MiMedx Group Inc (MDXG) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MiMedx Group, Inc. First Quarter 2015 Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I'd now like to turn the call over to host for today, Ms. Alexandra Hayden, General Counsel and Secretary. Ma'am, you may begin.

Thank you. This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based upon the current beliefs and expectations of our management and are subject to risks and uncertainties.

Actual results may differ materially from those set forth in, contemplated by or underlying the forward-looking statements based on factors described in this conference call and in our reports filed with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2014. We do not undertake to update or revise any forward-looking statements, except as maybe required by the company's disclosure obligations in filings it makes with the Securities and Exchange Commission under federal securities laws.

Pete?

Thank you. Good morning, and welcome to our first quarter shareholder call. I have with me Bill Taylor, our President and Chief Operating Officer; and Mike Senken, our Chief Financial Officer. You've just heard from Lexi Hayden, our General Counsel. There are other corporate executives also on the call.

Let me begin by making a statement that has become very routine. The first quarter of 2015 was the 14th consecutive quarter of MiMedx meeting or exceeding our revenue guidance. In this case, we ended up in the upper range. We have calculated that the unusually severe winter storms cost us at least $1 million in revenue for the quarter. We always take that into account winter weather when we give our first quarter forecast, but this one, we had some exceptionally severe storms.

Also, the normal disturbances associated with pricing changes were evident in the first quarter, as it was in the first quarter a year ago when we had the same type of disruptions. It takes staff at most Wound Care centers a significant time to make these changes in their systems and always delays patient treatments. However, in spite of these issues, we had what I would classify as a good quarter.

As we look out on the rest of the year, we expect our quarterly performance to be very similar to the way it was last year. That is, historically, our first quarter has proven to be the weakest relative to quarter-over-quarter growth. The reimbursement confusion and the weather issues are behind us now, and we expect robust growth each quarter during the remainder of the year. As in last year, we currently expect the third quarter to be the fastest growth quarter sequentially.

From a strategic standpoint, MiMedx has become the clear leader in advanced wound care therapy. We generally know approximately the number of patients being serviced by our competitors, but we certainly far exceeded our largest competitor by the end of last year, and we are way ahead of the others. I predict by the end of 2015, our major competitor, Organogenesis will have deteriorated to the point that they will have a very limited presence in advanced Wound Care. It's a shame that their executive decisions over the last decade left them in such a vulnerable position with outdated technology and no new innovations.

Speaking of Organogenesis, I'll simply add this comment, the evidence continues to build relative to how much time and effort they have spent over the last several years in trying to disrupt and destroy MiMedx. This effort has been primarily focused at federal agencies, but is also focused in other places. It's quite amazing how much time and effort was devoted to this activity rather than attempting to improve the tenured product line that had made contributions to advanced wound care 10 years ago but was never improved or configured to reduce the significant wastage. We will keep you apprised as we continue to gather additional information on this matter.

So MiMedx is going to finish 2015 with an extremely broad footprint across the country in wound care. We have rapidly added health plan coverage in the first quarter, as we mentioned in our April 13 press release. In fact, that was a stellar performance in bringing closure to a number of reimbursement initiatives that we've been pursuing for, really, some years.

With the body of clinical and scientific evidence that includes approximately 20 peer-reviewed publications, we may be able to convince large majority of the health plans to provide MiMedx with coverage for EpiFix. We're making rapid progress in finalizing the remainder of the significant plans by the end of this year.

Now as I mentioned, we expect to be the dominant advanced wound care provider from this point forward. We have done an excellent job in just the last 3 years in building that position. We came from the nowhere. However, because of our regenerative medicine product line, we are very focused in other health care procedures. We've highlighted our activity initiatives in certain surgical areas. We've built the foundational elements of the sales and distribution group to support the surgical initiatives.

In the surgical area, we grew 125% first quarter-over-first quarter. I think you'll continue to see the surgical area grow rapidly in the quarters ahead.

I think it's time to quit thinking of MiMedx as a wound care company, but instead as a regenerative medicine company with initiatives across numerous medical disciplines.

Now relative to surgical area, I wish to announce that we've been quietly furthering development of our collagen fiber product, which was the foundational technology for MiMedx 8 years ago. I know that will make some of our initial shareholders extremely happy, because I have heard for many years from them as to why we had not continued to exploit the advantages of this unique collagen fiber.

Our CollaFix is a collagen fiber about the diameter of a human hair. The fibers are extremely strong and stiff, and they have the strength and stiffness that is very equivalent to tendons and ligaments. The fibers were originally developed around bovine collagen. However, because of this large supply of human collagen available to us from our placentas, we have now focused the CollaFix technology towards a human collagen product. This product has shown to be very promising for the repair of tendons and ligaments. Because of its strength and -- because its strength and stiffness matches that of the native tissue, the repair can be exercised and utilized rather quickly, and actual tendon and ligament cells grow into the collagen scaffold as opposed to scar tissue.

CollaFix has proven in [our] studies to be extremely effective in terms of producing repairs that are as strong as native tissue. This technology will provide an opportunity for us to develop the product line and incorporate some of our amniotic membrane and allografts with these strong fibers to produce some interesting surgical products. You will have to stand by for further information, but we do have a concerted effort in this area. And Bill Taylor is going to give you a few additional details.

