Good day, ladies and gentlemen, and welcome to the MiMedx Group First Quarter 2014 Quarterly Earnings Call. [Operator Instructions] Please note that today's conference is being recorded. I would like to hand the conference over to Thornton Kuntz, Vice President of Administration and Human Resources. Sir, please go ahead.

Thank you, operator, and good morning, everyone. This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based upon the current beliefs and expectations of our management and are subject to risks and uncertainties. Actual results may differ materially from those set forth in, contemplated by, or underlying the forward-looking statements based on factors described in this conference call and in our reports filed with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2013. We do not undertake to update or revise any forward-looking statements, except as may be required by the company’s disclosure obligations and filings it makes with the Securities and Exchange Commission under Federal Securities laws. With that, I will turn the call over to Pete Petit, MiMedx Chairman and CEO. Parker H. "Pete" Petit: Thank you, Thornton, and good morning. We appreciate you joining us for our first quarter shareholder call. I have with me Bill Taylor, our President and Chief Operating Officer; and Mike Senken, our Chief Financial Officer; Thornton Kuntz, our Vice President of Human Resources and Administration; and some other corporate officers. First, as our press release indicated, we had a great quarter. Our revenue exceeded upper end of guidance and it was increased by 69% over the first quarter of last year. We had our 10th consecutive quarter of meeting or exceeding our revenue guidance. We had our 9th consecutive quarter of positive adjusted EBITDA. Adjusted EBITDA increased by 77% over the quarter a year ago, and we added 47 direct sales professionals during the first quarter. We want to reiterate our second quarter revenue guidance of $21.5 million to $23.5 million, and our full…

Thanks, Pete. Well, the first quarter played out essentially the way we projected it to, or slightly better, in terms of revenue. We successfully dealt with the confusion regarding skin substitutes in the hospital out-patient setting, we significantly ramped up our sales and reimbursement organizations, we had our first pre-IND meeting with the FDA, we received additional CMS MAC coverage, we saw 2 new peer-reviewed studies published and we had a record revenue in the month of March. We had an excellent quarter by all reasonable means. Regarding reimbursement, I spoke at length during the February and March shareholder calls about our progress in educating facilities about CMS' new payment methodology. So I won't go into details again here. The bottom line is that we believe most of the issues related to the change in methodology were resolved by late February, the sales in March and, so far, in April, reflect that. Sales this month are strong and we reiterated our guidance of $21.5 million to $23.5 million through the second quarter. Our focus now in terms of reimbursement is to build additional clinical data to gain additional commercial health plan coverage and also to continue differentiating EpiFix from the competition in the advanced wound care space. We're also building our scientific and clinical data for AmnioFix in various surgical, orthopedics and sports medicine applications and the potential associated reimbursement. On the clinical front, recall that we have a 7-center EpiFix VLU, or venus leg ulcer, randomized controlled trials with 90 patients in it that has recently finished enrolling, and we expect to complete the study this quarter and then submit the publication. The interim data, with roughly 75% of the patients' data complete, was presented in the SAWC yesterday, and it showed a statistically significant improvement over standard of…

Thanks, Pete. The company recorded revenues for the first quarter of approximately $19.6 million, an increase of 69% or $8 million over prior year first quarter revenue of $11.6 million. Beginning with the first quarter 2014, we will be reporting revenue in 2 rather than 3 revenue categories, as we had in the past. The first is wound care, which now includes both the sheet and powdered versions. The second category is surgical, sports medicine and OEM, or SSO, for short, which includes our AmnioFix sheet and injectable versions; our OEM products for spine, orthopedics and surgical applications; as well as ophthalmics and dental applications. As a reminder, MiMedx decided to exit the HydroFix business in Q4 2013. Based upon this new reporting format, wound care revenue represented 75% of total revenue at $14.7 million, with the SSO revenue coming in at $4.9 million. Wound care revenue growth was driven by increased penetration in commercial accounts, as well as continued growth in government accounts. Gross margins for the quarter were 85% as compared to 84% in the first quarter 2013. Improvement in gross margins was driven by both products and customer mix. R&D expense for the quarter were approximately $1.4 million or 7% of quarterly revenue, which represents an increase of 11% as compared to prior year. The increase in R&D spending is driven primarily by increased investments in clinical trial. Selling, general and administrative expenses is approximately $15.9 million for the quarter or 81% of total revenue. The increase in spending reflects the accelerated build-out of our direct sales force. In the first quarter, the company added 46 new direct sales associates, bringing the total to 122 while also adding an additional 11 reimbursement associates to provide assistance to customer claims staff. The company reported positive adjusted EBITDA of…

[Operator Instructions] Our first question comes from the line of Bill Plovanic from Canaccord.

