MiMedx Group Inc (MDXG) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 MiMedx Group Inc. Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Thornton Kuntz, SVP of Administration. Please go ahead.

Thank you, operator, and good morning, everyone. Before we begin, please be reminded that our comments today may include forward-looking statements. These statements are subject to risk and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website, www.mimedx.com. We do not undertake to update or revise any forward-looking statements, except as may be required by the company's disclosure obligations in filings it makes with the Securities and Exchange Commission under federal securities laws.

During the call, we will discuss non-GAAP financial measures when talking about the company's performance. You can find the reconciliation of these measures to GAAP financial measures in our press release and on our website.

Finally, MiMedx is not responsible for the accuracy of our earnings teleconference transcripts provided by third parties. We only authorize live and archived webcasts located on our website.

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

Thank you, Thornton. Good morning. We appreciate you joining us for our second quarter update. I have with me today Bill Taylor, our President and Chief Operating Officer; Mike Senken, our Chief Financial Officer; Debbie Dean, our Executive Vice President; and Chris Cashman, our other Executive Vice President and Chief Commercialization Officer. There are other corporate executives in the room with us.

First, I'd like to simply comment on the fact that we had an outstanding quarter. However, most importantly, we expect this trend to continue. I wish to congratulate all of our executives, management and staff for the hard work and expertise which allows this progress to continue.

Our press release certainly provided the second quarter highlight. Just a couple, of course, is our revenues of $76.4 million exceeded our guidance of $73.5 million to $75 million. Our second quarter revenue grew 33% over our second quarter revenue of 2016. Our net income of $8.3 million is a 309% increase over second quarter a year ago. We had positive net cash flow from operations of $13.5 million compared to $7.3 million in the second quarter year ago. And Mike Senken will comment on the fact that our days sales outstanding and accounts receivable dropped to 72. A year or so ago we commented to you that we'd be bringing that number down considerably and we, as always, fulfilled our commitment.

I hope all the shareholders received a copy of our 2017 business report. We took the time to explain our corporate assets in a format that clearly demonstrates the strengths we have built over the last six years. I still do not think that the strength and advantages of this asset base are fully appreciated. Our discussion around our transition to a biopharma company is to be taken very seriously. The asset base we have built clinically and scientifically will be better appreciated in months ahead as we continue to announce new product initiatives at the Food & Drug Administration. And we continue with our record of significant clinical student and scientific publications.

Of course, our manufacturing capabilities have been expanded dramatically and we continue to implement programs and increase our gross profit margins. Our regulatory staff and acumen has improved rapidly and are now expanding efforts on international opportunities.

Our sales organization and its management have become much more efficient and effective as we've improved our management systems and informatics. We've made changes in some of those positions. Our sales force will number approximately 375 direct employees by the end of this year. Our marketing programs are becoming much deeper and much more effective.

As I mentioned, you noticed a significant drop in our accounts receivable down to 72 days. That's a result of a number of staff additions we've made in our accounting area, a new process and procedures related to the role our sales organization plays in that function. In summary, your executives have managed rapid growing healthcare companies previously and certainly up to this point, we've been able to keep our progress, our procedures and staff at points where we have very capably manage MiMedx and the opportunities we have.

To summarize all those comments, I believe your company is poised for a decade of new product innovations from placental tissue through the FDA IND BLA process. And that will result in continuing rapid growth and increases in profitability and cash flow. Actually, there are very, very few biopharma companies that have over $300 million revenue base, that's still growing at – up near 30% with 89% gross profit margins and adjusted EBITDA margins that will eventually exceed 30%. Just take a look, examine, and you're not going to find many of those. In short, the executives and management certainly believe MiMedx has a very, very bright future.

