of product in a month that we can pay $100,000 for. So our key focus, for me anyway, is to get more people on the ground in the U.S. and broaden our footprint, and get more depth in our sales force so that they're seeing more accounts, and keeping up with the surgeons. I've encouraged people in the past to have a look at our site and have a look at the videos on there for some of the key opinion leaders in the best universities in the U.S. with their patients pushing and following them, with amputations and diabetic foot ulcers and burns and so forth. Please look at that because that's where our growth is coming from. Our growth is coming from keeping up with the surgeons, number one; getting more depth; increasing the number of hospitals; and increasing the footprint, not just in the U.S. Max mentioned the U.K., we've got a lot of work to do there. But it's heading all in the same direction, and we're seeing record results December, record results January. We haven't asked Ed to sort of comment on February because he's not done with February yet, but the early numbers look pretty good to me as well. So the fact that we can get record months, who cares? It doesn't matter. It doesn't matter because it's just an extrapolation of what we got. So expect more of that. And because of that, expect what Jan's already preempted, which is that we will be cash flow positive by the end of this financial year. We've got cash. We'll be cash flow positive. And we've now got cash off a sale of the building we bought a couple of years ago after paying off our debt. So that's a good thing as well and allows us to synchronize our leases so that we can go forward with some certainty. So for us, it's happy days. And it's even happier days because, by definition, we're changing the way in which surgery is done. We're saving lives not just for diabetic foot ulcers, but have a look at some of the cases on our site that other competitors couldn't have achieved. So it's a fantastic business to be in. And I encourage you, and I thank you for staying with us as shareholders in these trying times, but certainly not trying times for us in terms of the way in which the fundamentals of the business are going. Thank you. I think we might have a few questions. So we'll take those, and we'll push them around amongst the 4 of us depending on what they are.

[Operator Instructions] Your first question comes from Andrew Paine from CLSA.

Just focusing on the -- your commentary on the U.S. salesman. Can I just get some clarity, is that $100,000 per year their base salary? Or does that include sales bonuses? Will that kind of ramp up?

I'll sort of stabilize as their -- as a base. So those really super performers, of which we've got many of them, making good commission on top of that as well. Ed made a comment that he's got at least one guy -- I looked at the list this morning, there's one guy doing $2.5 million with the sales. And again, think about our margin. So I'm not going to be upset if we're paying him a few pennies extra in commission on the back of that.

Yes. Great. And just so on the kind of, I guess, the revenue, they're growing well. January is looking good, incremental gains in December. What does this look like for the sales team? So do they get these contracts? And can you expect those to continue rolling forward, and then the salesman refocus on new accounts? What I'm kind of looking at here is do you have this base from 1 month and then you can kind of go out and generate more business with that base recurring -- ongoing, in a sense.

I might ask Ed to make a comment about that, please?

Yes, sure. So it takes a lot of work to get into the hospital initially. And usually, we have 1 or 2 surgeons who are very supportive of us. So getting them up and running. And it's not only the hospital sale that we focus on, it's also the postoperative care and making sure we're there for the patient dressing changes because the product, it's not just put on and we walk away. There's a lot of aftercare that takes place. And if you've only got -- if you've got a large center that we bring on, there's a number of different specialties. There could be 20 surgeons within that hospital that could use our product. So it's not just about opening new accounts. It's also about going deeper in those accounts and establishing ourselves across the different specialties or different types of wounds and trauma cases. So each area is a little bit different, and it allows us to expand, as David was saying, within each area a little bit focused. But everyone's got their key targets that they're focused on, and that's what we follow up with them on very frequently when I talk about the pipeline. So the idea is basically to do a little bit of the both or a lot of bit of both.