Now I want to make a few comments on our patent litigation. We provided a press release some months ago to help shareholders understand the process and its complexities. I can simply tell you that we've won every milestone in moving these several lawsuits along. We're highly confident in our ultimate success, or we would not have filed the patent suits in the first place.

Also, I'd remind you that patents are not always the ultimate business weapon without a superior and well-managed sales and marketing effort and supporting business structure. I think we've obviously proven our ability to develop the sales and marketing of our allografts, and I will submit that we will soon prove that we have similar expertise in protecting ourselves from a patent standpoint.

You saw in our press release this morning that our board authorized yesterday another $10 million on our share repurchase program. There are times we certainly consider our stock undervalued, and with the cash flow that we currently have and the future projected cash flow, we feel very comfortable in repurchasing shares. Also, this should clearly indicate the confidence that the Board of Directors have in our future.

I'm going to make a couple of comments about our OIG investigation. As we previously press released, the OIG has, at this point, decided not to involve themselves in the case. The case is not quite closed, but it's certainly reached its final stage. However, it's very noteworthy that OIG reached its conclusion in a relatively short four-month period. I have emphasized how quickly we respond to their request and how the data and information left no doubts in our minds that there were not any issues here of merit. However, I hope this gives you some insight on how well managed and professional our business activities are and how focused we are on our honesty and integrity.

Our management are all extremely experienced and we plan extremely well and we execute extremely well. Issues of this nature should not come up in the ordinary course of business. However, I have indicated to you that we have dealt with a number of issues that have been the result of actions of one of our competitors. We will report to you when this case is unsealed, and we can discuss through it later in that case.

Also, please note, we've increased our full year of 2015 revenue guidance from $175 million to $190 million up to $180 million to $190 million. As occurred last year and the previous year, expect that we will continue to raise that guidance unless some unforeseen issues develop.

I'm going to defer to Bill Taylor and Mike Senken to highlight some of the specifics related to growth that occurred in the first quarter. Bill?

Thanks, Pete. Good morning, everyone. The first quarter played out essentially as we anticipated, and we are very well positioned to meet or exceed our increased full year projections. We anticipate our quarter-over-quarter growth will replicate the pattern established last year. The seasonality of the first quarter is well established, and the rest of the year will show accelerated growth. Our team did a great job in strategic and tactical planning last year in preparing for this year and the evolving market dynamics.

The planning it takes to successfully manage these market variables is extremely complex. Frankly, it's so complex that many of our competitors refuse to give any revenue guidance. Fortunately, our team is very seasoned and understands those variables and what we can do to strategically -- to affect them in a positive way. And for 3.5 years, we've shown that we can accurately project our performance quite well.

As you can see from our press release, we increased our guidance to $180 million to $190 million for the year, which is a sign that we feel very good about our opportunities this year. Of course, it helps that our business is very diverse. And although our platform technology comes from one source, the placenta, it certainly has a multitude of applications where it can be used. And that diversifies our customer base, and therefore, gives us many opportunities to grow, even when the market dynamics in certain sectors change in a given quarter.

Our people often ask me how we can be so accurate in our projections over time, particularly when the company is growing at more than 100% per year over 3-plus years. It really comes down to the multitude of opportunities that are provided by our PURION Process tissues. Remember, we're a regenerative medicine company, not just wound care. So when you have so many opportunities for growth and you plan well on multiple fronts, such that if something negative happens on 1 or two fronts, you still have enough other opportunities to meet your numbers. And then if things go the right way and you did a very good job planning and those negative things don't happen, then you exceed your guidance. It's really just that simple.

So a good example of this happened in the first quarter. We did a very good job planning and executing, and we planned for a typical amount of increment weather. And by the end of February, we were right on target with our planning. Then early March, one more big winter storm came through that made the winter a bit more harsh than we planned for, shutting down wound clinics and physician offices from the Midwest all the way through the northeast. Several offices were shut down for a few days. And we just missed the upper end of our guidance by $200,000. So if you do the math, you'll notice that our first quarter revenue averaged just over $600,000 per business day. And remember, the spread between our low and high guidance was $1 million for the first quarter. So our margin for error from top to bottom was just over one day sales. So think about that. Had the weather been average, we would've exceeded our guidance by a very nice margin.

Now let me talk about a couple of the key factors from the first quarter, the factors that I think we frankly managed very well. First, as everyone knows, the biggest change for us in the quarter was the expiration of the pass-through status for EpiFix. I'll remind you that some people mistakenly thought that this reflected the majority of MiMedx's revenue.

As we've stated in the past, this only related to the large EpiFix sizes used in hospital, outpatient or ASC settings with Medicare patients. It does not relate to any of our sales to the federal facilities, nor does it relate to grafts sold to physician offices or grafts used in DRG cases, nor does it reflect on grafts used in patients with commercial insurance in hospital outpatient centers. It does not also apply to surgical, orthopedic or sports medicine business.

Also, I'll remind you that an estimated 50% of our EpiFix grafts used in hospital outpatient settings last year were not eligible for the pass-through payment, because they were less expensive than the price threshold to qualify for that added payment.