Let me briefly touch on a subject that has been brought up by shareholders the last five years that relates to the degree of short sales we have. As I've said many times, there's not an issue with short sales, per say. However, when those short sales are a result of collaborative efforts by institutions and individuals, that include naked short selling, then laws are violated. We have been diligently collecting data and information over the last several years. I believe I can simply say to you that there could be some resolution to this long ordeal and it's caused a great deal of volatility in our shares. As an example, the Securities and Exchange Commission announced on May 24, that there are investigations into two individuals with Deerfield, a large hedge fund who are being accused of insider trading and other stock manipulations with two healthcare companies, namely the DaVita Healthcare Partners and Fresenius. These two individuals happened to be the persons that have represented Deerfield (inaudible) MiMedx since 2012. See sec.gov section enforcement, go in there, pull up the information and then draw your own conclusions.

I'm sure there's still some questions related to allegations made by certain terminated sales employees and their attorney. First, that attorney resigned his representation of those particular individuals. Second, after a thorough investigation, these particular individuals were terminated for cause because of their violations of the contractual commitments to MiMedx. They retaliated by filing countersuit with accusations that are unfounded. These lawsuits are going routine in our favor and we expect to see retribution from these individuals as these cases proceed. There's nothing for these individuals to blow whistles about. They trumped-up accusations to intimidate and damage the company. It's unfortunate that people of this nature through their attorneys can make charges of that nature to the public and damage publicly-traded companies as they do. However, we're working through these matters in a very programmed and diligent manner and it will soon be behind us.

We're also getting close to learning of the date for our first patent lawsuit. In our opinion, that will be a game changer in terms of the competitive environment. Small companies have taken advantage of our patent situation because we did not have a definitive judgment from any of the lawsuits. However, we expect that to change in the very near future. Once we obtain a favorable legal decision, we'll be able to move more rapidly against other organizations that are violating our patents. This process has taken us well over three years. Once we have a judgment from a court, we can ask for injunctive relief after filing suits and hope to bring quicker closure against the other violators of our patents. Therefore, management views this as a very positive event that should soon unfold.

We have some very positive answer we -- it will take place in the months ahead relative to our clinical studies. I'm going to let Debbie Dean give you the specifics. However, we'll be publishing very shortly our large multi-center randomized controlled trial on venous leg ulcers. We've indicated that the study should facilitate our EpiFix (inaudible) being given additional commercial coverage across the US by numerous health plans. While EpiFix is routinely used for a diabetic foot ulcer is because we did not have a large VLU trial of this nature, numerous commercial health plans did not grant us VLU coverage. That has a potential to open up an additional over $100 million in wound care business for EpiFix.

You will hear Debbie describe our series of IND BLA applications that we'll be filing with the FDA in the months ahead. We have substantial data already on these particular clinical indications and we expect these products to move rapid just as we have with our plantar fasciitis IND BLA. We also have a large diabetic foot ulcer multi-center randomized trial being published in the months ahead.

One other recent significant issue is expiration of our contract with AvKARE. Over the years with that contract, MiMedx developed approximately $150 million in revenues with AvKARE, which distributed our products to approximately 160 different federal hospitals and facilities during that period of time. In many cases, AvKARE had inventory in those facilities to help position us facilitate their patient care. As we've the majority of our audits and credits for AvKARE, we came out only approximately $50,000 in differences. Therefore, I think it was a credit to the AvKARE and the MiMedx staff that over this five-year period, this is the only discrepancy that he had found so far between their systems and our systems and our audits.

Looking forward in our federal business, now that the federal government's purchasing all product directly from us, we'll have more gross profit because we will no longer have a middleman distributor for those sales. Also, our sales force will be focused now solely on new revenue opportunities in these federal facilities and they will not be attempting to manage the healthcare transition to close out the contract as they did in our second quarter, which was and kept them quite busy.

