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…

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…

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…

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…

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…

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.