So mid-last year, we indicated the applicable portion of our business that could be negatively affected was estimated at around 8% or 9%. When the business is growing at a 100%-plus a year, such an effect is certain quite small relative to our full year revenue growth. Now that said, we still want to ensure that patients in need of our innovative technology have access to the best product in the market. So we developed a strategy during the year, whereby we offered additional sizes under the bundle and we developed a mesh version of EpiFix. Our regular grafts up to 8 square centimeters are under the bundle, which represents some 80% or so of the DFUs and VLUs. Then with our meshed configuration, we can cover wounds up to almost 20 square centimeters. According to our data from last year, this should get us coverage of around 96% or 97% of the wounds in these outpatient clinics.

One thing to remember is that effectively, this mesh EpiFix is a lower-dose being applied to a wound as compared to our regular sheet EpiFix. So it may take an extra application to fully close the wound, which will partially offset the lower price in many cases. By the way, our mesh is the same as our regular sheet EpiFix, but with punched holes. It is not like a skin autograft that is fenestrated and stretched. It's simply punched holes. By the way of example, our large mesh can cover that wound that I mentioned up to about 20 square centimeters, but it only uses 12 square centimeters of material. So the sales price of the material is less than a non-mesh sheet of the same size due to it having less material.

Our portfolio of EpiFix products is by far the widest selection in this industry, and we expect it to enable us to grow significantly in this coming year.

So another item to consider that gives you an indication of the expected growth this quarter is that our mesh was only available for part of the quarter. We launched it at our national sales meeting in early February. As you can imagine, a lot goes into a new product launch, such as GPO and IDN contracts that need to be updated, submission to value analysis committees, training of our sales representatives, et cetera. We made significant progress during the quarter and expect a very nice upswing in mesh sales this quarter and beyond.

Now briefly, let me mention our GPO and IDN contracts. You've seen some information related to these over the last few months. I'm not sure the full effect of what we've done here is really understood by shareholders. But I can tell you that our smaller competitors are definitely feeling the effects. Over the last 18 months or so, we've been quietly working diligently with these various GPOs and IDNs in securing contracts that not only get us on contract at thousands of hospitals, but based on our clinical and scientific body of work as well as our cost effectiveness, it puts us in an advantageous position relative to our competition.

Many of our contracts are set up such that facilities that opt into a specific GPO contract must either use the MiMedx product at an 80% or higher committed level or in some cases as the exclusive amniotic tissue in their hospital.

Additionally, a few of our competitors have recently issued press releases, indicating that they signed a specific GPO contract. What they left out of those particular press releases was the fact that we have the same contact but with the exception that if a hospital opts into it, they are committing to an 80% MiMedx usage. So just because you're in doesn't really mean you're in.

So at the end of last year, we were in roughly 50% of the Wound Care centers across the country. These GPO and IDN contracts will really help strengthen the position of the accounts and help us grow into the balance of those centers throughout the rest of this year.

One area we haven't really spoken about much, but we're getting some traction, is our product lines that are used in surgical cases for large wounds, such as burns and surgical dehiscence. While many of these can be classified as wounds, we consider them as part of our surgical or DRG business, and as such, are not reported on our Wound Care numbers. You can see from our press release that our surgical business grew this quarter pretty significantly, and a sizable portion of that revenue was from our grafts used in this area.

We're also ruling out this year our burn graft called EpiBurn. It's specifically configured for burns, and we've had some very nice success early on, and we expect to continue to significantly grow this business. This product line consists of larger grafts that are used in various burns of the face, neck, ears and around joints where contraction can be a factor in the healing process. It's really for those specialty areas at this stage rather than the very large torso or leg burns. But we're very excited about this new focus as well as our other surgical wound grafts.

Also, our AmnioFix group of products grew this past quarter as well, going along with our focus on internal surgical applications. We attended several trade shows in the quarter and had great physician interactions and interests in orthopedics and urology. Our focus on building our urology business is going very well with numerous top robotics surgeons trialing the product, and we're kicking off our prospective RCT on nerve-sparing prostatectomy, to complement our first published study that showed a return to sexual function in about half the time it took without the use of the product.

Regarding our federal business. You probably noticed that it grew in the first quarter, and we still believe that there is a substantial amount of business that we can target in these accounts that we had not yet touched. Some of you may have seen the $6.5 million BPA, or Blanket Purchase Agreement, for federal accounts that we recently signed. We participated in a few of these over time, but this is a big one, and I expect us to sign several more of similar or larger dollar volume over the course of this year.

Also, I'm sure many of you may be wondering about the status of our agreement with our federal distribution partner, [AdCare]. The original three-year contract was set to conclude this month. We've been very pleased with our partnership over the past three years, as they are a well-established company with years of experience with the federal government and are also a service-disabled veteran-owned small business or SDVOSB. We extended our contract with them, and we also have our own contract now with the federal government.

We decided that we should begin the process ourselves. And early this year, we were awarded our own FSS contract. We can sell into the market through our own contract or through our distributor. Our contract extension with our distributor enabled us to transition the business over to our contract through mid-next year. It also enables facilities that desire to order a product from an SDVOSB to continue during that period of time. We're very satisfied with that relationship, and we could not have entered the federal market as quickly or as deeply on our own as we did by partnering with them over these past few years. We're thankful for that relationship.