In summary, I think the company has a substantial amount of good news that will be forthcoming in the months ahead. As has happened in the last 26 quarters, we expect to continue to see rapid increases in our revenues and even faster increases in our profitability. As is often said about bull markets, "they climb a wall of worry". That's exactly what could be said about MiMedx. Of course, the wall of worries has been created generally by institutions and individuals taking short positions in our stock. They will continue to regret the decision in the company in that fashion. Personally, I cannot be more optimistic about the company's prospects. While we cannot talk about all the very promising matters that will be disclosed in the months ahead, I can assure you they will continue to add to the breadth of product line and the growth opportunity should be coming.

Okay, Bill.

Thanks, Pete. As you have heard, our second quarter of 2017 was an excellent quarter for MiMedx with a very strong year-over-year and sequential-quarter revenue growth. It was also very strong operationally as we increased our gross margins and completed our final quarter in our contract with AvKARE. It was a solid performance from our team to achieve such strong sales, even with the administrative effort put forth to finalize the work under that contract. So I'd like to thank the entire MiMedx team for their hard work and focus, which led to such a great quarter and prepared the foundation for a very strong back half of the year.

Now, regarding our field sales force, we continue to grow it every quarter. The opportunities for our products continue to expand and we expect further growth over the next several years. At present, would including offers accepted but not yet -- the people not yet started, we are about 350 total field sales personnel. We project to be at 375 or more by the end of this year. We're hiring in wound care, surgical and pain management. Our detailed planning, with the help of our informatics group, continues to be focused on multiple quarters in advance, which helps us in our predictability as well as our continued growth. So, we really are focusing a lot of time on our informatics growth.

So as you will recall, our sales expansion focus over the past several years has been to expand our customer base and to go direct to customers through a combination of our own sales force and sales agents and generally away from distributors. We have maintained our long-term distributor base but have strategically decided to focus our energies on direct sales rather than adding additional distributors. Because of this focused effort over the past four years, we've expanded our customer base by several fold and drastically reduced our dependence on distributors to the point where the sales to distributors are no longer material nor have they been for quite some time.

Now let me talk a little bit about our product mix. As you know we've launched a number of new products last year. AmnioFill and AmnioCord are two of these products. We've classified both of these in our SSO category. It's important to note that our sales reps, who have traditionally considered -- who we have traditionally considered "wound care" have access to these products and are helping to expand these sales rapidly. So a very large percentage of AmnioFill is actually used in the inpatient surgery suite for dehisced wounds. AmnioCord is used in foot and ankle surgery, the call points, of which are many times overlapped with wound care. So our portfolio has expanded to such that there is significant overlap between our wound care and SSO product classifications. This overlap is not easily differentiated in a clear category like wound and SSO. So don't focus on that mix too tightly.

Now regarding our clinical studies, we've entered a very exciting period of time for our company. Market-leading surgeons in the urology and colorectal specialty areas recently presented data at conferences showing the use of AmnioFix can significantly improve outcomes and reduce complications. Chris will speak to that specifically in his comments.

Regarding EpiFix, we have completed our multi-center VLU study and we have completed the study and we're in the process of getting it published as Pete mentioned. Debbie will give you more information, but the preliminary results are incredibly strong. The results far stronger than any advanced skin substitute to date in this indication. On the heels of this study, our multi-center VLU study is nearing completion as well. And as a reminder, both of these studies followed the FDA's guidance on BLA or PMA wound studies. It's a very solid protocols with large multicenter populations and should further solidify our leadership position in this sector.

Our IND clinical trial efforts have expanded as well. We've already submitted our Phase III plantar fasciitis trial to the FDA and we're awaiting their response. We expect to submit two more IND studies for AmnioFix injectibles in the next 45 days or so. So you can see our clinical and regulatory teams continue to be quite active.

And just as a brief overview of our clinical activities, we have in excess of 30 clinical trials that are in process with 25 of them listed on clinicaltrials.gov at the moment. These studies encompass some 150 clinicians, 100 sites, and over 1,600 patients in 25 different clinical uses of our placental technologies.

So with that, I'm going to hand the call over to Debbie Dean now to give more detail on these clinical trials.