Yes. Andrew, I just want to just embellish that a little bit because I think one of the comments that Max made was about the hospital load, for example, that the sales people have in Australia vis-a-vis the U.S. And so somebody like a lady, an excellent -- a very excellent lady in Sydney has got 27 hospitals she looks after, whereas the average in the U.S. might be 10. It's not because they're lazier. It's because when you start off, you start with no clients, and so it builds up. And as you start to sell, it enables you to then broaden your wings a bit and go further afield in terms of the number of hospitals you can get through. I think Ed's then raising another layer to that as well, which is 2 years ago, when we thought we were mainly a burns company, you could go into UCLA, sell to the burn surgeon, come out, get in your car drive to the University of California San Diego, for example. Now that salesman will stay in the hospital, and he'll go down a floor to the diabetics unit. He'll go down a floor to where they're doing oncology burns. He'll go down a floor to where they're doing wounds and amputations and so forth. So that's what Ed's talking about when he's going deeper into this. So it's a fantastic opportunity for us because on the one hand, just to broaden the footprint so that we're in all sorts of places that we're not at the moment is going to be powerful enough. But then the ability to go deeper and, as I referred to it, follow the surgeons, even better. But if you just think about the opportunities for us in the States, I mean, it sounds big when we say 40 or going to 54 salesmen. But we've got somebody in Perth now. We've got somebody in Brisbane, and we're just talking this morning about putting in a second person that's potentially on there to just do North Queensland. So in other words, even though we don't have a person in Idaho, which has got a population of 2 million; or in Wyoming, which has got a population of 600,000, I personally don't see it was any different than having somebody in Lansvale or in Perth or in Geraldton. So the opportunity for us are enormous in expanding that -- I'm going on a bit. I'll stop myself right there. Other questions, please. Thank you, Andrew.

Your next question comes from Lyanne Harrison from Bank of America.

I've got a question for Ed, and it really follows on some, I guess, what Andrew was asking. So in terms of the momentum seen in December and January, obviously, there's a lot of moving parts there with the United States with Omicron, operating procedure access out of head count. But what in your view has been that key driver of the growth that we've seen in December and January?

I think it's simply that we've added more heads to the team over the course of the end of the fiscal year last year, earlier in the fiscal year this year. And it's just being present in those accounts. If you've got somebody that covers 2 -- a whole state, you can only be in certain parts of that state so many times. You can't just live in one part of the state because the rest of the state won't see you. As the territories have gotten more contiguous and people can actually stay, as we've talked about, and go deeper into those accounts and establish better relationships within those accounts, so more people, better relationships, more surgeons, as David said, following the surgeons and where the opportunities are, that's probably been the biggest factor that I've seen is that just our ability to have a presence and stay present. Sales is a vacuum, right? If you're not there, somebody else is. Our goal is to make sure our people are there, and that we're seeing and that we're thought about when they're taking patients back to the OR.

And so coming back to going deeper then into those accounts. If you look at the revenue per hospital that you're generating in the United States, have we got to a point now where that is higher than what we saw pre COVID? And if so, how much higher is it given that you managed to go deeper into other units within the hospital?

Yes. I'd say that some hospitals are obviously we're able to go deeper in. We've established ourselves into some major burn centers and major trauma centers where there could be 25 potential surgeons who could use our product there. We may have gotten in during COVID, but we haven't really been able to expand beyond those initial surgeons because of COVID lockdowns. And they're not going to really allow you to bring a new product in, it spread it around the hospital. People aren't properly trained. And if you're not allowed to go in and get trained, then you're not allowed to sell the product. So we have found ways around those in a number of different accounts. And places where we already are in, we've found ways to go -- as I've been saying, go deeper with more -- different types of pathologies like different types of wounds that we've been talking about. I mean, there's still a ton of opportunity. That's the whole thing. There isn't an account, in my opinion, that we are tapped out on. I think there's truly opportunity to continue to add to the teams and build a structure that can support the growth within each of those territories and within each of those hospitals.

And so adding to that team, you talked about adding whether it's 10, 14 more sales reps and David mentioned as quickly as you can. In -- how -- what sort of time frame are we looking at in reality? And I'm just thinking this, too, in terms of when can we revenue growth to come through but also looking at the employment cost side of things. And perhaps you and Jan can elaborate on that.

Yes. I'll hire the right people when I find them. So we've had territories -- just to give you -- put it in perspective, we've had territories that have been open for 9 months. And it isn't because we haven't interviewed, it's just because we haven't interviewed and found the right person for that territory. And making a bad hire is very costly, and it's not something that we're willing to do. We've had other territories that were open for a week, and we were able to find multiple candidates within those territories. So one of the initiatives that my leadership team has is to always be interviewing and to make sure that we have not only a funnel of accounts but that we have a funnel of people across the country that we can tap on a shoulder for either a territory that they're in or potentially move them to a territory if they're the right person to join our team. So I expect out of those 14 that we'll start to see those trickle in early -- some of them will be filled in early March already. And there will be others that just depend on our recruiter and finding the right people for those areas. But it is the primary focus of the team.

