Good day ladies and gentlemen, and welcome to the Q3 2017 MiMedx Group Inc's 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]. 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. Before we begin, please be reminded that our comments today may include forward-looking statements. These statements are subject to risk and uncertainty and actual results could differ materially. We list the factors that might cause results to differ materially and our SEC filings which are available on our website www.midedx.com. We do not undertake to update or revise any forward-looking statement except as maybe required by the company's disclosure obligations in filings it makes with the Securities and Exchange Commission under Federal Securities Laws. During the call, we will discuss non-GAAP financial measures when talking about the company's performance. You can find the reconciliation of these measures to GAAP financial measures in our press release and on our website. Finally, MiMedx is not responsible for the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized live and archived webcast are located on our website. With that I will turn the call over to MiMedx Chairman and CEO, Pete Petit.

Good morning. Thanks for joining us for our third quarter conference call. I have with me today Mike Senken, our Chief Financial Officer, Chris Cashman, our Executive Vice President and Chief Commercialization Officer; and Debbie Dean also an Executive Vice President. Bill Taylor, our President and Chief Operating Officer is on a well-deserved vacation overseas. He is not going to be able to participate on the call. As well as Chris Cashman will discuss some of Bill's operating matters. Let me begin by making some general comments about our quarterly performance and frankly our performance this year. Shareholders seldom I may use the word exceptional, I will generally use the word good to describe the quarter. As I believe our performance is now becoming exceptional in terms of all the operating parameters. However, I'm certain someone will initially criticize the fact that our operating profit as a percent of revenue should grow faster than 88% considering our revenue growth. Let me remind you that I've stated on numerous occasions that in our current stage of growth, the company still has opportunities for very high return on our investments. In other words, we have opportunities in terms of our sales force, new product and market development, clinical studies and software management system updates that give us very high returns on our invested dollars. These investments, as they can pay as you've seen demonstrated very good returns in the future in our view. Please give us a benefit of doubt, when you see us not escalating the operating profits as rapidly as you think we should. We see these investing opportunities, which we review monthly as we analyze our private loan statements, we will be proactive. This is one of the major reasons we've had our successes that we've had over the…

Thanks, Pete and good morning. We are very pleased with the sales results our team delivered this past third quarter. We grew revenues 31% over prior year's third quarter and over 10% sequentially from Q2 to Q3. Taking a look at the mix, revenues were strong broadly across all facets of our business. Wound Care grew 24% in Q3 over prior year's third quarter and 13% sequentially quarter-to-quarter. SSO grew 4% sequentially quarter-to-quarter and 56% in Q3 over prior year's third quarter. As said before and I'll say it again, we are not growing by chance. We have a purposeful strategic plan and well-defined processes that focus our management and their teams to be able to provide these results. In the early days of our direct sales organization our sales people relationships help open doors and gave our products a chance to be used. Once the physicians used our products, they would see the benefit themselves, particularly in the wound space and it quickly became their product of choice. We have since changed as an organization, through a very deliberate process. Our sales personnel not only foster good professional relationships, but they also have developed very good planning, forecasting, education and account management skills. Today the disciplined approach of our new sales management system is a major asset in facilitator of our strong revenue growth. It continues to make a positive impact on our sales productivity in core and organizational structure investments made at the same time. Due to our continued expansion of our sales force, focus on secondary and tertiary city markets and smaller overall territories, we have the ability to reach more providers and they'll go deeper and broader within these accounts where the doctors expand their usage. We have found many more opportunities than we even thought…

