MiMedx Group Inc (MDXG) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MiMedx Group Second Quarter 2016 Earnings Call. (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 risk 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 filings it makes with the Securities and Exchange Commission under federal securities laws.

With that, I will turn the call over to Pete Petit, MiMedx's Chairman and CEO.

Thank you, Thornton. Good morning, and 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 Presidents, who has just joined us from his most recent career as an analyst on Wall Street. There are certain 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, in some Wall Street firms, we've become not just undervalued but very undervalued. This time last year, when our stock was $12 and touching $13, I stated at that time and I thought we were becoming overvalued. Today, I'll reiterate that I feel we are very undervalued. At the same time, the biotech and Biomet industries were generally down 40% from where they were a year ago. When we had $1 billion on market cap, our shares were aggressively purchased by numerous biotech EPS and indices and in addition, by some of the S&P indices.

Most of these biotech indices contain companies that are very immature in their state of development. Often, they do not have revenues, much less profits. If they do have revenues, they do not have the growth profile that MiMedx has. 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 repurchased approximately $50 million of our shares in the open market. And these indexes and funds, I believe, will certainly be classified as being a top 5% in terms of financial and operating performance. However, we're just one stock in that broader Market Basket. Our stock price will be moved around as the Market Basket price rises and falls in value.

In addition, we're still detecting a certain amount of short selling that seems to be very focused in the last few weeks. We believe we finally found a means to track the illegal short selling, namely naked short selling in a very accurate fashion. From this point forward, we will be tracking that on a daily basis and we'll take steps to address any illegal activity identified. Some other companies have been effective in using this new technology and we will also be relentless in shining a light on any of the illegal short selling that is occurring. If there are damages, we will pursue the necessary means to obtain remuneration.

Management will continue to attend financial conference and do the non-deal roadshows to be sure that the investment community fully understands the value of our assets. Now we fully recognize that we are temporarily in the penalty box because we slightly missed revenue estimates in the first quarter. However, we've done exactly what we told our shareholders we would do in terms of resetting this year's expectations and in the second quarter, we started our progress again, by exceeding our revenue estimate.

Now some brief comments on our second quarter financial performance. First, we exceeded our revenue forecast. However, I am sure you're concerned since we reduced our annual EBITDA operating profit and EPS forecast. As I've stated many times, management controls operating profit levels. When we see very promising investments in our various operating units, new products, clinical studies, intellectual property, we're prone to make those investments. Otherwise, we will not optimize our opportunities. However, I believe we should still be quite able to achieve a very respectable EBITDA margin in the vicinity of 20% this year.

Let me reemphasize something I have discussed numerous times previously. As I've just stated, the decisions that drive our EBITDA operating profit and earnings per share are generally made by management, often on a quarterly basis. I've asked shareholders focus on gross profit margin, because those are the financial performance measures that management has less control over.

If there are industry or other endemic issues with our business, they will show up in our gross profit margins, which would be an issue of concern. However, the slight change you've seen this year in gross profit are related to our Stability Biologics acquisition. We're bringing their production efficiencies up quickly and we do not expect to see significant continuing deterioration in our gross profit margins.

Therefore, when you focus on our operating profits or EPS, keep in mind that we will continue to make investments to build our asset base and revenue base at a rapid rate. We have significant opportunities for growth, but we must keep our management systems and initiatives ahead of when they will be needed.

Remember, we do not make these investments. If we do not make these investments at this point in our growth, we're not going to have the huge returns that we expect. Generally, these returns should be triple digits in the first year or so. We also intended to continue to build the very valuable assets that we will have assembled and nurtured over the last five years.

I've submitted to you -- if you will just review our quarterly revenue charts, this type of performance cannot be achieved without an effective focus from management on just these types of issues. We do not have cash issues. We do not have any debt. We will continue to build cash and we will be managing our cash flow and EBITDA carefully. Again, recall we purchased almost $50 million of our shares back in over the last two years. We will continue to do so.

