MiMedx Group, Inc. (MDXG) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the MiMedx Group Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Thornton Kuntz, Senior Vice President of Administration. Sir, you may begin.

Thank you, operator, and good morning, everyone. This press release 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, 2015 and our most recent 10-Q. We do not undertake to update or revise any forward-looking statements, except as may be required by the company's disclosure, obligations and filing 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.

Thank you, Thornton. Good morning and I thank you for joining us for our second quarter conference call. I have with me this morning Bill Taylor, our President and Chief Operating Officer; Mike Senken, our Chief Financial Officer, Chris Cashman, our Chief Commercialization Officer and Mark Landy, one of our Vice President who has just joined us from his most recent careers in Analyst on Wall Street. There are certainly other corporate executives with us in the room. I want to begin this morning with some comments about our current stock price and market valuation. In my personal opinion and some Wall Street firms we become not just undervalued but very undervalued. This time last year when our stock was $12 and touching $13 I stated the time and I thought we were becoming overvalued. Today I’d reiterate that we’re very undervalued. The same time biotech and biomed industries were generally down 40% from where they were a year ago and we had a $1 billion of market cap of shares were gradually purchased by numerous biotech ETS and industries, and in addition by some of the S&P industries. Most of these biotech industries contain companies that are very immature and are state of development, ultimately they do not have revenues much less profits. If they do have revenues they do not able to growth profiling, MiMedx says. Therefore they’re viewed by the street as risky investments, however MiMedx has a solid five year track record of growing revenues quarter-over-quarter and showing positive EBITDA for over 18 quarters. During that period, we purchased approximately $50 million of our shares in the open market. And these indexes and firms I believe we would certainly be classified as being in the top 5% in terms of financial and operating performance. However with just one stock in that broader market basket, our stock costs would be moved around as the market basket price rises and falls in values. In addition we’re still taking a certain amount of short selling that seems to be very focused in the last few weeks. We believe we finally found the means to track the illegal short selling namely naked short selling in a very accurate fashion. From this point forward we’ll be tracking that on a daily basis and we’ll take steps to address any illegal activity identified. Some other companies have been affected with using this new technology and we’ll also be relentless in sharing a light of any of the illegal short selling that is occurring. If there are damages we will pursue the necessary means to obtain numeration. Management will continue to attend financial conference and do the non-deal road shows, be sure that investment community fully understands the value of our assets. Now, we fully recognize that we are temporarily apparently bought because we slightly missed revenue estimates in the first quarter. However, we’ve done exactly what we told our shareholders we would do in terms of restating missed used expectations and in the second quarter we started our progress again by exceeding revenue estimate. I have some brief comments on our second quarter financial performance. First we exceeded our revenue forecast, however I’m sure your concern since we reduced annual EBITDA operating profit and EPS forecast. As I’ve stated many times, management controls operating profit levels. When we see very promising investments in our various operating units, new products, clinical studies and intellectual property, to prone to make those investments, otherwise we will not optimize our opportunities. However, I believe we should still be quite and we’ll achieve a very respectable EBITDA margin in the vicinity of 20% this year. Let me reemphasize something I discussed numerous times previously. As I’ve just stated the decisions that drive our EBITDA operating profit earnings per share are generally made by management, often on a quarterly basis. I’ve asked shareholder’s focus on gross profit margin because those are the financial performance measures that management has less control over. If there are industry or other endemic issues with our business, they will show up in our gross profit margins which would be an issue of concern. However, the slight changes you’ve seen this year in gross profit are related to our stability biologic tech recession. We’re bringing their product efficiencies up quickly and we do not expect to see significant continuing duration in our gross profit margins. Therefore when you’re focused on our operating profits or EPS, keep in mind that we will continue to make investments to build our asset base and revenue base at the rapid rate. We have significant opportunities for growth but we must keep our management systems and initiatives ahead when they will be needed. Remember, we do not make these investments, if we do not make these investments at this point of growth we’re not going to have the huge returns that we expect, generally these returns should be triple digits in the first year or so but also intended to build the very valuable assets that we will have [indiscernible] and nurtured over the last five years. I submitted it to you, if you will just review our quarterly revenue charge this type of performance cannot be achieved without an effective focus from management on just these types of issues. We do not have cash issues, we do not have any debt, we will continue to build cash and we’ll manage our cash growing to EBITDA carefully. Again recall, we purchased almost $50 million of our shares back in over the last two years, we will continue to do so. One other very important initiative that I would like to discuss as our fourth coming patent law suit. We’re scheduled to be in court this fall with our first trial and so possibly the second case will also be ready for trial this fall. We have confidence in our cases because we have a progressed in regards to our flagship patents. Bill Taylor will explain some of that detail in a few minutes, but we’ve gone through IPR process with those patents very successfully and we believe – and we believe it should build well for us if we go into the actual trials. If we obtain favorable decisions that will put us in a position seeking injunctive relief. We're not only the defendants, we have sued in these cases but also from the other end [indiscernible] business entities that are violating these patterns. Please realize that some of these competitors while there's still small have accumulated revenues over the years that are substantial. Many of these organizations were notified several years ago about their potential violation of the patents. But since they know that and they continue to violate our patents, they could be subject to triple damages. We saw a press release on Monday morning relating to our first two new product lines. We will discuss the second in the next few weeks. We have our CollaFix product line in production and moving through the regulatory approvals. We have some exciting new product concepts in cardiology and respiratory areas of medicine. MiMedx is and will remain the unquestioned leader with [indiscernible] based regenerative medicine. These are exciting times for the company and we intend to re-convey to shareholders and Wall Street. Okay, I’ll turn it over to Bill Taylor. Bill?