Okay. But the likelihood is that would you add a good majority of that 14 this calendar year?

This fiscal year.

Is that the sort of time frame we're looking at it? Calendar. So December this year -- or you think you'll get this done this fiscal year?

If I could get them all by the end of March, I would get them all by the end of March. Let's just put it that way.

Okay. But the -- I'm just -- I'm trying to understand the likelihood of that happening is that would you then, the likelihood of getting all 14 by the end of June? Or should we be thinking more December?

Yes. I would say, June give or take.

Okay. Great. While we're on sales regions. Are you adding Canada to your -- in terms of market expansion? What's the size of the market there? And how are you looking to enter that market? And how do you go about getting penetration into Canada?

Yes. So we already have some penetration through what we call the special access that we've reported on. We've done a number of different cases up there through special access at 3 different hospitals. We're still discussing. As Max had mentioned earlier, the challenge of working with distributors, sometimes -- we're still discussing what we believe is going to be the best focus for the country just because of the expanse of the geography itself. The market, at different pricing than the U.S., it's more in line with Australia. I think the potential is going to be probably -- I wish I could remember the number. I'm not going to just start off a number because I don't remember what I pulled up as the market potential. I apologize for that. But it's something I do have that we can get to you.

That's fine. We can follow up on that after the call. And one final question for Jan is looking at corporate costs, obviously, a significant increase on prior corresponding period. But if I look at it sequentially compared to the second half of '21, corporate costs were down. How should we be thinking about it for second half '22, and then into first half '23?

I guess in first half, we have had, I guess, with the professional fees has been one that has gone up. Our shareholder base has increased and our corporate registry fees increase as a result. Another really huge cost, what's significant is D&O insurance, and we're looking at different ways of managing that like every other corporate. It is expensive. And also just with the business the way it's expanded, your general insurance, our ISR policy does go up. You have to insure your gross profit, and we're making more gross profit now and so forth. But as the business continues to grow, particularly in FY '23, this will plateau. It's not going to grow at the same rate as sales, obviously. And we've had some one-off items that have occurred during the year as well that won't be happening in the second half and in FY '23. So it is up on, I guess, in percentage terms, in dollar terms, but there was meant to be an increase as budgeted, but I'm not concerned about the rate of growth in that -- in those expenses.

Okay. But my other question was sequentially compared to direct half before, so compared to the second half '21, corporate costs and administration costs were down. In terms of that trend, would we expect it to be down in second half '22? Or would it start to go back up again?

I expect it to be slightly up, and then FY '23 would start to flatten out.

Sorry. Can I just embellish something, Lyanne, just on this issue about the 40 to 54. And I got the impression that you're going to take a more pessimist view about this and say the Board is -- to be very clear, Ed's instructions are to get those 54 on as quickly as possible. And he sort of intimated it, but he's got quite a few already of those people in the pipeline. So will we get to 54 by the end of March? Don't know. But we certainly would love him to, and he knows that, he's writing instructions. But it's certainly not going to be December. And as soon as he gets anywhere near that 54, he knows that what I'm going to be telling him is, "How do we get that to 70 real quick?" So we're looking to keep this -- we want this momentum to keep going because there are so many centers and jurisdictions that we're not covering, and we want to get that going as quickly as possible. The other thing I just want to mention, Lyanne, which is really important and we tend to gloss over, is how long does it take between when you put a salesman on and when he, number one, covers his costs; and number two, gets up to $1 million worth of turnover? Let's put the second one aside just for the moment. But I think I've had this discussion with Ed and he's super confident that when he puts the new salesmen on, that it takes them about 6 months to train them, give them a call program, get them on the track and for them to start generating enough sales to pay for themselves. So now it's important, I think, that discussion because we internally debated, and there is no right or wrong answer because it's an individual thing. But it's an important discussion when you look at expanding very quickly the head count because is it working capital? Like, if I can prove to you that over the 40 people we got, each of them can be up and running and paying for themselves within 6 months, then it's working capital. And in 6 months, I've paid him $50,000 worth of salary. But as soon as they start generating, the profits just fall straight to the bottom line. So it's a really important thing just to concentrate on is what's that delta between starting and being relevant.

Your next question comes from Rachael Hardwood from Macquarie.