Thanks Chris and good morning. The company recorded revenues for the third quarter were approximately $84.6 million, which represents an increase of 31% or $20.1 million over prior year third quarter revenue of $64.4 million. Wound care revenue was $61.9 million and SSO revenue was $22.7 million with growth driven by additions to our sales team, new products launched in the second half of 2016 that continue to gain traction in the marketplace and increased interest in our placental technology due to recent positive clinical trial results. This was also the first quarter after the wind down of the AvKARE inventory resulting in increased sales under the MiMedx federal supply schedule as compared to our prior quarters It should be noted that the amount of inventory repurchase part of the contract with AvKARE was nominal and all inventory buyback obligations have been satisfied as of September 30. Distributor revenue represented less than 5% of total revenue, while we continue to grow the number of active accounts driven by increased direct sales headcount, allowing us to expand into secondary cities. Stability Biologics product revenue for the quarter was $2.2 million as compared to $2.6 million in the prior year. Revenues for the nine month ended September 30, 2017 was $233.6 million, which represents an increase of 33% as compared to prior year. Year-to-date wound care revenue is $171.4 million and SSO revenue is $62.2 million with revenue from distributors, again representing less than 5% of total year-to-date revenue. Stability Biologics product revenue on a year-to-date basis was $7 million as compared to $9.8 million in the prior year. GAAP gross margins for the quarter were 88.7% as compared to 87.6% in the third quarter of 2016. A 110 basis point improvement was driven by higher sales volume, processing yield and efficiency…

Thank you, Mike. In summary, let me tell you that company should continue to reform very, very well and we'll do it in a relentless manner. We have a lot more good news coming. The short sellers are so wrong on our situation. Unfortunately, they're accepting as truth information for these ex-employees who have been dishonest. However, apparently this group has fallen for some of their stories. Short sellers need to reflect on the fact that these people are acting dishonestly relative to quality employer who is compensating them very well. They did that to us, they're going to do that to other people. The idea that this company should valued at $1 to $3 a share is just incredibly stupid. This demonstrates a lack of business acumen on the part of the short sell individuals. Sure, every now and then, they're going to find a situation to have some malfeasance and those conditions are generally pretty obvious. We just had our third quarter financial reviewed by our new auditors, just reflect on that fact as well as our results. Then reflect on this management's long track record of successful business development and the acquisition those entities for strong shareholder returns. Please give that facts some strong consideration. Let's open the call for questions.

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

Hi. This is David Saxon for Mike. So to start, are there any updates on the VLU coverage discussions you've been having with insurers?

This is Debbie. We have actually started having conversations. We've submitted the packets. As you probably are aware, there's a certain amount of information and different things have met according to the payer and so we're in process with those discussions.

And then for the Stability divestiture, can you quantify first margin and DSO benefits that might have?

As I said in my prepared remarks, the average gross margin on the Stability products was a little bit less than 50% and so, you can do the math on that. And then we did state that we felt that overall operating results as a result of the divestiture would be accretive by $0.02 per share.

And that was on a GAAP basis?

That's on a GAAP base, that's correct.

And any impact on DSOs or..

No, with the product that we were selling through that channel, their DSOs are about in line with our overall DSOs. So in the mid-60s which we came in this quarter. In fact, just to mention, when we did the DSO calculation, we did adjust for the fact that Stability's accounts receivable was not in the balance. Otherwise the number would have been 64 not 65. So, we did adjust for that.

And then I guess you expect to kind of normalize on the mid-60s?

That's what we hope. Some of this is driven by how you develop in different markets. For example, if we grow internationally and you're selling through distributors that could have an impact that brings it up a bit. As we stated on previous calls, our internal target was 75, that was developed really with the mix of direct and distributor higher than where it is right now. As we said before, we've got less than 5% of our revenue is with distributors and typically the more distributors you have, the more DSO grows.

And then last question, have you ever -- do you currently sell products through physician-owned distributors?

I wonder where that question came from. No.

And our next question comes from the line of Matt Hewitt with Craig-Hallum Capital. Your line is now open.

Good morning and thanks for all the details. Couple of questions from me, Mike since you’re on this time, I am wondering if you could help with that the AvKARE relationship. You had reserved several million dollars against the 90 day repurchase period. And I'm curious if you were able to recognize any of those reserves now?

Let's say this, the third quarter revenue was not affected by any reserve reversals. We quite frankly will look at that situation for the full year and make a determination at the end of the year.

Another one, Pete maybe this is one for you. So, a couple years ago at analyst day, you hold out a new tagline, 3-in-1 in 20. Tripling revenues, it appears that you're on track to hit that number, but given some of the more recent issues and increasing legal expenses, is the dollar in earnings by 2020 still on track are achievable and maybe point to some of the areas of ways that you think that you can get there?