Thanks Pete. I would like to eco what Pete said, and as the second quarter is a very solid quarter for MiMedx and we recovered very nicely from the operational issues we had in the first quarter. On the call today, I’ll address several different areas of progress. First related to our sales force, I’m happy to announce that we’ve eclipsed the 280 mark on our field sales force. Our total is just over 280 sales professionals, noticeably larger than where we were on our last shareholder call. And this is one of our key investment areas. Our split is roughly 230 people in wound care and just over 50 people SSO. As we continue to evaluate the U.S. Wound Care market, we are consistently finding a tremendous amount of growth opportunities. As recently reaffirmed by the independent business intelligent service company Biomed GPS, MiMedx has the market leading position in the U.S. Wound Biologics market sub segment of CTPs, Cellular and/or Tissue based Products or skin dermal substitutes, and with our market share at about 26.4%, the overall CTP market during the first quarter of 2016. Our internal analytics department has recently compiled data from third party aggregators and has identified a substantial number of target Wound Care opportunities that we do a reasonable job converting many of those accounts. We should continue to see approximately 25% growth in Wound Care for the next several years. The analysis is very inline to us and there is a lot more low hanging fruit remaining out there so this is very exciting for us. Our growth in the SSO area was also quite satisfying in the second quarter. We have a tremendous opportunity to introduce our innovative regenerative products into new surgical and therapeutic applications. Our clinical and informatics team are working with physicians and facilities to model clinical use and effectiveness of our technologies which is critical particularly with the pressure on a healthcare system today and in the future. Unlike devices or allograph to simply address a functional issue, we’re finding ways that our technologies can be used in more of a therapeutic function, not only providing clinical efficacy but also are cost efficient and they can improve quality of life functions. This is the focused area of some of our research and development initiatives and we expect new therapeutic products to come out of these initiatives. In the future, we feel these outcomes will become more critical because new technologies cannot function, if new technologies cannot function in this manner, we’re going to have a difficult time being successful based on changes and reimbursement down the road. As Pete has discussed some of our increased investment areas and I want to highlight some of our clinical study advances. At present, we have about 24 active clinical studies and another dozen or so that are under consideration and/or being contracted and designed right now. They range from small 20 patient prospective case series to large multicenter 200 plus patient randomized controlled trials. Among these studies in our IND studies of plantar fasciitis with our micronized product. We’re at the half way point on this study and are preparing to conducting the interim analysis on it as per our protocol. We’ve completed enrollment on a 60 patient OrthoFlo study and 90 day and 108 day data points are expected to be completed in the fourth quarter this year and the first quarter of 2017 respectively. We also have a number of additional settings underway that focus on other specific surgical procedures, and those studies progress towards completion in publication and we’ll discuss some in more detail. On the intellectual property front, we are now ahead about 29 placental tissue patents issued and allowed. Overall we have nearly 80 patents issued and or allowed and over 120 pending. Our IP portfolio is one of our strongest assets and that’s why we are investment not only strengthening but also defending it. As you know there are several companies we’ve tried to emulate our success, many of whom appear to fringed on our patents. We now have four patent law suits going and we’ve kept you praise of our progress with those law suits. I know it’s been a long road to get to where we are, but we can now see some lives at the end of the tunnel. We expect to have our first patent trial this fall, the second falling shortly thereafter. While litigation is always uncertain, we are confident in our position, particularly in light of how the case overall has progressed so far. To that end you will recall the two key patents for EpiFix and AmnioFix were challenged within inner parties review process. We successfully overcame both challenges without any equivocation. And should we prevail in our first patent trial, what followed will be somewhat interesting. Besides any potential damages that could be awarded to MiMedx, a win should prove to be a major determent for other companies and so far, jumped of relief against future vendors should more readily and easily be obtained. However competitors should not just be taking either of our current cases but also of the numerous patents and patent applications which make us our portfolio. It will come as no surprise anyone in MiMedx will vigorously defending its copies for those who improperly tried to trade on MiMedx good name in the industry. On the international sales front, we continue to drive our sales expansion and have expanded our tissue use internationally, particularly with EpiFix. We have focused international sales efforts in Canada, the UK, Italy and Switzerland among other countries and focused regulatory efforts in Germany, Japan and Australia where we have targeted to be selling within the next 18 months or so. In May of this year, our team exhibited the European wound management association leading in Bremen, Germany. We had great goods traffic and well attended symposium that we MiMedx sponsored. This September we are exhibiting in the world union Wound Healing Society meeting in Florence, Italy and we’ll be interacting with multiple clinicians there from around the world as well. With that, I’ll turn it over to Chris.