Thanks, Bill. MiMedx continues to invest in research, illustrating the clinical and economic impact of our various products. There are currently approximately 30 clinical trials underway or under development and we will be completing several large multi-center clinical trials this summer and preparing them for formal publication.

Research investigation includes clinical work across MiMedx's broad product portfolio, with investigations including EpiFix, EpiBurn, EpiCord, AmnioFix, AmnioFix injectibles, OrthoFlo and AmnioFill. The first of these studies includes the recently-completed large multi-center venous leg ulcer trial performed at 15 sites, which included 109 patients. In the United States, the estimated payer burden associated with the treatment of VLU is near $15 billion in 2014. And this number is only expected to rise. This landmark study has been submitted to a prestigious journal for publication and we anticipate that it will find its way to general circulation in the medical literature in the next couple of months.

We are pleased with the results of this clinical trial, especially with the broad inclusion criteria, including diabetes and multiple co-morbidities. A higher level of standard care was used in this trial compared to prior VLU trials. In an average wound size of 7.6 square centimeters, where another FDA-approved skin substitute trial was only 1.3 square centimeters. Additionally, we followed the ICH E6, the R1 guideline for good clinical practice and the FDA's Guidance for Industry Chronic Cutaneous Ulcer and Burn Wounds clinical trial design. That is standard for FDA and taught to your research organizations around the world. In our Phase IIb AmnioFix injectible IND trial, we have also recently fulfilled our enrollment requirements across 14 sites with 147 patients, for plantar fasciitis, which is an extremely common condition. The first patients in this trial had a new compatibility blood work completed at enrollment, 3 months and 12 months. Their requirement for additional blood draws was removed by FDA because the results showed no additional need for testing.

We have had discussions with the FDA throughout this trial on progress. While the results were still blinded, we believe the interim results from this study will reassure the FDA that this trial too will be a success. As such, we have submitted the IND application for the next Phase III trial, which incorporates feedback from our FDA pre-meeting and is undergoing FDA review. If approved, we could begin site initiation visits for the Phase III IND trial for this indication in preparation for our final BLA license in the third quarter. Additionally, we have already completed our GMP compliance work to produce Phase III product for this trial.

Our positive experience with both the sheet and micronized forms of dHACM product now also reassure us that we can move to expand our clinical research endeavors through additional indications where impaired use of this material in the field has suggested important solutions to needed clinical problems that would benefit from regenerative potential of our PURION process dHACM. We intend shortly to file an IND request for a Phase III clinical trial involving the treatment of Achilles tendonitis using micronized dHACM. This condition is frequently preceded by trauma and has been difficult to resolve quickly. Our clinical experience has demonstrated that Achilles tendonitis results nicely with AmnioFix injectible when other therapies have provided only supportive care.

Similarly, we intend to file a Phase IIb IND request for our use of micronized AmnioFix injectible in the treatment of late-stage osteoarthritis, where pain relief is fleeting, are unresolved with lesser therapies. We believe that the addition of dHACM injections will provide improved pain relief without the more extensive use for prescription opioids, the risk of repeated steroid injection, or the uncertain efficacy of hyaluronic acid. As you can see, there are a number of biopharmaceutical trials that are underway and in development for our unique clinical platform products.

I will now turn the call over to Chris Cashman.

Thanks, Debbie, and good morning. We're pleased with the sales progress we made in the second quarter. We grew revenues 33% year over year overall and revenues were strong in both of our market focuses of wound care and SSO. Just as we expected, the implementation of our new sales management system for 2016 has grown to become a major asset and facilitator of our strong revenue growth and we are reaping the benefits of this disciplined approach.

The processes, accountability and reporting, continue to make a positive impact on our sales productivity. So too are the corresponding informatics and organizational structure investments made at the same time in 2016, delivering results as planned. We finished the quarter with over 340 personnel in the sales organization and today are approaching 350. Our internal search and hiring team, alongside our sales management, have done an excellent job of maintaining the pace of new hires. The depth and experience of our sales organization continues to improve, aided by our internal training department and the sales force alignments provide greater specialization for our product line focuses. We are very positive that we will continue to deliver robust revenue growth.