With the growth we have experienced in the past three years, we're in a position now to have our own contract fulfillment commitments on our own. So we're going to use our new agreement to expand our federal business, and in upcoming calls, I expect us to update you on some of these initiatives that should continue to drive incremental revenue for us.

As we do so, we may have some quarter-to-quarter variability, since some of these orders can be stocking orders rather than consignment, and I expect to see a very strong trend over time growing the business significantly.

Now related to our field sales force. We continue our expansion activities and have brought in some additional strong sales executives and management. I think we had roughly 140 or so field sales personnel at the end of the third quarter last year. We added about 28 or 30 more by the end of the year to get up to about 168 or 170 field sales personnel into 2014. In the first quarter of this year, we added about another 25 sales professionals to bring our total to 193 at the end of the quarter, and we should hit 200 any day now. That means we have at least 25 people that have been here for three months or less and above 50 that have been here less than six months.

As you know, in the past, it's taken our reps on average about six months to get to the $1 million per year run rate. At this stage, it might be a little longer, maybe seven or eight months based on our hiring profile. But doing the simple math, you can see that we expect a strong second quarter and rest of the year in terms of sales growth. And if we can hire another 40 or so sales professionals by -- per our current plan by the end of the year, we'll be in a very strong position ending this year and going into next year.

Now talking about our clinical studies. As you know, we submitted our first IND for plantar fasciitis last year, with the intent to begin a Phase IIb trial in the first quarter. We're very pleased to announce that we have 4 sites enrolling patients and a total of 11 sites that are in process. Additionally, we've already enrolled and randomized a number of patients out of our total of 146. Our projections are that we may be able to complete enrollment of this study during this calendar year, and we're pushing hard to do so.

And for our second IND, we've been assembling additional clinical data from the field to improve our position for our wound healing injectable study. And once that data is summarized, we will submit our second IND.

On our sheet products, we have an EpiFix study that will have over 100 patients enrolled shortly. And then, we expect to close it out and completely -- complete this study later this quarter or early third. That will continue to add to our body of evidence illustrating that EpiFix is truly the best-in-class in chronic wound healing. We have another five RCTs in process and another half dozen in the preparatory stages. Our commitment to leading the industry in scientific and clinical research definitely continues.

Now I'll talk briefly about product development. Normally, we don't talk a lot about these development projects, but we are excited, as Pete mentioned, about expanding our focus on CollaFix. Our main focus over the past several years has been on our amniotic technology, although we've quietly been moving CollaFix along. We've talked in the past about finding uses for the placental material that we currently throw away. I'm happy to announce that we are elevating the priority of CollaFix and are in the process of converting that collagen source to be human placental tissue rather than bovine collagen. I'm sure that's striking a core with the long time MiMedx shareholders, and will have a number of them very excited.

For those of you who don't know what CollaFix is, I will explain it a little bit deeper than what Pete did. This is one of the two original technologies on which MiMedx was founded. And basically, it's proprietary technology that purifies collagen to about 99.9% pure collagen. And then it processes it into a continuous fiber, about the size of a human hair, and then it's cross-linked to make it stronger. It can then be made into various woven or braided constructs that can be used in tendon and ligament repair but as well as in two areas such as specialty sutures or meshes. The fiber is about twice as strong as a human tendon, with about the same stiffness, which allows the constructs -- various constructs that to be made that can mimic native tissue biomechanics. We're very excited about this renewed focus on CollaFix and how it'll be a fantastic addition to our surgical and sports medicine line of products.

A little later this year, we're going to talk more about our first few products that are in the timelines associated with them, but I'll give you a hint. Several are expected to be 510(k)s, so the timelines for launch will be reasonably shorter. So again, we'll give you more to come in future calls.

And one last thing. You may remember, on the last call I mentioned, we negotiated a lease on a new 25,000 square foot office building in our current business park. It is signed and the construction has begun, and the target completion date is early June. So we'll move several of our groups into that building in the summer and create a bit more space for us here to expand. We're very excited about this growth and look forward to the next phase in growing to $200 million and beyond.

With that, I'll turn it over to Mike.

Thanks, Bill, and good morning. The company recorded revenues for the first quarter of approximately $40.8 million, an increase of 108% or $21.2 million over prior year first quarter revenue of $19.6 million.

On a market segment basis, Wound Care revenue was $29.8 million, which represents approximately a 103% increase over prior year. The company believes that the recently introduced new sizes and our new mesh configurations, which are working their way through the value analysis committee process, will gain momentum beginning in Q2 and continue over the balance of the year.

Surgical, Sports Medicine and OEM, or SSO for short, revenue was $11 million, which represents approximately a 125% increase over prior year. The growth in SSO revenue is a reflection of our strategic focus to grow both the SSO segment as well as the Wound Care segment.

On a customer segment basis, commercial revenue was $27 million, which represents a 158% increase over prior year, while federal revenue was $13.8 million, which is a 51% increase over prior year. As expected and reflected in our guidance, commercial revenue was impacted by seasonality and the change in reimbursement, somewhat offset by the addition of new customers in the aforementioned introduction of new sizes and the new mesh configuration. Government sales reflected penetration in new facilities as well as increased sales at existing facilities.