So I apologize if it's noisy. I'm actually at the SAWC. My question is first are -- you had a very strong quarter in the wound care if you look at the year-over-year increase, and I'm trying to get a handle on -- the only hole I can poke in this is your surgical -- your SSO division was a little lighter than we're looking for. And I'm wondering about how much revenues did you shift from that division as it was measured under the old way to the new way other than wound care, so from the injectable, just to help me kind of work through my numbers? And then my second question is, with all these reps coming on, I think historically it's taking 6 to 9 months. Well, with the last batch, how quickly did they ramp up to that $1 million run rate? And do you think that this next group would be any different from the last batch?

Well, Bill, if we look at this year versus last year, of course, last year as we had said very often on these calls that we've reported all of our injectables as part of surgical... Parker H. "Pete" Petit: Micronized.

Micronized, as part of the surgical and sports medicine group. And then over the course of last year, we introduced SKUs specifically for wound care applications. But we did continue to report the micronized in surgical and sports medicine for consistency sake. We have also said on calls that, in trying to go back and determine how much of the micronized was being used in wound care application, we did some analysis on our TUR cards. Our tissue utilization records. And in that analysis, it appeared as though almost 50% of the micronized product was actually being used in wound care application. Is there an impact if you compare year-over-year and the fact that the numbers would show a $500,000 decline? The answer is yes because now we have, what we're calling, our powdered product, which is the micronized product, in wound care. But to quantify it specifically, that's difficult. Now that all being said, I think one other comment on the first quarter in terms of the SSO group, keep in mind that, that group includes a distributor sales. And over our history with distributor sales, we've seen them move up and down, so they're lumpy. We had a very strong fourth quarter in terms of distributor sales in the AmnioFix platform and the injectable related to that, and it was not as robust in the first quarter, but that's normal. It was no indication that there was any softness coming from the SSO group.

And I'll add also in there, just if we were -- and I don't have the exact numbers in front of me, but if we did look at these numbers, like we did last year, when all of our micronized were in the wound care, which -- that's why we've changed it now -- or excuse me, were in surgical and sports medicine rather than in wound care. The wound -- if we reported the same way, obviously our wound care numbers would be down and our surgical, sports medicine would be up because everything was in the surgical, sports medicine section. So moving on to your next question, on the reps. We are seeing -- I think our last batch, on average, we're looking at that right around 6 or 7 months to get up to the $1 million run rate. This batch of people, I think, are looking very similar to that. We do have a few glimmers that are actually people that are actually quicker than that. It's a little too early to give you kind of an estimate on what we think the whole group is going to do. I think what I can say though is that based on what we've seen so far, we still feel very comfortable with the 6-month estimate. We don't see anything that's going to drag out to be longer than that based on what we can see right now. A few people have actually gotten off to some really quick starts, which is great.

And then sort of clarity, Mike, I don't know if have this on your fingertips, maybe you can look through and give it, too. But what would have wound care growth been if you've reported the numbers the same way in Q1 as you did all of last year? And then have you seen any impact from the FDA discussions about the micronized version, impacting that business with your customer base? And that's all I have. Parker H. "Pete" Petit: I'll comment on your last question. We have necessarily been very conservative with the way we've shown our micronized in the marketplace. Our conversations with the FDA, I think, as Bill said, are going very, very smoothly. And we're doing the things that are prudent, the management group would do under the circumstances. We have not really been aggressive in terms of promoting our micronized version of the product because, until we clear that hurdle with FDA, we don't expect and want to do that. So that's kind of the...

And if I could add in a second. Parker H. "Pete" Petit: Go ahead.

Okay. We don't advertise on the micronized now, we're just letting the orders come in as they have been. So we haven't pulled it back. And we're not, incrementally, doing any advertisement.

