Wednesday, March 24, 2010

Medafor CEO responds to latest Cryolife salvo

MINNEAPOLIS - (Business Wire) Medafor Inc. (“the Company”) sent a letter to its shareholders detailing recent corporate accomplishments, including highlights from the Company’s unaudited financial results for 2009, and recent significant developments at the Company.

The complete text of that letter follows:

March 22, 2010

Dear Medafor Shareholders,

I am writing to update you on our financial highlights for 2009, as well as to provide you with some information about recent developments at our Company.

2009 Financial Highlights

I am pleased to report that Medafor has once again experienced a very strong year. Our performance was highlighted by continued revenue growth, a significant increase in operating profitability and steady positive cash generation. Perhaps most important is our demonstrated success in increasing MPH market penetration worldwide. As a result, we have entered 2010 with an improved financial base and a strong operational foundation.

Each shareholder will be receiving the audited numbers and detailed commentary following the completion of our annual audit. The audit has just commenced and we expect it to be finalized in late April or early May. In the interim, here are some highlights based upon our preliminary unaudited financial results for 2009:

  • Strong Revenue Growth

In 2009, Medafor experienced an approximately 40% growth in revenue as compared to 2008. Unaudited revenues of $13.8 million for 2009 exceeded the business plan of $12.5 million by approximately 10%.

In the U.S., our fast growing general surgery distributor network achieved a revenue growth rate for 2009 that was well in excess of 120% for the year, and we are seeing impressive new daily growth in the use of our products in Urology and OB-GYN surgical applications. Further, our well established distributors in Japan and China achieved substantial revenue growth in 2009 of approximately 90% as compared to 2008, reflecting what appears to be enormous ongoing demand for our product in China, as well as the initial entry into Japan following successful receipt of regulatory clearance by the Japanese authorities.

The only decline in our overall net revenues came from those markets that are serviced by CryoLife. Revenues in those markets declined by approximately 40% as compared to the same sectors for 2008, after taking into account the transition of our then existing International network to CryoLife under the terms of the Exclusive Distribution Agreement (“EDA”), effective January 1, 2009.

  • Operating Performance

Since receiving FDA approval in 2006, we have been focused on achieving positive operating cash flow from the sale of the MPH product as rapidly as possible. I am pleased to report that, consistent with that objective, Medafor’s cash based operating profit increased to approximately $2.4 million in 2009, representing a roughly 350% increase as compared to the comparative figure reported in 2008. Unfortunately, these operating profits were reduced by the very significant legal expenses we incurred in defending ourselves against the lawsuit initiated by CryoLife, which totaled over $1.2 million in total legal and associated fees for 2009. As a result, our basic operating income, though still strong due to steady margins and disciplined SG&A management, was reduced by about 50% to $1.2 million to reflect these litigation expenses. Therefore, net growth of operating profit was just over 120% in 2009.

  • Improved Cash Position

From a balance sheet and liquidity point of view, we generated positive cash flow. Our cash position was further increased by a positive inflow arising from the debenture extension. Medafor therefore ended the year with approximately $1 million in cash on hand, and about $1 million in additional cash availability under an unutilized line of credit. Absent the legal fees caused by the CryoLife litigation, Medafor would have had $2 million in cash on hand.

Long Term Agreement with Magle Life Sciences

We are extremely pleased with our results for the year, and are even more excited for the future prospects that this positive momentum will bring to our Company. Now that our MPH product is generating strong operating cash flow, we are better equipped to turn our focus on expanding the range and scope of possible new surgical and medical applications.

With this in mind, we are delighted to share with you a very significant and exciting development regarding an expanded relationship with our long-term technology and supply partner, Magle Life Sciences of Sweden. As you may have read on our website and in the press release we issued on March 12th, we recently signed a long term agreement with Magle, under which we have secured full control of the vital technology and manufacturing process needed to make the key powder component in our patented MPH surgical product.

In the past, ownership of the manufacturing process and technology resided overseas and was not within Medafor’s control. This agreement is a watershed event for our company and its future, and one which we believe will enable us to create greater value for Medafor shareholders in hemostasis and other initiatives long after the Hemarrest owned patent expires. By deepening our partnership with Magle, a company with a recognized strength in starch technology and research, we will be able to develop and enhance new applications of the MPH product, and strengthen our valuation prospects for a potential IPO or acquisition, if deemed appropriate.