Gross margins for the quarter were 87% as compared to 85% in the first quarter of 2014. The improvement was driven by product mix.

R&D expenses for the quarter were approximately $1.8 million or 4% of quarterly revenue as compared to $1.4 million in Q1 of 2014. The year-over-year increase in R&D spending is driven primarily by increased investments in clinical trials.

Selling, general and administrative expense was approximately $29.3 million for the quarter or 72% of quarterly revenue as compared to $15.9 million or 81% of quarterly revenue in 2014. The year-over-year increase in SG&A was due to the continued buildout of our direct sales force in both Wound Care and surgical markets, additions to the reimbursement team and other support areas as well as increased legal costs.

The company reported positive adjusted EBITDA margin of 22% or approximately $8.8 million for the quarter ended March 31, 2015, which is a $6.8 million improvement as compared to an adjusted EBITDA of $2 million in the first quarter of 2014. It is the 13th consecutive quarter of reporting positive adjusted EBITDA. Included in our press release is a reconciliation of adjusted EBITDA to reported net income. The improvement is driven by increased sales volume, improved gross margins and the corresponding operating leverage.

Operating income in the first quarter was in line with our guidance and is approximately $4.2 million or 10.4% of quarterly revenue, which represents an improvement of $5.1 million as compared to an operating loss of $0.9 million in the first quarter of 2014.

The company reported net income for the first quarter of approximately $4.1 million or $0.04 per basic and diluted common share as compared to a net loss of approximately $0.9 million or $0.01 per basic and diluted common share in the first quarter 2014.

Turning now to the balance sheet. The company reported approximately $82.3 million in total current assets, including $38.7 million in cash, $6 million in short-term investments, which are comprised of fully insured and liquid certificates of deposit, $31 million in accounts receivable and $4.2 million in inventory. Day sales outstanding for the quarter were 68 days as compared to 61 days at the end of the prior quarter. Inventory turns were 4.9 for the quarter as compared to 2.8 at the end of the prior quarter. Current liabilities were up slightly in the quarter.

The company repurchased approximately 1.4 million shares in the quarter under the share repurchase program, bringing the cumulative total to approximately 2.3 million shares repurchased under the plan. As mentioned in this morning's press release, the board has authorized an additional $10 million for the share repurchase program.

Turning now to the statement of cash flow. The company reported positive cash flow from operating activities of approximately $4.2 million for the quarter as compared to a negative $1.6 million for the first quarter of 2014. Positive cash flow from operating activities for the quarter was driven mainly by an increase in adjusted EBITDA, somewhat offset by increased working capital.

Cash used in investing activities in the quarter of $1 million was primarily for investments in fixed assets in support of the company's growth. The cash flow from financing activities for the quarter was a negative $11 million, including $12.3 million for share repurchases, somewhat offset by the proceeds received from the exercise of stock options.

And finally, we added 38 associates in the quarter, bringing our total headcount to 424, which represents a 47% increase as compared to March 31, 2014.

And finally, turning now to our guidance. The company has increased the lower end of our 2015 revenue guidance, with a range now between $180 million and $190 million, and an operating profit of greater than 15%. Our guidance for the second quarter is $44 million to $46 million in revenue and in excess of 11% operating profit.

Also, management will be participating in 3 investor conferences this quarter, beginning with the Deutsche Bank Health Care Conference in Boston on May the 6th, the Craig-Hallum Institutional Investor Conference in Minneapolis on May 27, and the Jefferies 2015 Global Health Care Conference in New York City, the first week in June, with the exact day still to be determined. Please check back to the Investor Relations page on our website for further updates.

With that, I will turn the call back over to Pete.

Thank you, Mike. I hope that our comments have been helpful. I hope you can tell that we're looking forward to another very robust year of growth in revenues and operating profits. We're looking forward to building our surgical, Sports Medicine and OEM markets very rapidly this year. Therefore, we certainly expect MiMedx to grow into one of the most respected regenerative medicine companies in the industry, with exceptional revenue growth and profitability. Thanks, and we will open it up to questions.

(Operator Instructions) Our first question is from the line of Mike Matson of Needham & Company.

I guess, I wanted to start with the surgical business. Obviously, it was much stronger than expected. Can you give us some insight into the various factors there that drove the growth? And specifically, I was wondering if you could tell us what benefit you saw from the robotic prostatectomies, if any, this quarter?

Well, we certainly grew in a number of areas, and we did have growth in that area of the prostatectomies. We haven't broken those numbers out that much, at least at this stage. The one thing I will also point out is in the first quarter, we did not have any Zimmer revenue yet. That is expected to go this quarter. So we were pretty strong across the board in terms of our own product lines as well as through spine, orthopedic as well as the urology and surgical side of things.

Also, I want to highlight our EpiBurn, we had a very nice quarter with that. Again, we've did kind of a quiet roll out of that. We had a sizable revenue in that area, that last year would have been more in the EpiFix numbers in Wound Care, but since we have now a very specific product for burns, we include that in the surgical side of things, because it's more of a DRG focus.

Okay. And you mentioned Zimmer, but what about Medtronic? Was there any kind of larger stocking orders, or is that more of just selling product into them as they're selling it on their own?