One other very pertinent issue that I would like to discuss is our forthcoming patent lawsuit. We're scheduled to be in court this fall with our first trial. There's a possibility the second case will also be ready for trial this fall. We have confidence in our cases, because of how they have progressed in regards to our flagship patents. Bill Taylor will explain some of that detail in a few minutes, but we've gone through the IPR process with those patents very successfully and we believe it should bode well for us as we go into the actual trials.

If we obtain favorable decisions that will put us in a position to seek injunctive relief from not only the defendants we have sued in these cases, but also from the other individual business entities that are violating these patents. Please realize that some of these competitors, while they are still small, have accumulated revenues over the years that are substantial. Many of these organizations were notified several years ago about their potential violation of our patents. But since they know that and they continue to violate our patents, they could be subject to triple damages.

You saw our press release on Monday morning relating to our first two new product lines. We will discuss the second in the next few weeks. We have our CollaFix product line in production and moving through the regulatory approvals. We have some exciting new product concepts in the cardiology and respiratory areas of medicine. MiMedx is and will remain the unquestioned leader in (inaudible) regenerative medicine. These are exciting times for the company and we intend to re-convey that to shareholders and Wall Street.

Okay. I'll turn it over to Bill Taylor. Bill?

Thanks, Pete. I would like to echo what Pete said, 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 have eclipsed the 280 mark on our field sales force. Our total was 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 in 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 intelligence service company, BioMedGPS, MiMedx has the market-leading position in the U.S. Wound Biologics market, subsegment of CTPs, cellular and/or tissue-based products for skin and dermal substitutes, and with our market share at about 26.4% of the overall CTP market during the first quarter of 2016.

Our internal analytics department has recently compiled data from third-party aggregators and identified a substantial number of target Wound Care opportunities that, if 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 was very enlightening to us and that there is a lot more low-hanging fruit remaining out there. So this is very exciting for us.

Our growth in the SSO area was also quite satisfying in the second quarter. We have a tremendous opportunity to introduce our innovative regenerative products into new surgical and therapeutic applications. Our clinical and informatics team are working with physicians and facilities to model clinical use and effectiveness of our technologies, which is critical particularly with the pressure on our healthcare system today and in the future.

Unlike devices or allografts that simply address a functional issue, we're finding ways that our technologies can be used in more of a therapeutic function, not only providing clinical efficacy but also our cost efficient and they can improve quality of life functions. This is a focus area of some of our research and development initiatives and we expect new therapeutic products to come out of these initiatives.

In the future, we feel these health outcomes will become more critical, because new technologies cannot function -- if new technologies cannot function in this manner, we're going to have a difficult time being successful based on changes in reimbursement down the road.

Now Pete had discussed some of our increased investment areas, and I want to highlight some of our clinical study advancements. At present, we have about 24 active clinical studies and another dozen or so that are under consideration and/or being contracted and designed right now. They range from small 20-patient prospective case series to large multicenter 200-plus patient-randomized control trials. Among these studies is our IND study for plantar fasciitis with our micronized product. We're at the halfway point on this study and are preparing to conduct the interim analysis on it as per our protocol.

We've completed enrollment on a 60-patient OrthoFlo study and 90- and 180-day data points are expected to be completed in the fourth quarter of this year and in the first quarter of 2017, respectively. We also have a number of additional studies underway that focus on other specific surgical procedures. As those studies progress towards completion and publication, we'll discuss them in more detail.

On the intellectual property front, we are now at about 29 placental tissue patents issued and allowed. Overall, we have nearly 80 patents issued and/or allowed and over 120 pending. Our IP portfolio is one of our strongest assets and that's why we are investing not only in strengthening it, but also defending it. As you know, there are several companies who have tried to emulate our success, many of whom appear to have infringed on our patents. We now have four patent lawsuits going and we've kept you apprised of our progress with those lawsuits.