The second quarter produced a very strong showing with revenues exceeding the upper end of the guidance by $1.4 million. We were very pleased by the growth in SSO, as it achieved 42% growth over prior year's quarter and 27% sequential quarter-over-quarter growth. We attribute this to our improved focus and planning taking hold for this SSO group, revenue contributions from our new product introductions of AmnioCord, AmnioFill, and OrthoFlo in 2016 and additionally continued adoption of hospital members accessing our market-leading GPO and IND contracts. We continue to educate and train on the new products and they are performing in line with our forecast and expectations.

Wound grew 30% in second quarter over prior year's quarter. Our wound business is robust and we are very positive on the growth of our wound revenues that we'll see in the second half of 2017. We did have some headwinds in the second quarter, as healthcare wound down -- wind down activities for many of our sales representatives were a distraction. We are through that now with the termination of the distribution agreement effective with the end of the second quarter and we expect to have some upside potential revenues in the second half of this year.

Both AmnioCord and AmnioFill recall works synonymously well in surgical procedures and in enhanced wound-healing applications. Both our wound and SSO sales personnel sell these products. AmnioFill is being used by doctors to fill deep voids like dehisced surgical wounds, pressure ulcers in the hospital setting, and other muscle and skeletal conditions. Additionally, there has been excellent interest in the office-based wound setting. AmnioCord often gets used in wound procedures as well when the wound presents with a deeper and more chronic condition, as in foot and ankle procedures for example. Of course, these product lines are reported in SSO even though the applications are for wound healing and sold by our wound team. We are pleased with the progress and how it has been adopted by our whole sales organization.

As you've heard many times, there are 3 million products of non-healing wounds each year and fewer than 150,000 patients receive a skin dermal substitute. Currently, MiMedx's focus is in wound care clinics and has been, for the 1.4 million diabetic foot ulcers and venous leg ulcers. The commercial portion of our insurance coverage has been predominantly for DFUs. However, with the expected release of top line data that Debbie spoke to and the publication of new multicenter VLU clinical data, which at the interim look reveals a significant improvement of healing at 12 and 16 weeks, meaningfully improving the -- on the Apligraf healing rates that took 24 weeks, EpiFix will have an opportunity to expand in the approximately 500,000 total VLU patients per year. With expanded positive venous leg ulcer payment policy, we believe there is $75 million to $150 million in potential wounds that can be addressed. And this opportunity doesn't even contemplate the approximate 1 million acute pressure ulcers that could benefit from our products as well. So in summary, there are plenty of wounds left to address.

I now would like to make a few comments on our medical and professional education focus. They are the recognized regenerative market leader, evidence-based medicine programs are expected from MiMedx. Both educational events and the steady stream of clinical study experience are critical to the continued revenue growth and the adoption of our products in the marketplace. The wound patient opportunity is still significantly underpenetrated, even with the success of EpiFix. The SSO specialties, as evidenced by this past Q2 revenue performance, are gaining continued acceptance in understanding of the AmnioFix line and new product introductions and their place in regenerative surgical healing. Expanded utilization will come with broader educational events.

MiMedx conducted in Q2 the first two of several physician medical education forums planned for the year to further increase awareness of MiMedx's grafts in the SSO markets. First, we held our reconstructive surgery physician forum in Phoenix and focused on a clinical and scientific attributes of placental-based tissue grafts for plastic and reconstructive surgery. And second, we support a position medical education forum in Atlanta, focused on non-surgical approaches for muscular skeletal conditions in May with attendees from around the country and discussed the potential for AmnioFix and OrthoFlo as non-surgical regenerative solutions. These forums provide the attending physicians with a wealth of clinical and scientific information on procedural techniques, clinic referrals, and expected outcomes from physician colleagues whom are well respected and well published. In addition, they provide invaluable insights to MiMedx on the surgical and non-invasive therapy trends emerging in this newly-forged regenerative medicine market. We developed and delivered impactful programs that helped the physicians understand better the full benefits of our placental-based tissue grafts.