Under this agreement, Magle will continue to exclusively supply Medafor with our DSM-A product for hemostasis on a long-term basis under favorable terms from both a pricing and minimum commitment point of view. This guarantees Medafor a quality long-term supply from a trustworthy and reliable partner. Medafor now also has the ability to create a second source of supply (with Magle’s active assistance).

For nearly a decade, our partnership with Magle has been built on a foundation of trust and mutual respect. We believe that Magle’s starch technology expertise, combined with Medafor's proven success penetrating the market for intra-operative surgical hemostasis products, is the ideal partnership arrangement as we continue executing our global growth strategy. The new agreement is particularly important because the prior agreement was expiring at the end of 2010. We began negotiating the contract renewal in 2009 and are very pleased that we were able to complete the negotiations expeditiously, while at the same time addressing the goals and objectives of both Medafor and Magle.

As consideration for acquiring this technology, we issued 1.8 million shares of Medafor stock to Magle, making Magle a significant shareholder in our company (approximately 7%) and further aligning their interests with those of our other Medafor shareholders. Based on reasonable expected revenue growth rates, the effective cost of the technology amortized over the next 10-15 years, will have a roughly 1% effect on net margins going forward. The cash savings we will generate from lowered mandatory minimum purchase commitments will offset the outlay for this technology, but much more importantly, as a single product/single technology company, we have finally secured perpetual control over our powder supply line and technology, which was previously threatened by the uncertainty surrounding CryoLife's actions.

Repudiation by CryoLife of the Exclusive Distribution Agreement

First, I would like to thank the many shareholders who have reached out to express their vocal support with regard to our Board’s recent actions taken in response to the unsolicited takeover attempt of our Company by CryoLife. We appreciate your continued confidence in Medafor, our strategic direction, and the promising future we see for our Company.

Now allow me to take a moment to bring you up to date on the status of our relationship with CryoLife and the EDA. On March 18th, 2010, we informed CryoLife that it has repudiated our exclusive distribution agreement by failing to respond to our reasonable request for adequate assurance that it would properly adhere to the terms of our agreement. Under state law, CryoLife’s repudiation effectively permits Medafor to treat that contract as terminated and cease all performance under the EDA, effective immediately. Our March 18th letter informed them that we intend to do so.

CryoLife has breached the terms of our agreement in China, Europe, Brazil and repeatedly in the U.S., and has continued to insist that it is somehow entitled to distribute HemoStase in China and Japan, despite the clear terms to the contrary set forth in the EDA. As a result of that action, we became highly concerned about whether CryoLife had any intention of honoring our agreement going forward, and we insisted it provide us assurance, as required by state law. CryoLife ignored this request, thus repudiating the contract.

Given their continuing actions and breaches of the EDA, we no longer believe that CryoLife can be viewed as a trustworthy partner, and worse, their actions confuse our customers which we believe is negatively impacting our future growth, thus impeding the overall objective of driving value for our shareholders. Thus, our Board unanimously determined that it is in the best interests of our shareholders to treat the EDA as though it has been terminated going forward.

As we have said in our previous communications, we will not engage in a public back-and-forth debate with CryoLife. However, we do recognize that you may have questions about the current situation and the allegations and personal attacks that CryoLife has been making. Therefore, we will continue to provide updates as warranted via the ongoing Questions and Answers section, which has been posted on our website and, if necessary, will be sent out in further mailings.

We have urged our shareholders, our customers and our employees not to be overly distracted by the noise CryoLife is making – be it via litigation, in letters to Medafor shareholders, or in the press. We view their aggressive campaign as nothing more than a sign of desperation on their part as they appear to be dealing with problems of their own making. As we have previously stated, it is becoming increasingly clear that our Hemostase MPH product is materially important to CryoLife’s business. However, what may be in the best interests of CryoLife and its shareholders, is not necessarily in the best interests of our Company, our future growth and our shareholders.

As always, please feel free to call me with any questions. Thank you for your ongoing support.


Gary J. Shope

Chief Executive Officer

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