Well, that's a good question. And that's why I commented earlier on the management of operating profit margins. First of all, we're not concerned about that. We're still -- this last year too and maybe a bit in the next year or in this phase where we just have some really compelling opportunities for investment. Same time, we've had these legal expenses that have come up, some up again related to this short selling situation. But I think and I'm looking around the table I see the heads going up and down and again company's profit and loss statement is something that this management team gets involved in every month. We have what's called F&O meeting, finance and operating meeting and we go into the detail. So we know what we're doing. We keep track of it and we make those investment decisions on a monthly basis. So I think, again, this company will take this -- keep it on 90% of their gross profit margins, we're going to substantially increases in operating profit margin, towards the end of 2018, 2019 and into 2020.

And Matt, if I could add, to get to the dollar in 2020, obviously the greatest amount of leverage is on the SG&A line. The leverage was even greater than it already is, if it's not for some of these investments, somewhat extraordinary when you start talking about some of the legal costs. And we expect that to subside certainly over time and then in addition to that is, as you go forward and you move into the pain management market, you're talking about a different level of sales effort more along the lines of the pharma model than what we have in wound care where wound care is much more hands on. So, those two factors alone should get you into the low 50% category, which gets you to that adjusted dollar per share.

One last one from me and this might be for Chris. Given some of this noise -- and I know you guys have been dealing with it quite a bit here recently, but how is that or does it affect the physicians -- are you getting any questions from your doctors and your customers, and if so what are you telling them? Thank you.

Sure, thanks Matt. We deal with more internally here. Certainly, our management team is aware of what goes on, but on the date-to-day basis, it's not something that we hear much about from our physicians and from our customers. Quite frankly, lot of people just realize it's been associated with the company that these things are false. And when you read them, they just kind of discount it. So quite frankly our team is very-focused, I won't say that it's never distraction at different times, but they continue to be very disciplined about what they're doing and we've got a good management team that has a good head on their shoulder. So, not a big deal in the field.

This is Pete, and I will add something, I got semi-involved when the physician caller came in yesterday and we tried to answer all of our shareholders calls and concerns. And he was a physician who was a practice physician, although near retirement. And he was outright. He said I just heard about this, he said, this is idiocy, why are people criticizing this company and your product. I've been using this product for years he said and he just went on and on and on. So it cuts both ways.

Next question comes from Matthew O'Brien with Piper Jaffray. Your line is now open.

Can you just kind of stick on some of these allegations that are running around out there and a little bit more? And just given your interaction with the employees that you terminated, what have you learned from a compliance perspective to ensure that some of these issues don't persist going forward and on the compliance processes side? What have you done to really ramp up your insurances, that there isn't anything nefarious going on, just anything you can provide as we kind of try to draw this whole thing out if it could be helpful?

First of all, from our standpoint, what was disappointing is us, not finding out about the last December about sales from these individuals going onto their own LLCs and own companies, that should have bubbled up through our compliance system etcetera. A year prior to that, we had a situation of over one of the managers out in the Midwest, it was bubbled up right through our compliance system. Within 48 hours, it was investigated and he was terminated. This situation, these individuals were lot more shrewd in that particular individual and I tell people, well corporate knows about this Don't worry about it. Well, I just kind of kept it quiet for too long. So we've done a lot of education and again in terms of what's proper, what is not proper. We can't -- when you have 300 salespeople out there, you have 800 employees, somebody can go rogue on you and you just have to have a system set up, that will highlight that quickly. We have two very efficient systems, if people would use them. We have used this as an example to all of the current people -- take the sales people of what went wrong here and how -- basic guide and how they must report this kind of malfeasance quickly, so we can deal with it. So from that standpoint, this could have been a better learning experience even though from a corporate standpoint, there's no malfeasance. We have some rogue employees. So we've learned a lesson and used that as a teaching moment as I used to call it with my children, as a teaching moment -- broad teaching moment for all our folks. But in terms of buttoned up systems here, we're in pretty doggone good shape and three years ago…

And then heading over, just real quick on the -- you gave the number or the percentage of revenues coming from distributors and OEMs. Can you give us the percentage revenues from independent sales agents?