Just my first question is just around exit rates. So I guess, obviously, Jan was a record month. How is Feb tracking? And how are you seeing the COVID impact in this half so far?

Sorry, was that a question to Jan?

I think it's probably to you Max in terms of January for Australia and for the U.S.

Okay. We've seen a very, very strong start in January. February is looking extremely positive. And I think the thing that's very, very encouraging is the lumpiness seems to be not quite so lumpy anymore. Very strong November, very strong December, very strong January, a good solid February. And there's no indication that we are seeing a slowdown in terms of momentum. And I think that's what we're going by. Ed's our largest market. We're not expecting record on record every month. But Ed, would you like to make a comment? We really don't want to get into month-by-month sales reporting. But it's starting to look very consistent.

Yes. And I would agree with that. And I think one of the questions you asked was about COVID, and it's still very regionalized, right, and it moves a little bit. We've watched it go from New England down to -- across the Midwest. Where it spiked, we may have had a little bit of challenges getting in, but we still had customers maybe using the product. Just weren't able to get in as much as we wanted to. But like Max said, we're starting to see that kind of come to an end. This team has been extremely resilient in the face of COVID and the unpredictability that COVID has provided us as an organization. And if you look at where we were 2 years ago and you look at where we are now, and it's been 2 years of COVID now, we've done -- this team has been able to achieve a number of different things, and that's what we expect of them, that they're very accountable for their actions. They know what they need to go do, and they find a way to do it. And that's what we continue to ask of them and what they continue to deliver on.

I think just to add to that, the big indicator for us is we're back to face-to-face conferences. We're back to having access. I think the world is learning to live with COVID. And that open access and that face-to-face conferences, having people actually on the podium, that's what we need to have, and we're seeing that right across the globe. We're seeing it in the U.K. at the moment. The U.K. is starting to look much stronger in terms of the account acquisition. And we're going to have a very strong February there. So we're bullish about how we're coping with COVID, and we're also bullish with how the world is starting to cope with COVID. There's still a big backlog in terms of surgery. That's going to help. So yes, we believe that we're coming into a good half.

I think the other thing, Rachael, that's clear in my mind is that, in the early days, this was a very lumpy business. And to some extent, it's still a little bit lumpy. But the more hospitals we get and the more jurisdictions we're in, it's just evening it out. It's not that we're any better at our job. It's just that, by definition, the more hospitals you have and the more regions you're in, it's going to become much more predictable. And within that, when you dig into it, you'll get salesmen who had fantastic sales last month but not this month. But across the board, as an average, we're going to -- this will turn into a much more predictable model.

That's great. And then maybe another one for Ed. How are you seeing the sales through the GPO network progressing? And then I guess with this new matrix products, will this also be able to be sold through the existing GPO networks?

So I'll answer the second question. Yes. So we just were talking about that this week. And one of the things we'll do is as we go to get FDA approval -- we can't do anything until we get the FDA approval for the product. We will start to go, sit back down with those -- with our GPO contacts and start to talk about moving this product on to the current GPO. So it should be a much easier process. We'll have to, obviously, make sure we provide the clinical data that they want to go along with the product, but I think there will be an opportunity to do that. And what was your first question -- part of the question again? I'm sorry.

The first part was just around how they're tracking, the existing sales, through the network at the moment.

Yes. So since we moved someone into the role, we saw -- just to put it in a percentage-wise, we saw a 68% increase in revenue in our GPO/IDN partners Q2 over Q1. So we're seeing more and more activity. Our partnership within the GPOs with their key people and hooking them up with our key people, having somebody just strictly focused on that has certainly seen that number start to rise quarter-over-quarter, which is exactly what I would expect.

I can add a bit to this because I looked at the numbers in detail this morning myself. And about -- it's roughly, I can't remember if it's 10% or 12%, but roughly 10% of our sales in the U.S. are to GPO hospitals. So it's early days. We're just scratching the surface. But I think we need to realize that even though it's a big help for us when a surgeon decides to order, that we still have the hard work to do to go and make sure that the surgeon knows who we are and what we are.

That's great. And then just moving on to cash flow, I guess one for Jan maybe. I guess the cash flow was down this half, and you expect to expand head count pretty aggressively. Do you expect to be able to fund this, I guess, through existing debt and then the sale and leaseback alone?