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

And our next question comes from the line of Matt Hewitt from Craig-Hallum.

As I look at the trajectory over the last couple of quarters and your progress on the profitability side, how should we be thinking about when, over the near term, you may hit actually positive GAAP EPS? Is that something that you foresee here in the second quarter? Just kind of looking at the way your revenues have grown, and I acknowledge this, you've been ramping up sales and marketing with some of the other infrastructure to support that growth. But will you break even here in Q2? Parker H. "Pete" Petit: Let me answer that, Matt. I'll start by saying this. Everyone should understand that our business focus has been on building the footprint in wound care as rapidly as possible because of the significant weakness of our primary competitors. When you have that kind of weakness, you exploit it. We had an opportunity to bring a number of excellent people in, primarily sales, to our organization in the first quarter. We now have to let them exploit their expertise and establish their presence in their respective markets. So wound care revenue has been our focus. But I also know and we all know that the question you just asked is going to begin to be one of the primary questions we have to deal with. I believe, if you examine our profit and loss statements, you know it's not going to take much in the way of revenue to continue to build EBITDA as a percent of revenue strongly, and then it's going to pop operating profit and then after-tax profit. So you can do your math. We don't expect to see any major change in our gross profit margins. And it's all revenue-dependent. And the issue is simply this, when we do pass through operating profit breakeven, from that point forward, our operating profits will increase very rapidly as revenues go up. That's the operating leverage we have and that's the beauty of our financial model. It's a nice thing to have and play out when you're exhibiting the kind of gross profit margins we have. So we're not going to give you an answer because we don't know the answer. But we'd simply say that when you get to the revenues we are projecting for second quarter, we should be getting fairly close. And again, once we pass through that breakeven, the numbers are going to increase dramatically or faster.

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

Okay. All right. And I guess the follow-up to that, and I realize that especially as we get into later this year and, more importantly, into next year, as you start working through some of those biological licenses and the necessary trial work, but as far as once you do break through profitability, is it your expectation or intention, over the near term, to just kind of maybe spend the overage so that you're covering -- kind of hovering around breakeven? Or once you break through, even though you're going to be investing a fair amount in some of the biological license initiatives, will we still see a pretty nice progression in your operating income and net income for that matter? Parker H. "Pete" Petit: Matt, to be frank about it, which we generally are, once we break -- you look at the operating leverage we have, once we break through the revenue levels that will start giving us operating profits, it's going to move very dramatically regardless of what we do. We won't be able to spend that dramatic. And we've analyzed this around every week. So once -- we shouldn't be too concerned about this company producing operating profits and after-tax profits, it's going to happen. And when it happens, it's going to be very dramatic. We're doing some things now that prudent management would do. But Bill Taylor and I and, for that matter, Mike and the rest of these executives around here, we understand cash is king. We'll continue to grow cash. We're going to be very profitable, unless something dramatic happens to curtail revenues and we don't see that happening at this point.

Okay. Maybe just 2 follow-ups or 2 additional questions anyway. I picked up last night that your partner for the government side, AvCare [ph], was awarded $150,000 purchase contract for the injectable EpiFix and AmnioFix. And I'm just curious, the award, it looks pretty clear, must the FDA-approved, but I'm curious if that gives you some leverage when you're meeting and talking with the FDA, saying, "Here, the U.S. Army wants to use our products. We should be allowed to continue selling this while we work towards a biologic license." Or am I reading too much into it? Parker H. "Pete" Petit: Well, Matt, you've given us a little bit of a surprise. I got a phone call this morning from the principle of AvCare [ph], which I didn't have time to take because of this call. So maybe he's passing something on to us that you picked up before we have. But it sounds like it's good news. We just don't know about it at this moment.

All right. And then maybe one last one, and this is probably a little bit more for Mike. As far as with the announced lawsuits, how should we be thinking or modeling legal expense going forward? Parker H. "Pete" Petit: Well, that's a good question. I think if I was in the management of those other companies, I would probably do -- what prudently they should do is I'd just back off. There's not a lot of revenue yet in any of these organizations. And in the case of MTF, they had a $26 million patent infringement suit they lost about 3 years ago. And I don't know whether they want to go down that path again, we're just going to have to see. But we certainly have the capital to pursue this to any degree we desire and hope that these people would be reasonable, they'll respect what we've done here in terms of our patent portfolio, in notifying them of the violations. But we'll see what plays out, there'll be a legal process back and forth on that.