It was a kind of a continued pace of what we had in the fourth quarter. It was not a sizable jump-up. We're still working with them and moving our way up the management there to try and get much deeper focus on their end, that they're capable of.

Okay. And then just wondering if you could comment on what you're seeing since April 9 in the Novitas regions, where they've started to cover some of the competitive products? Have you been able to sort of maintain your share and pricing in those markets?

Well, first of all, I can say we haven't seen anything that we could classify as disruptive. Second of all, I'll use my role to simply say, it's quite difficult to understand when the American health care system is based on evidence based medicine, why a Medicare intermediary would open up something of this nature, where they don't require any evidence-based medicine in order to participate. So it's quite confusing. I think they've got something else in mind, in terms of opening up like they have, and then again to limit it as they see what happens. Because at this stage, they basically open that LCD up without any requirement for evidence-based medicine; there's no requirement for clinical studies or anything else, and that's quite, quite, quite unusual. So we'll see what plays out, but it may end up being opened up initially and then it'll be pared back.

And this is Bill. One of the things I just want to highlight is there have been -- there were already a few other areas that were like that, because the Novitas states on the East Coast, I can't remember which ones they are -- or excuse me, Palmetto on the East Coast, were just like that, that were open to anybody with a Q-code. And we've had -- continue to lead the market in those areas. So our expectation is it'll be the same. And Novitas is -- there is a lot of noise from the competitors. But what we're seeing -- just like we saw in Palmetto was -- that it was a lot of noise. But a lot of folks didn't realize two years ago that they could get into Palmetto and they announced a year ago that they have coverage there, but they still don't have very strong penetration. So we think we're going to be just fine.

Okay. And then my last question just for Mike. The DSOs, I think you said that they were 68, and that was up from 61. So a fairly sizable increase, if I heard you correctly. So can you explain that? And does that have anything to do with the business mix, that you had more federal sales or something in the quarter?

I think, Mike, some of it is the first quarter phenomena. When we talk about weather and you talk about the first quarter getting off to a slow start, that's also reflected in our shipments. And so the shipments are weighted towards the back end of the quarter, and when you're doing this calculation, not on an average, but based upon a quarter-end number, it can distort the numbers a little bit. In addition to that, with the surgical and sports area being up, there are higher shipments to distributors and their terms are a little bit different than to direct customers.

Our next question comes from the line of William Plovanic of Canaccord Genuity.

A couple of questions here. Just on the -- I think it was an interesting comment with the EpiBurn product. You're shifting, basically, revenues from the Wound Care bucket into the SSO bucket. And Mike, I don't know if you've done the math on that, but if I look at that, how much would've been classified? I think if anybody wanted to poke a hole in the quarter, it would be that the SSO grew a lot faster. So this kind of takes that away if you're actually, some revenue's shifting between the buckets.

Yes, Bill, quite frankly, I don't think we want to fully disclose how much of the EpiBurn was included, for competitive reasons. As Bill mentioned, it was a significant amount. But that -- I mean let's not also underestimate the fact that -- I mean, the expiration of the pass-through did have some impact. So it -- overall, we think, we did well in EpiBurn.

Let me just add, Bill. It wouldn't fill the whole gap that you saw, but it would fill a nice chunk of it. We'll put it that way.

Good. That's helpful. And then just the next stage, you've talked about the mesh product as something that kind of -- I think, it was launched in February. When did that start gaining traction? And then, I was wondering if you could or would be willing to give us some semblance of, kind of, monthly cadence to revenues, just so we can get comfortable with Q2.

Well, I'd say it didn't really start picking up some momentum until March, and we're seeing that momentum continue. In terms of the cadence, I don't know if we can get that detailed, but we are seeing it grow the way we'd like. Obviously, we'd like it to grow even faster, but I think we're pretty satisfied with where we're at right now.

Bill, let me address the cadence issue. With 14 straight quarters of saying what we're going to do and doing it, I don't know that it's wise not to figure we're going to continue that. And we've always said and I'll it for a number of times again that if we've got issues, we will let the Street understand them. We're not going to surprise you. We'll get them out early and get them out there. So we feel comfortable about the quarter, and you've got our quarterly -- second quarter numbers.

Perfect. And then housekeeping questions. Your tax rate was very low. I think we're -- you're guiding 30% for the year. How should we think about the rest of the year? And then, you bought back a bunch of stock. What is the actual number of shares that we should be using for forward share count?

So in terms of tax rate, Bill, fundamentally, the taxes that we recorded in the first quarter were state income taxes. And that can be in the 3% to 5% range over the course of this year. As far as federal taxes are concerned, we've mentioned before that we have that deferred tax asset that still holds the full valuation allowance. We do anticipate over the course of this year that, that valuation allowance will be released. And so in effect, your federal tax rate will be zero.

Bill, was that not a good number?

That's a great number. And then just the share question.

In terms of share count, so at the end of the quarter, we were at, on a weighted average basis, fully diluted, 113.6 million shares. Total outstanding shares were 108.5 million. We don't include in our forecast an assumption that we're buying back shares. We kind of look at it as an opportunistic activity. So all I can tell you is we ended the quarter at 108.5 million shares.