I know it's been a long road to get to where we are, but we can now see some light at the end of the tunnel. We expect to have our first patent trial this fall, with the second following shortly thereafter. While litigation is always uncertain, we are confident in our position, particularly in light how the case overall has progressed so far.

To that end, you will recall that two key patents for EpiFix and AmnioFix were challenged with an inter parties review process. We successfully overcame both challenges without any equivocation. And should we prevail on our first patent trial, what follows will be somewhat interesting. Besides any potential damages that could be awarded to MiMedx, a win should prove to be a major deterrent for other companies insofar as the injunctive relief against future infringers should more readily and easily be obtained. All in all, our competitors should not just be taking heat of our current cases, but also of the numerous patents and patent applications, which make up our portfolio. It will come as no surprise to anyone that MiMedx will vigorously defend against copyists as well as those who improperly try to trade on MiMedx's good name in the industry.

On the international sales front, we continue to drive our sales expansion and have expanded our tissue use internationally, particularly with EpiFix. We have focused international sales efforts in Canada, the U.K, Italy and Switzerland among other countries and focused regulatory efforts in Germany, Japan and Australia, where we have a target to be selling within the next 18 months or so.

In May of this year, our team exhibited the European Wound Management Association meeting in Bremen, Germany. We had great booth traffic and well attended some symposiums that we, MiMedx, sponsored. This September, we are exhibiting in the World Union Wound Healing Society meeting in Florence, Italy, and we'll be interacting with multiple clinicians there from around the world as well.

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

Thanks, Bill, and good morning. We are extremely pleased with the progress that we made in the second quarter, as we grew revenues in both our market focuses of Wound Care and SSO. We continue to make significant investments in the sales organization as we've expanded our focus into surgery and the expansion of the 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 specialist teams. We continued 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 have expanded our portfolio to include cryopreserve, 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 Veterans Affairs directed to all hospitals covering the implant procurement process nationally. A preauthorization process for purchasing implants was developed and implemented. However, it had caused confusion across hospitals both in its interpretation as well as in the purchasing and consignment signatory processes and procedures. These issues are now generally resolved in all but a few 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 or trained in April of Q2. Many of these territories are built from scratch. So we have made the required investment ahead of the revenue and are truly taking the appropriate steps in these greenfield areas to engage, train, educate, go through VAC committees and conduct evaluations that will lay the basis for accelerating revenues in the months to come.

Last quarter, we shared that we had three main reasons that caused us to fall short in our revenue against guidance. These were the introduction of the SMS business planning system, the integration of Stability Biologics and the realignment of sales management and organizational resources for our new focus into surgery. I'm pleased to report that we have worked through each of these situations. The SMS business planning and alignments we have undertaken reaped minimal benefits this quarter and new growth revenues and expanded opportunities. Additionally, the tagging procedures that we spoke about in April have been resolved, incorporated into our systems and are being done on a daily basis without any technological concerns.

On the GPO and IDN front, we continue to make excellent progress with these partnerships. As stated before, many of these arrangements are 80% or sole-source agreements for amniotic tissue. We had our best quarter ever in several of these large contracts and continue to see good adoption with members opting in and participating.

Yesterday, we announced our plans for a nationwide launch of the company's first of two new product line introductions we have planned in this quarter. Our next-generation lyophilized version of OrthoFlo. This extension of the company's amniotic fluid product family provide superior product safety characteristics and enhance logistic capabilities. Lyophilized OrthoFlo is terminally sterilized product that maximizes safety, provides advanced ease-of-use for the physician, can be stored at ambient room temperature and has a five-year shelf life.

Lyophilization, often referred to as freeze drying, is a process in which water is removed from a product after it is frozen and placed under a vacuum, allowing the ice to change directly from solid to vapor without passing through a liquid phase. MiMedx's amniotic fluid is lyophilized to stabilize it for storage and distribution. Lyophilization also allows the allograft to rehydrate easily and quickly for use in various applications.