Thanks, Bill, and good morning. We are extremely pleased with the progress that we made in the second quarter. As we grew revenues in both our market focuses of Wound Care and SSO. We continue to make significant investments in the sales organization as we’ve expanded our focus into surgery and the expansion of Ortho, Sports, Med and Spine agency network. Focusing on wound first. We continue to make significant investments in our sales force, supporting clinical studies and our support teams in the contracting and field reimbursement specialists’ teams. We continue the expansion of our revenues showed robust growth in all focuses including hospital, wound care centers and physician office. I’d also like to add that we made good progress in the burn area, as we’ve expanded our portfolio to include cryopreserved split thickness skin called AlloBurn to complement our EpiBurn product line. As Pete mentioned, federal wound care revenue was lower than expected due to a department of veteran’s affairs directive to all hospitals covering the implant procurement process nationally. A preauthorization process for purchasing implants was developed and implemented. However, it cause confusion across hospitals both in the interpretation as well as in the purchasing and consignment signatory processes and procedures. These issues are now generally resolved in [indiscernible] hospitals. Turning to SSO, we made a significant investment in hiring surgical representatives in the mid to late first quarter to focus on abdominal and pelvic procedures. Over half of the direct surgical sales people were new to MiMedx at the end of Q1 or they started and were trained in April of Q2. Many of these territories are built and scratch, so we’ve made the required investment ahead of the revenue and are truly taking the appropriate steps in these Greenfield areas to engage, train, educate, go through that communities and conduct the valuations that will lay the basis for accelerating revenues in the months to come. Last quarter we shared that we had three main reasons that causes to fall short in our revenue against guidance. These were the introduction of the SMS business planning system, the integration of stability biologics and the realignment of sales management and organizational resources for our new focus into surgery. I’m pleased to report that we have worked through each of these situations. The SMS business planning and alignments we have undertaken meaningful benefits this quarter and new growth revenues and expanded opportunities. Additionally, the tagging procedures that we spoke about in April are going to resolve, incorporated into our systems and are being done on a daily basis without any technological concerns. On the GPO and IDN front we continue to make excellent progress with these ownerships. As stated before, many of these arrangements are 80% where sales force agreements for Amniotic tissue. We had our best quarter ever in several of these large contracts and continuously good adoption with members, opting in and participating. Yesterday we announced our plans for a nationwide launch of the company’s first of two new product line introductions we have planned in this quarter. Our next generation Lyophilized version of OrthoFlo. This extension of the company’s Amniotic fluid product family provides superior product safety characteristics and enhanced logistic capabilities. Lyophilized OrthoFlo terminally sterilized product that maximizes safety, provides advanced ease of use for the physician, can be stored at ambient room temperature and has a five year shelf life. Lyophilization often referred to as freeze drying is a process in which water is removed from the product after it’s frozen and placed under a vacuum, allowing the ice to change directly from solid vapor without passing through a liquid phase. MiMedx amniotic fluid is lyophilized to stabilize it for storage and distribution. Lyophilization also allows the Allograph to rehydrate easily and quickly for use in various applications. OrthoFlo is utilized in the surgical hospital in sports medicine outpatient market settings and addresses the physicians demand for advanced therapies to enhance the effectiveness of providing patient care solutions in spine, orthopedic and sports medicine applications. The lyophilized amniotic fluid contains the same constituents as our cryopreserved version of nutrients that facilitate fetal growth, growth factors, proteins, carbohydrates, lipids and electrolytes, hyaluronic acid which is a principle component of viscosity and lubrication in synovial fluid enhancing microbial effectors. OrthoFlo retains the critical properties of amniotic fluid which protecting cushion, provide lubrication and reduces inflammation in the effective soft tissue or joint. Current treatments on the market such as hyaluronic acid or better known as HA, PRP and “steroids” may provide short-term relief and improvement. However physicians are demanding a treatment modality that is more durable with a lasting impact on pain, mobility and healing. The growth factors contained in OrthoFlo and their inherent benefits are the critical advantage and differentiation of OrthoFlo over competing products in the market place. However OrthoFlo products is an ideal clinical and cost effective solution the meet this treatment need. OrthoFlo will be available through our national and network of agents and managed by our SSO management team and also will be available through our advanced Wound Care team for lower extremity and foot and ankle surgical and soft tissue procedures. We will be discussing our second product launch in a few weeks. Now I’ll turn it over to Mike.