Absolutely. No concern over that at all. As I mentioned during my presentation, we're in a similar position we were last year where we hadn't loss for the half, and then we came home with a really strong result and an underlying breakeven. So there's no reason why that is not going to continue. You can see the early indicators with the January sales being $4 million for the group. And if I look back at, for example, U.S. sales right back through to October, there's outstanding results, and that's going to help significantly, on top of the hires that we've made, with cash flow and adding the $3.3 million and then add on another $3 million from the building that we can use and then a reduction in the P&I payments because we pay down debt of $750,000 a year, puts us in a good position. And there's no concern at this end about cash on hand.

Okay. And just last question for me. I guess R&D spend was up this half. How should we think about this in the balance of the second half '22 and then just going forward, just given the number of clinical trials ongoing?

Sure. So we've got -- we've made a number of hires in the second half, so -- sorry, in the first half. So that will have an annualized effect moving forward. There's a number of projects we are working on. Expect the costs to increase a little bit in the second half and also in FY '23 as we build out our projects and work with our pipeline.

I guess just to add to that, Jan, in terms of the clinical trials, our reimbursement from BARDA will be increasing quite dramatically as well as a result of the recruitment of patients, et cetera. So...

That's right. With the clinical trial as well, Max, sorry, 138-patient DFU trials is to kick off soon. So that runs for, well, just over a year, and that's a cost that we'll get in the R&D line. Does that answer your question?

Yes. That's great.

Your next question comes from John Copley from E&P.

I just wanted to dig deeper on your profitability and the return on each dollar spent to grow sales. As the top line growth is impressive, but when I look at total sales, less adjusted employee and general and admin expenses, the margin this half did fall back to about 3.8% from 14.4% the prior half. And 3.8% is pretty well in line with what we've seen since about first half FY '19, including even during COVID when your sales growth was constrained. So for this reason, it seems as though PolyNovo hasn't seen a great return on each additional dollar spent to drive sales growth. So when do you expect the return on the new operating expenditure will improve?

I think, as I mentioned before -- and I see what you're saying, John, and nice to hear from you. We're in a similar position to last year. So we expect the second half to come in pretty strong. And we're seeing that, as I just mentioned, with $4 million in sales. And I know you're looking at the actual metrics itself. But in terms of how things play out, it's FY '23, that will be the really interesting year, I believe. If we acquire the growth rate that we've achieved on sales to date to where we end up with at the end of the full year for FY '22, that becomes a large number in revenue in FY '23. And it's achievable. So to give you an example, before we go into the metrics, John, to understand what you're looking at. But if you look at the headroom we've got, we've got 160 hospitals now in the U.S., and it's 220 level 1 trauma hospitals. There's the mid-tier trauma hospitals. There's 136 burn centers. There's actually 6,000 hospitals in the U.S. So we've got a long way to go. But I guess my point is FY '23 will be a really interesting year for the company. And I think in terms of profitability, it would be something that we'd be happy to achieve more so than what we've done today in terms of breaking even.

Look, let me just add to that. I looked at each of the employees in the States this morning that we listed in. And I'm sort of making a little bit of -- I can't remember exactly the numbers, but the bottom 4 just come on got 0 sales. But within the next 6 months will significantly increase. There's probably another 6 that have been on recently that were in the sort of like $20,000 to $10,000 sales for the month. There's a lot of people that have come in to the system, new salesman that they're just getting their training wheels off. So we should get a big uplift on those people in the second half. But John, we're going to be chasing our tails because as we just heard, Ed's got another 14 coming through the pipeline. And they take about a good 6 months to get their training wheels off and get their -- cover their costs and get their first good sales in the door.

Yes. And I think one of the very interesting metrics is if you look at the U.S. at the moment, and this is just an average number, you're looking at an average territory manager carrying about 4 accounts on average. You look in New South Wales, we've got somebody handling 27 accounts. Ed's already set himself a target of 10 accounts minimum per representative once they're up and running. So that's the huge productivity gains that we're going to get over time. We had a choice to make. One was to wait and get the productivity gains and then start again or continually flow and continually build. And we've opted to continually flow and continually build. We've put an infrastructure in to support those people now. And we're feeling very, very confident that, that infrastructure is getting them, a, productive earlier; b, able to handle more accounts; and c, get into more departments.

Okay. The reason I asked for a time frame is because it's difficult then to get cash flows to work with the existing cash balance unless, of course, you do see some quite material uplift in that margin probably by the latest, first half '23. Do you think then by that stage we would start to see some material uplift there in first half FY '23?