And then, Mike, just on the taxing, should I assume that 3% to 5% tax rate for the balance of the year and then Q4 is probably when we'd see the catch up for the valuation allowance?

I think at this stage, that's a good assumption, Bill.

Our next question comes from the line of Bruce Jackson of Lake Street Capital.

So looking again at the surgical business, how many of the direct reps are dedicated to that business right now?

So on that one, we have a group of folks that manage our spine and orthopedic folks as well as in our direct people on surgical. So if we add all those people, we've got, I think, we're right around 20 with both groups when you include the direct surgical as well as the folks that manage the distributors and sales agents.

Okay. And then the incremental revenue growth was quite strong. Was most of that burn? And could you sort of, just, like rank order where the growth was coming from?

I wouldn't say, Bruce, that most of it was burn. There was a nice piece of growth that came from burn. But in the surgical market, we experienced, kind of, lumpy orders from our distributors. If I look back to 2014, we had strong distributor sales in the first quarter and the third quarter, and weaker distributors sales in the second and the fourth. And this year is playing out, we believe, the same way that last year did. So again, burn was important to us, but it wasn't the only reason for the growth on the surgical and sports, and OEM --

And then we had some growth on the direct surgical side, if you add in there. So it's really a combination of both those; a little bit of the distributor orders, but then the growth in our -- on our direct, whether it be the burn or the prostatectomy and other type of statistical grafts.

Okay, great. Then with CollaFix, the first product -- the bovine collagen product, that was a tendon repair product. So is that going to be the first application again this time around? Have you done any animal studies? And if so, how does that compare with the first version of the product? And then to the extent that you can tell us about what the regulatory strategy might be for that, whether it's going to be a 510(k) or PMA, that will be very helpful.

Okay. Well, what -- we've done enough work to see that the placental collagen is expected to perform equally as good as the bovine. I don't really want to go in a lot more detail than that. But it looks very good, obviously, without the potential issues of bovine source, which as you know, you need to get from a closed herd, and there is a lot of concerns about BSE, which are not to the same with human tissue. So we feel very good about that. And we have ample supply based on, frankly, parts of the placenta that we just threw away right now.

In terms of our focus, again, for competitive reasons, I'm not going to go into a lot of detail just yet, but you can expect probably our first -- at least 1 or two applications are likely to be 510(k)s. What we talked before about CollaFix in terms of a tendon repair, if it's used to augment a tendon, then we expect that to be a 510(k) path, but if it's used to gap -- or bridge a gap in a tendon, that's likely to be a PMA. And our thought process has not changed on that. We do believe that, that is still -- as we expected a few years ago. So again, if you did a -- if you had bridge a centimeter gap in a tendon, then that will be a longer regulatory path. But we do expect several products earlier than something like that.

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

A couple of questions from me. First, the shift on the government business going direct versus your longtime partner, how will that impact margins, and when do you anticipate we'll start to see that, I would assume, benefit?

This is Pete. Well, there'll obviously be some gross margin implications there. But I would expect you'll begin to see a little bit second quarter, and it'll build as we begin to take more of that business through our own FSS.

Yes, we -- one of the things is we don't want to make this change abruptly, because we want to make sure that the facilities have smooth transitions and don't have any issues. And also, some of the -- we've been told, some of the facilities definitely like ordering from a service-disabled veteran-owned small business, because they have certain requirements for a portion of their spend to be from a veteran-owned business. So we don't want to force those changes too soon. But yes, we will have slightly improved margins.

Okay, great. And sticking on the margins front, thank you for the clarification on the mesh product regarding the punching holes. Is it safe to assume that you can use those punches, essentially, in the injectable? And will that enable some gross margin expansion?

We don't like to waste anything here.

Very perceptive, Matt.

Okay. And then, I guess, last question from me. Sounds like Zimmer is taking a little bit longer to ramp. And I'm curious if you think that's being held up by the Biomet acquisition and maybe as that comes to a close and is consummated that you could see Zimmer coming back at a faster pace or ramping that opportunity for you guys?

Yes, with Zimmer, actually -- relative to Medtronic, they're ramping faster, I can say that. With us, of course, any large company like that is not going to move as quickly as what we could move or would like to move. But we actually expect to start shipping first product to them this quarter. It could be a little different, because we're working a project with them where we're actually shipping directly to their hospitals, as opposed to a really large stocking order that goes straight to their facility. And then, in part that is because of their integration activities they expect to happen with Biomet. So they prefer to get started quickly. Even though the numbers may not be huge, they'd rather get started quickly, so that once the Biomet acquisition goes through, they can leverage both sales forces once all that's finalized.

So we're -- again, we're very optimistic there, because they have a focus from senior level management there that this is a very important product line for them, which is a little different than the mid-level support that we have at Medtronic.

(Operator Instructions) Our next question comes from the line of [Martin Bell], private investor.

When -- just as an individual investor, when I see the stock starting to go down and I wonder what happens, I look online to see if there was a press announcement or news; I don't see anything. And then, I'm often tempted and I kick myself for doing it, but looking at message boards, thinking those, as we know, are people who are shorts trying to put out information.

You've spoken about, again, Organogenesis, but I did see stuff on the board and wondered if it's -- we're talking about some product from Celgene with headlines that it's going to be -- MiMedx's downfall. Is there anything about that product you can tell us?