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

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

If I could follow up on the reimbursement comments that you made in the 8-K with the Blue Cross-Blue Shield plans. Can you just remind us how many covered lives those 23 Blue Cross-Blue Shield plans address? And then also if you could remind us what percent of the wound care market is Medicare versus commercial pay? Parker H. "Pete" Petit: Bruce, it turns out Debbie Dean, who is the executive, who would have that on her -- right on the tip of her tongue, is not in the room with us. I have actually some of that on my desk, but I don't have it off the top of my head either, neither does Bill or Mike. So ask another question. I'll depart the room and try to come back with that document.

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

Okay. Well, let me just kind of rehash what we said before. Previously, we've indicated that we had in our plan roughly $1 million this year in our budget for that as a frame of reference, we disclosed it last year. One of our larger -- or really our largest surgical and sports medicine distributor last year was roughly $6 million in revenue and they are a regional supplier of metal and so forth, spine surgeries and other types of surgeries, they both -- orders both the sheet form as well as the injectable form, and they were about $6 million last year. So that gives you a frame of reference from our small, regional company versus a large company like Medtronic in the long term. In terms of the buildup here, this initial order was kind of -- the initial order for their limited launch that they're doing right now with a few of their distributors, and then they expect to do the full launch after their June national sales meeting. Their fiscal year, I believe, is May 1, if I remember correctly through the end of April. So we have a different fiscal year than calendar. So we expect then through the back half of the year that those numbers will build. But again, I think the first few orders will be kind of stocking orders. It will take probably another month or 2 after that to see how it levels out and see what kind of normal ordering patterns are going to be for them. So I think by the end of the year, we should have a little better visibility to what those normal patterns look like. Parker H. "Pete" Petit: Bruce, I have a document in my hand that should be reasonably accurate. In terms of the Blue Cross-Blue Shield, or the only health plans that we currently have coverage with, it looks like about 51-million-plus covered lives. The largest of those, we've announced previously, is HCSC, there's about 14 million lives there. So -- and the rest of the sheet is some of our goals and we finish out all of these large health plans. The rest of health plans, it should be about 215,000 covered lives, so...

Million. Parker H. "Pete" Petit: Million -- excuse me. Million, million.

Incremental. Parker H. "Pete" Petit: So we're probably got a ways to go, but we're quite busy and very focused on pulling in the rest of these health plans.

Okay. And then can you remind us just what percent of the market is Medicare in the wound care side? Parker H. "Pete" Petit: 75%.

That's 75%. Okay. Then last question just on the process with the FDA, do you have the next meeting scheduled yet? Will there be any meetings after the next meeting? And when, roughly, do you think you might have resolution on these issues? Parker H. "Pete" Petit: What I have said is that I hope to have some resolution for shareholders second quarter. So everybody can figure out what that date is.

[Operator Instructions] Our next question comes from the line of Suraj Kalia from Northland Securities.

So Bill and Mike, I guess let me start out with a couple of financial questions. I guess your guidance for the year, the midpoint is $100 million. And Q4, roughly, our math indicates it has to come close to $30 million. And if you choose the top end of the guidance, the math indicates it would've been plus or minus $40 million. I guess I'm just curious, how you are seeing the progression, what you are factoring in from Medtronic contribution? And you're, obviously, have worked out the math and I'm curious in your internal analysis for Q4, specifically as we are going to anniversary the reimbursement, current reimbursement, and then people are going to start preparing for the new reimbursement landscape.

Okay. Really, the midpoint actually -- we've adjusted our numbers to $95 million to $110 million, so the midpoint is $102.5 million. And our progression, I think we have a very strong progression. Just to get to that midpoint though, I think the progression is not quite as high as what you just indicated. I think based on our numbers, I think the fourth quarter is more like in the low 30s, third quarter would be in the high 20s, and that would get it to roughly $103 million, if you look at the midpoint. So I'm not exactly sure where you got such a high number there on the 40 side. Parker H. "Pete" Petit: Your number seems too high, Suraj.