OrthoFlo is utilized in the surgical hospital and sports medicine outpatient market settings and addresses the physicians' demand for advanced therapies to enhance the effectiveness of providing patient care solutions in spine, orthopedic and sports medicine applications. The lyophile amniotic fluid contains the same constituents as our cryopreserve version; of nutrients that facilitate fetal growth; growth factors, proteins, carbohydrates, lipids and electrolytes; hyaluronic acid, which is a principal component of viscosity and lubrication in synovial fluid; and antimicrobial factors.

OrthoFlo retains the critical properties of amniotic fluid, which protect and cushion, provide lubrication and reduces inflammation in the affected soft tissue or joint. Current treatments on the market such as hyaluronic acid, or better known as HA, PRP and corticosteroids may provide short-term relief and improvement. However, physicians are demanding a treatment modality that is more durable with a lasting impact on pain, mobility and healing.

The growth vectors contained in OrthoFlo and their inherent benefits are the critical advantage in differentiation of OrthoFlo over competing products in the marketplace. Our OrthoFlo product is an ideal clinical and cost-effective solution to meet this treatment need. OrthoFlo will be available through our national network of agents and managed by our SSO management team and also will be available through our advanced Wound Care team for lower extremity and foot and ankle surgical and soft tissue procedures. We will be discussing our second product launch in a few weeks.

Now I'll turn it over to Mike.

Thanks, Chris. The company recorded revenues for the second quarter of 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 are 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 adds to our direct surgical sales force and progress made in getting through various VAC committees. With the continued momentum seen in Q2 as well as new product introductions, we feel confident in achieving our growth targets of 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 impact to results of the acquisition of Stability Biologics that closed on January 13, 2016, and the release of the valuation allowance on the deferred tax assets on reported tax expense in 2015, the company has decided to include additional adjusted non-GAAP measures in our press release and earnings call to provide a means of comparing normal ongoing operating results on a year-over-year basis. The additional measures include adjusted gross margin, adjusted EBITDA, adjusted net income and adjusted diluted EPS to normalize results for comparison purposes in addition to reporting GAAP results. Tables are provided in our press release, which reconcile non-GAAP to GAAP reported results. GAAP gross margins for the quarter were 87.1% as compared to 88.9% in the second quarter of 2015.

2016 gross margins were impacted by approximately $597,000 in onetime costs related to the Stability Biologics acquisition. On an adjusted basis, gross margins for the second quarter of 2016 were 88.1% as compared to 88.9% in the second quarter of last year. The adjusted gross margin decline of 0.8% was due to product mix, with the Wound Care to SSO mix of 73% and 27%, respectively, in 2016 versus 78% Wound Care and 22% SSO in Q2 of 2015.

Please note that in Q2 -- that the Q2 mix of Wound Care versus SSO in 2015 was unusually high due to the launch of a new Wound Care product, our mesh configuration, at the end of the prior quarter. On a year-to-date basis, GAAP gross margin was 86.1%, which includes $1.3 million in onetime costs. Gross margins after adjusting for these onetime costs were 87.3% as compared to gross margins of 88.2% in the prior year. The year-over-year decline of 0.9% is due primarily to product mix. Included in the press release is a reconciliation of GAAP gross margin to adjusted gross margin.

R&D expenses for the quarter were approximately $3.2 million or 5.5% of quarterly revenue as compared to $2.1 million in the second quarter of 2015. The increase was driven primarily by increased investments in clinical trials. On a year-to-date basis, R&D spending is up $1.8 million or 46% over prior year. The year-over-year increase in R&D spending is driven primarily by increased investments in animal studies and clinical trials.

Selling, general and administrative expense was approximately $42.8 million for the quarter or 74.6% of quarterly revenue as compared to $32.7 million or 71% of quarterly revenue in 2015.