Thanks, Chris. The company recorded revenues for the second quarter were approximately $57.3 million, an increase of 26% or $11.7 million over prior year second quarter revenue of $45.7 million. Wound Care revenue was $42 million, which represents an increase of 18% over prior year and 7% sequentially with growth driven by additions to our Wound Care sales team. We believe that with the positive momentum we saw in Q2, we’re well on track to hit our annual growth target of between 25% to 30% growth in Wound Care sales. SSO revenue was $15.3 million which represents growth of 52% over prior year and 9% sequentially. Growth was driven by and adds to our direct surgical sales force and progress made in getting through various VAC communities. With the continued momentum seen in Q2 as well as new product introductions, we feel confident in achieving our growth targets are between 40% and 50% SSO growth in 2016. With the additions to our sales team, we have added over 380 new customers in the quarter. For the six months ended June 30, 2016 reported revenues were $110.7 million which represents an increase of $24.3 million or 28% as compared to prior year. Year-to-date Wound Care revenue is $81.4 million and SSO revenue is $29.3 million. As discussed in our Q1 earnings conference call, due to the impacted results of the acquisition of stability biologics that closed on January 13, 2016, and the release as the valuation allowance on the differed tax asset on reported tax expense in 2015. The company has decided to include additional, adjusted non-GAAP measures in our press release and earnings call to provide a means of comparing normal ongoing operating results on a year-over-year basis. The additional measures include adjusted gross margin, adjusted EBITDA, adjusted net income and adjusted diluted EPS to normalize results on a comparison purposes in addition to reporting GAAP results. Tables are provided in our press release, which reconcile non-GAAP to GAAP reported results. GAAP gross margins for the quarter were 87.1% as compared to 88.9% in the second quarter of 2015. 2016 gross margins were impacted by approximately $597,000 in onetime cost related to the stability biologics acquisition. On an adjusted basis, gross margins for the second quarter 2016 were 88.1% as compared to 88.9% in the second quarter of last year. The adjusted gross margin decline of 0.8% was due to product mix with the Wound Care to SSO mix of 73% and 27% respectively in 2016 versus 78% Wound Care and 22% SSO in Q2 of 2015. Please note that in Q2 – that the Q2 mix of Wound Care versus SSO in 2015 was unusually high due to the launch of a new Wound Care product or mass configuration at the end of the prior quarter. On a year-to-date basis, GAAP gross margin was 86.1% which includes $1.3 million in onetime cost. Gross margins after adjusting for these onetime costs were 87.3% as compared to gross margins 88.2% in the prior year. The year-over-year decline of 0.9% is due primarily to product mix. Included in the press release is a reconciliation of GAAP gross margin to adjust the gross margin. R&D expenses for the quarter were approximately $3.2 million or 5.5% of quarterly revenue as compared to $2.1 million in the second quarter of 2015. The increase has driven primarily by increase investments in clinical trials. On a year-to-date basis, R&D spending is up $1.8 million or 46% over prior year. The year-over-year increase in R&D spending is driven primarily by increased investments in animal studies and clinical trial. Selling, general and administrative expense was approximately $42.8 million for the quarter, or 74.6% of quarterly revenue is compared to $32.7 million or 71% of quarterly revenue in 2015. During the quarter we added 18 direct sales reps bringing the total direct sales headcount to 269 at June 30, 2016. The year-over-year increase in SG&A spending was due to the continued build-out of our direct sales force in both Wound Care and surgical market, patented and a regulatory illegal cost, new product launch cost, international sales development, government affairs and other support areas as well as the addition of stability biologics personal and their associated costs. Also included in SG&A spending was approximately $138,000 in onetime costs related to the acquisition. On a year-to-date basis, SG&A expense was 75.4% as compared to 71.7% in 2015. The company reported a positive adjusted EBITDA of $10.1 million for the quarter ended June 30, 2016 as compared to $10.6 million in the second quarter of 2015. It is the 18th consecutive quarter reporting positive adjusted EBITDA, included in our press release as a reconciliation of adjusted EBITDA to reported net income. The lower adjusted EBITDA reflects management’s decision to accelerate investments in several strategic areas including the build out of the direct surgical sales team, aggressive defense of our key patents, clinical trials for reimbursement and sales purposes, international business development as well as other key infrastructure areas to assure sustainable above average revenue growth over the next five to seven years. For the six months ended June 30, 2016, adjusted EBITDA was $19.1 million or 17.3% of revenue as compared to 22.4% in 2015 reflecting the aforementioned investments further positioned the company for long-term above average growth. GAAP operating income in the second quarter was approximately $3.6 million or 6.2% of quarterly revenue. Excluding $735,000 in non-recurring charges related to stability biologics acquisitions, adjusted operating income was $4.3 million or 7.5% of revenue as compared to $5.7 million or 12.4% of revenue in 2015. On a year-to-date basis, adjusted operating income was $7.2 million or 6.5% of total revenue as compared to operating income of $9.9 million or 11.5% of revenue in 2015. The company reported net income for the second quarter were approximately $2 million or $0.02 per basic and diluted common share as compared to net income of $5.4 million or $0.05 per basic and diluted common share in the second quarter of 2015. On a non-GAAP adjusted basis, second quarter net income was $5.1 million or $0.05 per diluted common share when adjusting for the non-recurring items as compared to $5.9 million or $0.05 per diluted common share in the second quarter of 2015. Please refer to the table on our press release for reconciliation of GAAP net income to adjusted net income. It should be pointed out that in addition to the after tax adjustments or non-cash share based compensation expense, their adjustments on an after tax basis for the cost associated with the acquisition of stability biologics as well as the normalization of book tax rates for both years. Year-to-date adjusted net income was $10.1 million or $0.09 per diluted common share as compared to a year-to-date net income of $10.7 million or $0.09 per share in 2015. Turning now to the balance sheet. The company reported approximately $101.8 million in total current assets including $23.8 million in cash, $54.9 million in accounts receivable, $17.2 million in inventory and $6 million in prepaid and other current assets. Day sales for the quarter were 86 days as compared to 91 days at the end of the prior quarter and we continue to add collections in field reimbursement staff to improve collection performance especially with new customers. Inventory terms were 1.7 for the quarter as compared to 1.8 at the end of the prior quarter. Goodwill and intangible assets were $27 million and $27.7 respectively as compared to $4 million and $10.8 million respectively at December 31, 2015. The increase was due to the stability biologics acquisition. Current liabilities were $38.5 million as compared to $26.8 million at December 31, 2015 with the increaser in line with the growth of our business. During the quarter we adjusted the preliminary liability for the expected payout of the stability biologics acquisition to approximately $25.6 million which represent contingent consideration payable to the former shareholders of stability biologics based upon of a formula of sales plus direct production cost for the years 2016 and 2017. The earn out consideration will be payable of 50% in cash and 40% in company stock in the second quarter of 2017 and the second quarter of 2018. Turning now to the statement of cash flow. The company reported positive cash flow from operating activities of approximately $7.3 million for the quarter driven mainly by improvements in working capital management. Positive cash flows from investment activities and financing were $573,000 and $833,000 respectively. Please also note that there is approximately $10.8 million still authorized under the share repurchase program through December 2016. And finally, we added a total of 53 associates in the quarter bringing our total headcount to 253 – 653 sorry. Turning now to our guidance. MiMedx estimates third quarter revenue to be in the range of $62 million to $64 million and full year revenue to be in the range of $243.5 million to $248 million as compared to a previous guidance issued of $242.5 million to $250 million. The company is guiding full year 2016 fully diluted adjusted earnings per share estimated to be in the range of $0.21 to $0.23 as compared to $0.30 to $0.32 in our previous guidance. The reduction in fully diluted adjusted EPS is due to the decisions by management to continue to invest in profitable growth opportunities. We see the tables included in our press release for reconciliation of GAAP EPS to adjusted EPS. With that, I’ll turn the call back over to Pete.