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

Yes. On the wound care side, really -- what -- it really doesn't come into consideration on the wound care, unless there's a big change like there was this year. And that's what happened actually in the first quarter, not the fourth quarter last year. So we expect that in July, we'll hear from CMS if they are planning on making any changes to the reimbursement. And again, we've mentioned it before that with the large change they made this year, typically they don't make another very large change. Doesn't mean they won't, but typically they don't. We expect that they'll probably make some tweaks to it. And as we mentioned before, we gave them data, met with them 1 month or 2 ago, and made a suggestion to them to add another tier for very large wounds because we think the data will lead to that kind of conclusion, we presented that to them. In terms of the tail-end of the year, we do expect that we'll start having some building revenue from Medtronic and potentially other -- as we've mentioned before that we cannot commercialize this technology on the surgical and sports medicine side only on our own. So we continue to have conversations with companies as well. But on the wound care side, I want to focus on that, we've added now over 50 people since the end of last year. Most of them were added between February and April. So over 50 sales reps now added between February and April. If you just do the math out on them, and when they are projected to hit their $1 million run rate, 6 months from say, March, puts you into a very sizable fourth quarter. So I think that should help you kind of see how the progression builds. And again, I'll remind you that we only had 76 people at the end of last quarter. So we've increased the number of salespeople by more than 2/3. So it's a huge difference. Parker H. "Pete" Petit: Let me make a quick comment about Medtronic. Again, we've been very conservative with our discussion about where that private label contract can go, and we still remain, because we don't have the insight yet. But I don't think Medtronic and the largest device manufacturer in the world is going to come to Marietta Georgia and negotiate with a company our size without having some significant ideas about the size of the marketing and development of that product. They had 40% of the U.S. spine market, and our product will ride in at a lot of those procedures. So we expect to see some robust growth. We just don't know exactly when it will come, how fast it will develop because we don't think Medtronic would have come here with a small niche market in mind without having some fairly robust plans.

Fair enough. Pete or Bill, one of the other callers earlier asked about profitability. Let me kind of rephrase that question. How do you see leveragability in this model? You all have done a phenomenal job so far in terms of bringing people onboard, capitalizing on competitor woes and growing the market for yourself. And Pete, you've rightly said, there will be a certain point. I guess I'm just trying to understand, if I -- I don't remember correctly if you all have ever said about comp structure for reps. But from the current level of SG&A, how do you see it playing out over the next, I would say, 24 months that would give us some sense of, okay, now, EBIT margins are going to start moving up? Because the gross margins to us it seems like it's relatively going to flatten out. They don't have too much room to grow. And what's going to happen in the OpEx line at least from a qualitative perspective? Parker H. "Pete" Petit: Well, Suraj you're absolutely correct, gross margins are probably going to be stable in this range. Over the next several years, it might have some valid pressure on them. But a company that has this kind of operating leverage, gross margins where they are, the kind of product we have and the markets we serve, we're going to be an operating profit company of 30%. Now I'm not going to talk today about when that might occur because I don't know. But I can tell you it's the kind of companies that Bill Taylor and Pete Petit have run before. With this kind of operating leverage, we ought to get there. We'll focus -- we haven't been focused very much on EBITDA margin because there's a lot of accounting noncash charges that get dropped in on our profit and loss statement. So we'll be passing through EBITDA margin of 10%, 20%, 30% and beyond. And operating profit will follow right behind that. So we will be a nicely profitable, high operating profit company, whether it's 12 months from now, 24 months from now, that's going to begin to show itself. And there's not much we can do about it. You cannot -- you won't be able to spend, and it wouldn't be prudent to spend, in terms of just expenses unless we have the kind of opportunity we just have in wound care. We've been, I think, very, very prudent at the way we've reached out and taken market share because of some weaknesses. It wasn't because of our -- necessarily all of our strength, it's some competitive weaknesses. We've taken advantage of that. But as that begins to play out, the operating profits will show themselves. And it will be very -- once they show themselves, they'll developed very strongly and rapidly.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back to management for any concluding comments. Parker H. "Pete" Petit: Well, thank you. I think we had an excellent Q&A session and the key questions are getting answered hopefully, and you're getting some comfort around those. We appreciate your confidence in the company, confidence in the management. And we look forward to continue to provide you with informative press releases as information's becomes available. Thank you.

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