First of all, Pete doesn't look at those blogs much at all. I've learned over the years, that all it does is raise your blood pressure a little bit. But anyway, Bill said he's seen that, I haven't.

[Marty], I know what you're talking about. Biovance is from Alliqua, which -- Alliqua is a company that's, in part, been invested by Celgene. A good management team. I think they've got a lot of good things going for them, but they are a wound -- they're focused on wound care. And that product, Biovance, before Alliqua had it, was actually Celgene's product. They had actually done a small clinical trial with that product on diabetic foot ulcers. It was published in 2009, frankly before we even became involved in surgical biologics. They had a 29% healing rate in 12 weeks, which is not that much better than a standard of care. It's a single layer amnion that's decellularized. And Celgene, the big company that they are, was not effective at moving that, I would assume, because it did not have very good clinical efficacy. And that's also the company that recently bought Celleration, which has MIST Therapy, which we took a look at as well and declined, because our technology, frankly, doesn't need that.

I would just say that a company that buys that technology may not be as enthusiastic about their amniotic tissue as what we are, because if they were, they wouldn't need to buy that company. So that's my two cents.

That's good to hear.

Marty, let me add to this, because I know the volatility of our shares is something that none of our shareholders like and certainly we don't like. And we have done the things we know how to do to reduce that as much as possible. But I can tell you that having run public companies now for 34 years, we have some very unusual activity in this company. There is not many things I haven't seen or dealt with.

But I also take that right back to the fact that there's two elements: one, again the competitor; number two, there have been some hedge funds that have bet heavily against us recently in the last year. They have taken some strong short positions, and they're doing their utmost to get the story out and get it sold.

I just cannot understand that. I'm a fairly sophisticated investor. And to take a company like ours that has a base technology we have, the management experience that we have, the track record of 14 straight quarters and the real thing that's going to ruin shorts days, and I've done that before, is when the press release comes out and says "Company x has been acquired by company y."

I don't understand the -- except the fact that they have taken a position, and they're probably way under water and they need to try to figure out ways to exit gracefully. But we're just -- I just don't understand it. We're just not a good short candidate. And of course, I'm the CEO, so take that for what it is. But I just don't understand that. But it's there and until we continue to be quarter-after-quarter relentless, doing what we've been doing for 14 straight quarters. And someday, maybe they'll realize.

But I apologize for the volatility. We're doing all we can do as a management team to work it through, and we're continuing to ferret out the issues that seem to be causing some of it.

So try to stay away from the blogs. And you'll see this management team keeps our shareholders very informed. And as I've always said, if we've got a problem that we've misstated something or we have miscalculated something, we will get out to shareholders quickly with it. So thanks for your patience.

Thank you for all you're doing. I don't think, at least as a shareholder, we could ask for much more.

Our next question is a follow-up from the line of William Plovanic of Canaccord Genuity.

Just some clarity. So with the reclassification of some of the AmnioFix as you start to sell the EpiBurn -- or I'm sorry, the EpiFix, to EpiBurn, do you think that there could be some further shift of buckets as we go through 2015, where some of the EpiFix is still being sold into burn, so we could see some degradation of that wound growth because of that and enhanced SSO growth? Or has that all taken place in Q1 '15?

Yes, I don't think you're going to see much of a difference going forward. And just to remember, last year, we were used in some burns, but not a lot on EpiFix, and it was -- it's hard to delineate the exact numbers, because we don't always get our TUR cards back; the tissue utilization records. So it's been more of a focused effort for us on burn here recently. So I guess, it would normally be in last year's numbers, but we're having added focus on it. So I guess, that's the way to look at it.

Yes, Bill, maybe a follow-up to the question you asked earlier, and my struggles with it. Just keep in mind what's happening is similar to what we have with micronized from '13 to '14, where we had one brand of micronized and then we came out with an Epi micronized and an Amnio micronized and then started reporting them in the two different segments. We've done the same thing on the burn side. So we created a brand called EpiBurn. And what it's doing is, whereas last year, it would've been a larger size EpiFix that happened to be recorded as part of wound, it's now being recorded in surgical and sports.

The difficulty we have in looking at all of our large sized revenue last year is, to Bill's point, the only way you can drill down into it is hopefully you can find the tissue utilization records, which give you those larger sizes that were actually used in burn cases. And quite frankly, we haven't done that detailed analysis. We decided to come up with the brand, EpiBurn, because we felt it was a significant market, and we wanted to get clarity there. But that's what's happening here. So it's more difficult to analyze that than you think.

Okay. But I think the takeaway, though, is that you've probably -- whatever the magnitude was Q1 '15 versus Q1 '14, that should be similar as we go through the year. So the ramp, as we think about it sequentially, Q2 versus Q1, in each of those buckets should be no more normalized as we think of the business. Plus, you also don't have the transition of the -- into the bundle.

I would agree with that statement. I think that's right.

And with no further questions in queue, I'd like to turn the conference back over to Mr. Pete Petit for any closing remarks.

Well, thank you for joining us this morning, and hopefully, the conversations and our answers to your questions have been helpful. We look forward to continuing to give you all good news, and we'll go from there. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Have a great rest of your day.