Thank you, Mike. Now I’d like to introduce you to Mark Landy, who recently joined MiMedx in the staff role to me. Mark brings a distinguish background from Wall Street as an Analyst and an individual participated in several companies in private equity roles. Additionally he has been an operating executive in the biotech sector healthcare. We’re current using Mark in a variety of projects as such he is quickly obtained the broad view of our activities. I felt it’d be appropriate this morning for Mark to make some comments about his experience with MiMedx so far. Mark?

Thanks, Pete, and hello to all my friends and past colleagues in the investment community. It will be an understatement to say that I’m really excited to have joined MiMedx. I want to thank Pete, Bill and MiMedx executive team for the warm welcome I received. However, as I watched the same welcoming extended to other new hires, I soon realized that I received no special attention and at my welcome and immediate inclusion as a member of the MiMedx team is a reflection of the extraordinary commodity and teams with Pete and his executive team have created. Most common question I received over the past six weeks is, has my view of the company and its opportunity changed now that I’m inside the company compared to that what it was of become analyst, and what has surprised me. Well the answer is no, and nothing which I think is rather disappointing for me and viewed somewhat as we putting up the corporate shield. This is not the case, and I would like to explain why. As an analyst, it was my belief that MiMedx was always transparent and [indiscernible] that shareholders were fully informed of key and material activities of the company. This provided me sufficient information to conduct the valuation and analysis required to formulate my investment thesis. Of course, your product development, research and business development opportunities and activities that remain confidential as you would expect. So with that backdrop, my message is simply this, what you see is what you get with MiMedx and as MiMedx is as transparent as the public company can be without comprising confidential initiatives or competitive reason. Because my core opinion that the company’s stock was undervalued as investors were focusing too heavily on the short-term and our gloss side of the leadership position that MiMedx had established, the competitive advantages MiMedx enjoys and the opportunity for sustaining 20% plus long-term revenue growth. Well my optimism and opinion have not changed, my confidence level for success and the ability to sustain a high level of growth over the long-term has it is much higher. I’m impressed with the company’s R&D activities, clinical trial programs and body of scientific evidence being accumulated to support the therapeutic use of amniotic tissue. I’m also impressed with how effective MiMedx amniotic tissue is in modulating inflammation, promoting angiogenesis, improving healing and most importantly it’s possible role as a therapeutic. I look forward to being able to share these observations with you in the future. One of the many challenges every growth company faces is the transition from explosive growth to sustainable growth. And putting in place the infrastructure, distribution capability and product pipeline required is to ensure successful future. The corporate graveyard is littered with one-hit wonders because executives were not able to manage this critical transition. MiMedx operating capability is impressive, as of the infrastructure being put in place to ensure a successful future. The challenges and effort required to build an infrastructure to support future growth are rarely evident to outsiders and are never fully appreciated. What has impressed me is the attention to detail and level of sophistication that has gone into the process. It is this attention to detail that separates MiMedx from the many emerging growth companies and places MiMedx in the strongest possible position for future success. So in the future, as we build a new streak of meeting and exceeding revenue guidance, I’ll ask you to think back to this call and last quarter’s call and to remember the investment and hard work that was required to achieve those results. I want to thank all of you for the many good luck wishes I received since joining MiMedx. I’m sure I’ll continue our friendship and professional relationship in my new role here and I look forward to seeing you all at the numerous investors conferences and industry tradeshows that take place through the year. With that, I’ll turn the call back to Pete.