During the quarter, we added 18 direct sales reps bringing the total direct sales headcount to 269 at June 30, 2016. The year-over-year increase in SG&A spending was due to the continued buildout of our direct sales force in both Wound Care and surgical market, patent and regulatory legal costs, new product launch costs, international sales development, government affairs and other support areas as well as the addition of Stability Biologics personnel and their associated costs. Also included in SG&A spending was approximately $138,000 in onetime costs related to the acquisition. On a year-to-date basis, SG&A expense was 75.4% as compared to 71.7% in 2015.

The company reported a positive adjusted EBITDA of $10.1 million for the quarter ended June 30, 2016, as compared to $10.6 million in the second quarter of 2015. It is the 18th consecutive quarter reporting positive adjusted EBITDA. Included in our press release is a reconciliation of adjusted EBITDA to reported net income. The lower adjusted EBITDA reflects management's decision to accelerate investments in several strategic areas including the buildout of the direct surgical sales team, aggressive defense of our key patents, clinical trials for reimbursement and sales purposes, international business development as well as other key infrastructure areas to assure sustainable above-average revenue growth over the next five to seven years.

For the six months ended June 30, 2016, adjusted EBITDA was $19.1 million or 17.3% of revenue as compared to 22.4% in 2015, reflecting the aforementioned investments to further position the company for long-term above-average growth. GAAP operating income in the second quarter was approximately $3.6 million or 6.2% of quarterly revenue. Excluding $735,000 in nonrecurring charges related to the Stability Biologics acquisition, adjusted operating income was $4.3 million or 7.5% of revenue as compared to $5.7 million or 12.4% of revenue in 2015.

On a year-to-date basis, adjusted operating income was $7.2 million or 6.5% of total revenue as compared operating income of $9.9 million or 11.5% of revenue in 2015. The company reported net income for the second quarter of approximately $2 million or $0.02 per basic and diluted common share as compared to net income of $5.4 million or $0.05 per basic and diluted common share in the second quarter of 2015. On a non-GAAP adjusted basis, second quarter net income was $5.1 million or $0.05 per diluted common share when adjusting for the nonrecurring items as compared to $5.9 million or $0.05 per diluted common share in the second quarter of 2015.

Please refer to the table in our press release for a reconciliation of GAAP net income to adjusted net income. It should be pointed out that in addition to the after-tax adjustments for noncash share-based compensation expense, their adjustments on an after-tax basis for the costs associated with the acquisition of Stability Biologics as well as the normalization of book tax rates for both years. Year-to-date, adjusted net income was $10.1 million or $0.09 per diluted common share as compared to a year-to-date net income of $10.7 million or $0.09 per share in 2015.

Turning now to the balance sheet. The company reported approximately $101.8 million in total current assets, including $23.8 million in cash, $54.9 million in accounts receivable, $17.2 million in inventory and $6 million in prepaid and other current assets. Days sales for the quarter were 86 days as compared to 91 days at the end of the prior quarter. And we continue to add collections and field reimbursement staff to improve collections performance, especially with new customers. Inventory turns were 1.7 for the quarter as compared to 1.8 at the end of the prior quarter. Goodwill and intangible assets were $27 million and $27.7 million, respectively, as compared to $4 million and $10.8 million, respectively, at December 31, 2015. The increase was due to the Stability Biologics acquisition. Current liabilities were $38.5 million as compared to $26.8 million at 12/31/2015, with the increase in line with the growth of our business.

During the quarter, we adjusted the preliminary liability for the expected payout of the Stability Biologics acquisition to approximately $25.6 million, which represents contingent consideration payable to the former shareholders of Stability Biologics based upon a formula of sales less direct production costs for the years 2016 and 2017. The earn out consideration will be payable as 60% in cash and 40% in company stock in the second quarter of 2016, '17 and the second quarter of 2018.