Yes, John. And I think you've got to realize as well, the auditors wouldn't sign up and go into turn after seeing the modeling that we do, if there was an issue. So we expect to see an uplift in the first half of '23.

I think we're seeing an uplift month on month. That's the point, because you've got coming out all the time. We just put somebody on in Perth. Like, well, fine, what do you expect the sales to be? Well, we actually do have some -- but it's going to be a good year before I see her getting anywhere near 500 or 750 but at a 0 base. So we're going to see that uplift. We are seeing that uplift. November, December, January, I think they're material uplifts already, and we've still got probably 1/4 of our sales force in the U.S., in a sense, finding their feet. I don't mean that in a grumpy way, but getting up the learning curve and getting their call programs going.

Okay. But still given the cash position is very tight, are you able to give some additional guidance as to what we should expect in second half for cash flows? And particularly as well, while we are here on this issue, also some guide as to what the total lease repayment would be, assuming your sale and leaseback is successful?

First question, sale and leaseback. So P&L repayments are currently $168,000 a month. So we're going to be paying off a big chunk of the outstanding debt with the equipment finance facility. It's likely come down to about $110,000 a month. And so a little bit more. So $750,000 saving on P&I for the year after we apply the $3 million, and you -- after a forecast cash position for the end of the year. So we think we're going to end up, well, we know based on the modeling, as viewed by many. As we said earlier, we're picking up a strong second half and similar to the situation where we were last year. Remember last year, we ended up with the same cash on hand that we did. Same -- we did same in the half as we did at the end of the half. Now we're able to do a little bit better than that. On top of that, we've got the sale proceeds to be added. Does that make sense, John?

Yes. I understand. $3 million of that has to be used to pay down debt -- $6.7 million, isn't it?

$6.35 million. We'll pay 3 of the debt, and the lease is 3.35%. The lease is in the release today, it's 4.3% on $6.35 million. And that's pretty much it.

Yes. I mean the building aside, the business is going to end up what we forecasted with some more cash than we currently are at the end of the financial year. And you add in the net premium that's added on.

Okay. And then just the final thing while we are on this topic as well because it is an important one. And the cash position is incredibly tight. You have mentioned in the past the potential for some licensing deals, which might include an equity stake in the company or some upfront milestone payments. And particularly, I know, David, you have an existing relationship, based on your website, with China Grand Pharma. Are you able to comment there at all?

No. There is interest in our products and our company, though, from a number of people.

Just now looking at it. But I guess then there's nothing really near term that we can point to regarding an upfront milestone payment or anything of that side, right? Nothing we should be thinking about in our model on there?

Even if there was, John, and it was happening tomorrow, which I'll define as near term, what would you expect me to say today? Look, put it this way, just in terms of cash, forget about China Grand or Japanese or other people that have been sniffing around. We're relaxed about our position, regardless of what it might not happen with that. And we have no pressure whatsoever from our bank. It's really in our court, and we're relaxed about it. But there are quite a number of initiatives going on around the world, and who knows?

Just one more for me then since you bring it up. You mentioned no pressure from the bank at all, but the bank is requiring a $3 million repayment. And I note the current portion of that equipment finance lease is $1.5 million. Can you help me to understand that, please?

Well, I'll answer that. Look, the bank -- we went to the bank -- the bank had no pressure, whatsoever. They're very happy with their position. We said we're thinking about doing certain things with our capital, and one of them might be a sale and leaseback because we've been offered a profitable deal that will help us sink the leases. And they said, "Well, we're happy to do that. But if you're going to pay down -- if you're going to get all that cash in, then we want a bit of it ourselves." But without that, there was no pressure whatsoever. It was in our court 100%. So we've created that as ourselves. And frankly, we don't want that expensive money. So it was really happy to pay $3 million of it down and use the rest of it as working capital.

And John, the sale of the building is upside to our modeling and where we're planning -- what we're planning for the rest of the year. So it's not something we have to do or forced to do. We want to take control of the building, and we're not in the real estate business either, and we had a tiny profit. So...

There are no further questions at this time. I'll now hand back to your speakers for closing remarks.

Thank you. I'll just make the closing remark just to thank -- well, first of all, thank my own team, on screen and off, but thank shareholders in particular for staying around, and I think you'll be rewarded very quickly. So thank you for staying with us.