Thank you, Mark. As I said earlier, these were exciting time for your company, a stock price may not necessarily reflect that but it is. We’ve got two new major product lines being launched this quarter. We’re continuing our growth and profitability and I think if you look at the last five years there is very few companies that can show the growth – sustained growth in revenues and then the profitability rolling in behind that that we’ve done. Sustainable growth that’s the word that Mark is using and the word is very, very apt for what we’re doing, that’s why we’re focused on adding these assets at the right we’re adding them, that’s the only way you sustain growth and build a management platform, process and procedure platform and asset platform that will sustain growth. We’re very discipline relative to those matters and those kind of things will pay off richly for us and the years ahead as we continue to grow the company and/or at some point in our future meet the company partner that we want to be in a position to acquire this company. Thank you. We’ll keep you informed, we’ll see you as we get in the market place and these meetings that are coming up and what we call non-deal roadshows. Thank you. Okay, now for Q&A.

[Operator Instructions] Our first question comes from the line of Mike Matson with Needham & Company. Your line is open.

Good morning and thanks for taking my questions. I guess I just wanted to start with your margins and – look, I understand the reinvestment decisions and that you’re trying to build the surgery business and that involves a lot of investment. But are you confident now that you’ve accurately forecasted how much spending is going to be required for the rest of the year and that you can get back on track to meeting or beating your EPS guidance?

Mike, we are an extremely disciplined management group and has pretty impeccable track record. We've seen opportunities here that we discussed and decided that we needed to make the investments. I think again I've tried to focus people on the fact that this is a company that when we get through this explosive growth barriers and enter something that'll be classified as more sustainable growth phase, there's no reasons our operating profit margins can't go to 30% and even higher. If you start with the high-80% gross margins that we have and continue to maintain, it ought to be quite evident that's achievable. So to answer your question, at this stage, in the numbers we have put out, a lot of thoughts going into them, a lot of analysis going to them, we're confident. At the same time, running the company quarter to quarter with this kind of growth rate is not a simple matter. And we've had one flaw here in four years, and we hope not to repeat that again for some period of time.

Okay. And then just curious about whether you've seen the Integra product out in the field, the Omnigraft product. Has that had any noticeable impact on your business at all?

We've not really seen it, and we don't expect to see any marketable impact. We've discussed rather openly the flaws with the product. We respect Integra greatly. We wish other competitors we have had the same integrity and approach to market as they do, so we'd certainly respect that. But we think they're dealing with an inferior product line that was not going to basically have much impact in the wound care sector.

All right. Thanks. And then just one more on the patent trial. Can you give us more detail around who is involved on the other side and then what are the potential outcomes? And then I would assume that you have adequately accounted for the legal expenses in your EPS guidance because my experience with these things is that there's typically a surge in legal costs around the timing during the trial and just before the trial.

Well, we've certainly over the last four years gotten quite used to forecasting our legal costs associated with these, and it has been costly. We've made some major investments, and we intend to prevail here. So, yes, we've taken that into account. I'm going to let Bill give you some specifics, but I'll tell you right now, the two cases will come up this fall. The first one is – was filed against the company by the name of Bone Bank, who was acquired by...

By Globus.

...by Globus Medical. So they're now part of Globus. And the second one is against MTF, another large tissue bank who we've notified MTF almost three years ago about their situation. So those will be the first two up. And, Bill, you want to give some detail?