Turning now to the statement of cash flow. The company reported positive cash flow from operating activities of approximately $7.3 million for the quarter, driven mainly by improvements in working capital management. Positive cash flows from investing activities and financing were $573,000 and $833,000, respectively. Please also note that there is approximately $10.8 million still authorized under the share repurchase program through December 2016. And finally, we added a total of 53 associates in the quarter, bringing our total headcount to 253 -- 653, sorry.

Turning now to our guidance. MiMedx estimates third quarter revenue to be in the range of $62 million to $64 million and full year revenue to be in the range of $243.5 million to $248 million as compared to a previous guidance issued of $242.5 million to $250 million. The company is guiding full year 2016 fully diluted adjusted earnings per share estimated to be in the range of $0.21 to $0.23 as compared to $0.30 to $0.32 in our previous guidance. A reduction in fully diluted adjusted EPS is due to the decisions by management to continue to invest in profitable growth opportunities. Please see the tables included in our press release for a reconciliation of GAAP EPS to adjusted EPS.

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

Thank you, Mike. Now I'd like to introduce you to Mark Landy, who recently joined MiMedx in a staff role to me. Mark brings a distinguish background from Wall Street as analyst and an individual who participated in several companies in private equity roles. Additionally, he has been an operating executive in the biotech sector of health care. We're a company using Mark in a variety of projects. As such, he has quickly obtained a broad view of our activities. I felt it will 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 would be an understatement to say that I'm really excited to have joined MiMedx. I want to thank Pete, Bill and MiMedx executives, the team for the warm welcome I received. However, as I watched the same welcome being extended to other new hires, I soon realized that I received no special attention and that my welcome and immediate inclusion as a member of the MiMedx team is the reflection of the extraordinary camaraderie and team spirit Pete and his executive team have created.

The 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 the covering analyst and what has surprised me. Well, the answer is no and nothing, which I think is rather disappointing for many and viewed somewhat as we're 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 routinely ensured that shareholders were fully informed of key and material activities of the company. This provided me sufficient information to conduct evaluation and analysis required to formulate my investment thesis. Of course, we have product development, research and business development opportunities and activities that remain confidential as you would expect. So with that backdrop, my message here is simply this, that what you see is what you get with MiMedx. And that MiMedx is as transparent as a public company can be without compromising confidential initiatives for competitive reasons.

It was my former opinion that the company's stock was undervalued, as investors are focusing too heavily on the short term, and I'd lost sight of the leadership position that MiMedx had established, the competitive advantages MiMedx enjoys and the opportunity for sustaining 20%-plus long-term revenue growth. While my optimism and opinion have not changed, my confidence level for success and the ability to sustain a high level of growth over the long-term [has], it is much higher. I'm impressed with the company's R&D activities, clinical trial programs and body of scientific evidence being accumulated to support the therapeutic use of amniotic tissue.

I'm also impressed with how effective MiMedx's amniotic tissue is in modulating inflammation, promoting angiogenesis, improving healing and most importantly, it's possible role as a therapeutic. I look forward to being able to share these observations with you in the future.

One of the many challenges every growth company faces is the transition from explosive growth to sustainable growth, and putting in place infrastructure, distribution capability and product pipeline required to ensure a successful future.

The corporate graveyard is littered with one hit wonders, as executives were not able to manage this critical transition. MiMedx's operating capability is impressive as if the infrastructure being put in place to ensure a successful future. The challenges and effort required to build an infrastructure to support future growth are rarely evident to outsiders and are never fully appreciated. What has impressed me is the attention to detail and level of sophistication that has gone into the process. It is this attention to detail that separates MiMedx from the many emerging growth companies and places MiMedx in the strongest possible position for future success. So in the future, as we build a new streak of meeting and exceeding revenue guidance, I ask you to think back to this call and last quarter's call and to remember the investment and hard work that was required to achieve those results.

I want to thank all of you for the many good luck wishes I have received since joining MiMedx. I'm sure we'll continue our friendship and professional relationship in my new role here, and I look forward to seeing you all at the numerous investor conferences and industry trade shows that take place through the year.