I honestly don't know that off the top of my head. I think and I am looking to Chris. The majority of the sales agent revenue is flowing through SSO and that's the subset of the total SSO revenue. So, again as we've seen some of these allegations, when you talk about different distributors and the like, what's not brought out here is in many cases, these are the distributors, the main product they were selling was not ours, I mean we were kind of an add-on biologic, some hardware or whatever. So it's not our core wound care business, it's a sub-segment of our SSO.

In SSO, we predominantly we use both surgical as well as musculoskeletal, but as we've said to you before, we continue to move more and more towards direct. This has been a focus of ours for several years now. And we like the direct model, not that there is anything wrong with the 1099 independent, but we put a lot of time into training and compliance, and all the things that we're talking about today, and we like the model where we have 100% of those individuals' times.

I mean strategically, it makes sense for us, this gives us the ability to interact directly with the docs over the customers. So we know what's going on in the marketplace. We can monitor what's going on with their inventories. We are not blinded by a distributor, who own the main relationship. So we moved in that direction. Again, keep in mind that, that agent is just getting a commission, so that commission hits the SG&A line. It's not hitting the revenue line. We build the customer, we collect from the customer, we manage the customer from that perspective.

And last one from me just on assets, another great quarter. Just trying to get a sense for, what's driving that the new accounts going deeper and existing accounts, new reps et cetera products, just how sustainable is this not necessarily at this level of growth, but pretty healthy growth as we think about 2018 and beyond?

Like I said, it's going to be a little choppy, but the last two quarters has been excellent. And we expect that it's going to continue. We're forging a new market in the operating room and its enhanced feeling. It's different than what other products that you had more structure and strength, like for hernia repairs as an example have come before. And so, we're just beginning to hit the stride. These hospitals and surgeons are certainly recognizing the value of amniotic membrane and they certainly recognize the value of the MiMedx through our education and the clinical work that has been done. What we're seeing is more and more [facts] that are approving the product to be in the hospitals, and we're seeing more widespread adoption once it's in there. So there is a lot to do, a lot more and these markets are very large, but we're very pleased with the progress we're starting to see. And I think that this is going to be able to continue, certainly for few years if it can -- can't get a 3-in-1 question by 2020 is still a very important piece of our growth.

[Operator Instructions] Our next question comes from the line of Bruce Jackson with Lake Street Capital. Your line is now open.

Just two question. Can I get the exact sales force count at the end of the quarter?

Exactly at the end of the quarter was 350.

And then -- in past years you've kind of put out some broad-brush guidance for 2018, around the end of December. Is that kind of still your intent going forward?

We will always have a Board meeting around December 15 and at that meeting the business plan for the subsequent years thoroughly vetted, work through, and then we release our guidance for the next year, right around that same time. So that's still on the dock at this year. The Board meetings is going to be in mid-December and we'll let you know when that press release is coming out.

And I'm showing no further questions at this time. So I'd like to return the call to Mr. Pete Petit for any closing remarks.

Okay, well thank you very much for joining us. Again I can't use any other words, but other than fact, we had an excellent quarter. And -- we are at the point that we expect to continue to produce some exciting results for you. And also I'll say that -- sorry that we're going through this illegal short selling activity. It's been an interesting learning factor for some of us. And frankly disappointing to see the integrity issues that are wrapped around these things. If we will just be patience, these things will soon clear themselves. And I believe I could sooner rather than later, I think someone is just absolutely foolish to be shorting this company at this point. I don't think it takes a lot of investing acumen to understand the asset base we have and the suspicion that this management team is somehow corrupt and dishonest. Just look at our track record and that's all you need to go to -- go from there. And always little perturbations in the market of this person said that and that person likes that -- those things, we're dealing with them, we take them seriously. And if we have an issue, we'll deal with it, but we don't. Thank you very much, appreciate your patience and watch for our progress and I guess I could also say I would certainly believe this is a good entry point for investors. Thank you all very much.

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