Yes. So the first one, as Pete mentioned, will be the Bone Bank lawsuit. In terms of your question relative to cost, we can't really go into detail on that other than I think based on what we've looked at, we should have it, at least the best that we can estimate, that should be in the forecast. I think we're – obviously, there could be things that come up, but at the moment, we think we've got a pretty well forecast. Then the second one is MTF, Medline, and Liventa all together in one lawsuit relative to their – the patent infringement by those three. So we'd like to give you a little more detail on the cost there, but I don't think we go into that kind of detail publicly. So...

All right. Thanks a lot. Appreciate it.

Thank you, Mike.

Thanks, Mike.

Our next question comes from the line of Matt Hewitt with Craig-Hallum. Your line is open.

Hi. This is Charlie on for Matt. Thanks for taking our questions.

Hey, Charlie.

You bet, Charlie.

Hey. First, how much of a headwind was the VA directive in Q2. And then kind of as a follow-up, you currently have reimbursement for OrthoFlo, and if so, what is the rate?

Yeah. Hey, Charlie, it's Chris. With regard to the VA new procedure on implant pre-authorization, it was more of a headwind in early in the quarter and into the midway through. You can imagine it's a large system and every VA hospital is going to handle and react differently. And so, some hospitals, it was non-event, but a number of them really ended up going through a full review. And when something new that comes out, they want to understand it. They go through their own procedures and processes, and then they'll implement to their standardization. So we had worked through each of those individually and it just was a process, but we're through that now for the quarter. If I didn't ask, obviously where we came a little lower than where we like to be revenue-wise. On the OrthoFlo side, currently OrthoFlo is not reimbursed. We are doing the requisite early clinical work now. I think we've sated before we had early clinical trial going on our cryopreserved product, and we're now getting ready to kick off the enrollment on our [indiscernible] version. But what we are excited about, and if you recall the marketplace in general, there's over $900 million spent on hyaluronic acid products annually. And then, there's another over $100 million spend on PRP. Not every patient is going to respond adequately to these other products. And so, there's going to be an elective market that is going to be appropriate for OrthoFlo. Additionally, in my comments, I stated that there is a major differentiation between the composition, the constituent that are in OrthoFlo where it includes the growth factors and proteins NHA constituents and that's not the case for these other types of products that had the full continuum of factors chemokines, cytokines, inflammatory agents and so on. So we think that we have a very good position. The doctors are very interested in the early going with the cryopreserved product that had been very favorable and so we're excited about the – both the logistics as well as the handling and the stability of OrthoFlo for the office.

Okay. Thank you.

Thanks, Charlie.

Our next question comes from the line Bruce Jackson with Lake Street Capital. Your line is open.

Hi. Good morning. I was wondering if you could give us the EPS guidance in terms of GAAP. So you took the adjusted EPS down slightly. What's the GAAP equivalent on that new number?

The GAAP equivalent is $0.08 to $0.10.

Okay. Great. That's all I've got. Thank you.

Thanks, Bruce.

Thank you. Our next question comes from the line of Jason Wittes with Brean Capital. Your line is open.

Hi. Thanks for taking the questions. Just first off, just looking at the breakdown of your sales force, I think you said 50 of the 230 are going to be for SSO. That would imply more than a million per rep or is that math correct or are some of the wound care guys also going to be selling into the SSO market as well?

You have to remember that on SSO it's the combination of direct reps as well as management that manage the sales agents and distributors. So it's a little bit of a mix in there. Chris, anything else?

That's very true. It's not going to be easy to come up with the standard territory breach of those 50. It's right across the large agent network. And then also remember, on the surgical [indiscernible] area, we've started from scratch in many of these territories, but they were the right cities to put these early new surgical reps into. So, they're in the process of going through all the different hurdles, [indiscernible] training, education, et cetera to get to the viable territories we know they'll be in the months to come.

So, I guess you've given expectations for sort of where wound care guys should be, I think, within six months in the past. I think it's extended a little bit. Can you give us sort of a sense of what those numbers are, what metrics you look for in SSO, sales reps as well at this point, or is it just too early?

Well it is early, but we have mentioned that we think it's going to be a little longer than the wound care side because we're not – on wound care, in many cases, we were converting pre-existing business. In surgical area, we're actually addressing some unmet needs which obviously takes a bit longer to build that book-of-business. So I think we've been talking about it, at least in that eight, nine months, if not longer, in some cases.

Okay. Thank you. That's helpful. Then just a competitive question. I know there's been questions about Integra product which it doesn't sound like it's been much impact yet. However, I've heard from the field a little bit about organogenesis sort of coming back to life with PuraPly antimicrobrial. It's an old product, but it appears as if it has – it was able to get past your status and that's helping a little bit. Is that something you've noticed in the marketplace?

Yes, we've seen it in the marketplace. It is an old product. It's collagen-based. The real – what has helped them is that it had passed for the last year. And so, many of these economically, many of these centers are going to move to that because that's favorable. But it's really barely scratching the surface. I mean, it's still, at the end of the day, EpiFix is approaching standard of care and – but we do see pure play here and there in some pockets.

Okay. But it sounds like it's not necessarily impacting your trajectory the way you see it.