With that, I'll turn the call back to Pete.

Thank you, Mark. As I said earlier, these are exciting times for your company. Our 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's very few companies that can show the growth -- sustained growth in revenues and then the profitability growing and behind that, that we've done.

Sustainable growth, that's the word that Mark is using and the word is very, very affordable with what we're doing. That's why we are focused on adding these assets at the rate 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 disciplined relative to those matters, and those kind of things will pay off richly for us in the years ahead as we continue to grow the company and/or at some point in our future meet the company partner that will want to be in a position to acquire this company. Thank you. We'll keep you informed. We will see you as we get out in the marketplace and these meetings that are coming up and with some 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. 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?

Mark, we are an extremely disciplined management group that has a pretty impeccable track record. We've seen opportunities here that we discussed and decided we needed to make the investments. I think, and again, I've tried to focus people on the fact that this is a company that when we get through this explosive growth worries and into something that we classified as more a sustainable growth phase. There's no reason 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 and the numbers we put out, lot of thoughts going into them, a lot of analysis going into 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, Omnigraft product. Has that had any noticeable impact on your business at all?

We've not really seen it and don't expect to see any marketable impact. We've discussed rather openly the flaws with the product. We respect Integra greatly. We wish the other competitors we have had the same integrity and approach the market as they do. So we 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. 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 is typically a surge in legal costs surround the timing of it 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 of the 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 a name Bone Bank, who was acquired --

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 two will be the first two up. Bill, you want to give some details?

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 it 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 it pretty well forecasted.

And the second one is MTF, Medline and Liventa altogether in one lawsuit relative to their -- patent infringement by those three. So 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.

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

Yes, Charlie. It's Chris. With regard to the VA new procedure on implant preauthorization, it was more of a headwind 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 a nonevent, but a number of them really ended up going through a full review. And when it's 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 and it just affected us, 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 stated before, we had an early clinical trial going on our cryopreserved product, and we're now getting ready to kick off the enrollment on our lyophilized 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 spent 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 and constituents 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. So 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 and they're really going with the cryopreserved product. It 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 of 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.

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 1 million per rep, or is that math correct? Or are some of the Wound Care guys are also going to be selling into the SSO market as well?

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

Yes. That's a very true. It's not going to be easy to come up with a standard territory for each of those 50. It's spread across a large agent network. And then also, remember on the surgical, I don't (inaudible), we 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 to going through all the different hurdles, VAC, 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 a Wound Care guy 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 that -- 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 preexisting 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. That's helpful. And then, just a question -- a competitive question. I know there's been questions about Integra product, which it didn't sound it's been much impact yet. However, I've heard from the field a bit about Organogenesis sort of coming back to life with PuraPly Antimicrobial, it's an old product, but it appears as if it has pass-through -- it was able to get pass-through 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 it has had pass-through 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 barely scratching the surface. I mean, still at the end of the day, EpiFix is approaching standard of care. But we do see PuraPly here or 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 time 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 maintained 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 are 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, 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 of what's going on as far as the buildup in the inventory on a year-over-year basis?

Well, Joe, 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. So the combination of those things -- those two things really contributed to the growth.

Okay. And then 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 -- Chris, as far as the VA and preauthorization, what you think the motivation behind that was? Why all of the sudden they come in with the preauthorization initiative?

Well, first of all, it's important to understand it's for all types of implants. So it's not just tissue, but it's controls over metals, agents 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 preauthorization, making sure that the product was acquired and it was acquired by the correct person that has signatory authority and then also ensuring that no product was utilized before they owned it in reference to that.

Joe, also on top of that, it still had some issues with products that have not been contracted on FSS that 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.

Right.

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 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 a 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?

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 be, 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 a rep count number?

Well, the first thing is Joe, we've made a conservative effort to bring in associate account executives. So we bring them in. They assist with a 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 we're 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 cause 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 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.