No, it's still a low-end product. It's a lot of times utilized in the interim before you can get to the advanced tissue allografts like EpiFix.

Used in the first 30 days.

Okay. Thank you. And then I guess last question, just thinking about the trajectory for wound care and surgical in the back half, you gave – you basically maintain your guidance. Can you give us a little more color in terms of how you think wound care develops throughout the rest of the year and surgical as well?

Well, I think, as Mike said earlier, we expect to continue in wound care in that 25%, 30% growth trajectory year-over-year. And I think as surgical starts to take hold, you'll see improved revenues as a percentage of overall revenue, but I think still the guidance that we're using of 40% to 50% year-over-year in surgery as well.

Yes. I think we were very encouraged by the commercial wound care growth in the second quarter. And as Bill mentioned, we have aggressively continued to hire wound care sales reps. So the momentum on the commercial side, the addition of sales reps and getting beyond this VA issue should all be catalysts to fuel the growth in the second half of the year. That's why we're confident in the 25% to 30% growth.

Okay. Thanks. I'll jump back in queue.

Thank you.

Our next question comes from the line of Joe Munda with First Analysis. Your line is open.

Good morning, guys. Thanks for the questions. First off, I'd like to take a look at the balance sheet. Inventory pretty high here, more than quadrupled year-over-year. I mean, it's down sequentially at 17.2, but a little bit of clarity there, what's going on as far as the buildup in the inventory on a year-over-year basis?

Well, Jo, it's primarily the inventory that we brought in when we acquired Stability Biologics.

That's right.

But much lesser degree, we have a little bit of an increase in inventory of the MiMedx products but that's really driven by the new products that we're introducing in the second half of the year.

Okay.

So I think to those things, those two things really contributed to the growth.

Okay. And as far as Stability goes, any idea of what the contribution was in the quarter?

It was a little over $4 million.

Okay. That's helpful. As far as the – Chris, as far as the VA and pre-authorization, what do you think the motivation behind that was? Why all of the sudden they're coming with the pre-authorization initiative?

Well, first of all, it's important to understand it's for all types of implants. So it's not just tissue but its control is over – MED-EL, anything that's implanted in the body. The bottom line, and as they stated, it was simply them wanting to get a handle across their own system. The handling and the standardization of their processes for getting pre-authorization, making sure that the product was acquired and it was acquired by the correct person that had signatory authority, and then, also ensuring that no product was utilized before they own it in reference to that. Also, on top of that, still have some issues with products that have not been contracted on SSS. It had been brought in on consignment and so forth so that they haven't been through in some cases. They hadn't been through the proper contracting process. So basically, their controls weren't as tight as they needed to be. With our products having an FSS schedule, we actually meet the requirements that they're looking for. But as sometimes happens with some of these government agencies when they come through and make some changes, there are some confusion that happens with the various entities, and it just takes them a while to work through that. But I think in the long run, it's actually going to be a good benefit to us because we have contracted through the appropriate process, and it's been a negotiated national rate on the prices there.

Okay. As far as litigation goes, how much was spent in the quarter on litigation?

In the quarter, let me get back to you with that in a minute, Joe.

Okay. And then my follow-up to that is, Pete, you talked about Bone Bank and taking them to court. I'm just curious, the lawsuit that was filed against them, was that prior to the acquisition of Globus Bank – by Globus or after?

Prior.

It was prior to, just prior to.

Okay. And then my last question. The productivity per rep here, I mean, based on my model, it looks to me you're hiring reps. The productivity seems to be flattening out a little bit. I understand you're taking on and hiring new reps, but, I mean, can you give us some sense of what your expectations on the back half of this year look like as far as productivity goes, as well as the rep count number?

Well, the first thing is, Joe, we've made a concerted effort to bring in associated account executives. So we bring them in. They assist with the territory and an account executive, and then they will transition in that 6- to 12-month period where they take on their own full territory. So by design, we know that we have areas that were still underpenetrated, and so this is a process that we're utilizing to transition into new territories effectively. So by definition, that's going to cost our productivity, as you look at it from that perspective, to look like it's slowing. But it's, again, an investment for the future. And again, as they become their own territories, then we'll see that ramp up.

Joe, in answer to your question, $1.8 million.

Okay. Thank you, Mike.

Yes.

Thank you. [Operator Instructions] Our next question comes from the line of Mike Matson with Needham & Company. Your line is open.

Thanks for getting me back in. I just have one quick question. Just with regards to Osiris, obviously, they're experiencing some trouble. So, are you able to really benefit from that and take meaningful share from them in the amniotic market?

Well, we certainly think we are. And again, I've never in my public company life seen a company that seems to have so many troubles. So that does reflect somewhat in the marketplace.

All right. Thanks.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Petit for closing remarks.

Thank you. Well, I hope this has been informative. You know you're free to call us if you have additional questions, please do so. Meantime, management will go back to work and continue to make this growth very, very sustainable. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.