We have also had new data presented at two prestigious national conferences adding to our growing body of evidence in the surgical space. At the American Urological Association meeting in Boston, three independent groups presented data, which corroborated the findings from the original study published by Dr. Patel on the benefits of AmnioFix in nerve sparring, robotically assisted laparoscopic prostatectomy. They each strengthened the patient study base in experience and reports on early aspects of the original study by Patel on outcomes including return to urinary continence and potency as well as new findings that also showed benefits of AmnioFix in patients younger than 55 years old with partial nerve span procedures. The new data included an 89-patient level I RCT, a 362-patient retrospective study, and a 241-patient retrospective study with propensities for matching analyses. This is a large cohort of new patients.

At the American Society of Colon and Rectal Surgeons meeting in Seattle, two posters were presented by Dr. Choat from Fayetteville, Georgia, and Dr. Minnard from Kenner, Louisiana. Both retrospective data sets showed a reduction in the anastomotic leak rates before and compared to the use of AmnioFix around the anastomoses after bowel resection, got 4% down to 1.2% and 5% down to 1.35%, respectively. Additional data showing anastomotic leak reduction was also accepted to the American College of Surgeons meeting in October.

And finally, we have spoken often about the fact that we are barely scratching the surface and making EpiFix available to more than 3 million non-healing product wounds each year. In order to exhibit the expansionary reach that MiMedx wound group has in just one quarter, listen to the following list of conferences and meetings attended. We attended two large national wound conferences, the 30th Annual FAWC, which is the largest North American wound care conference with 1,500 attendees; and also the 49th Annual Ostomy Continence Congress which has 1,200 attendees. We attended the European Wound Management Association Conference in Amsterdam. That's the largest European wound care conference with over 5,500 attendees. Additionally, we attended two regenerative medicine meetings with 500 attendees or more, two Veterans' Affairs DOD Association meetings, and 17 regional wound care, podiatry, plastic surgery, burn, and vascular conferences around the US and Puerto Rico. Additionally, and of note, we conducted approximately 125 local and regional speaker educational programs with approximately 1,900 medical professional attendees. I hope this overview provides some insight as to the exposure that MiMedx products get over an entire quarter and how we generate so many opportunities for our expanding sales force as we further educate providers.

Now, I'll turn it over to Mike Senken.

Thanks, Chris, and good morning. The company recorded revenues for the second quarter of approximately $76.4 million, which represents an increase of 33% or $19.1 million over prior year's second quarter revenue of $57.3 million. Wound care revenue was $54.7 million and SSO revenue was $21.7 million, with growth driven by additions to our sales team as well as new product introductions, somewhat offset by the time dedicated to completing the transition of the remaining VA facilities through the MiMedx FSS schedule and the wind down of the remaining AvKARE inventory.

Stability Biologics revenue for the quarter was $2.3 million. We believe that the positive momentum we saw in Q2, we are well on track to hit our annual growth targets in wound care and SSO.

Tail winds for the second half of the year include the completed wind down of the AvKARE inventory, results of the various clinical trials, as well as continued momentum in sales of our new products, AmnioFill, EpiCord, and AmnioCord.

Revenue for the six months ended June 30, 2017, was $149 million, which represents an increase of 35% as compared to prior year. Year-to-date wound care revenue is $109.6 million and SSO revenue is $39.4 million.

GAAP gross margins for the quarter were 88.7% as compared to 87.1% in the second quarter of 2016. The 160 basis point improvement was driven by higher sales volumes, processing yield and efficiency improvements, and lower one-time costs related to the Stability Biologics acquisition. On a year-to-date basis, GAAP gross margin was 88.3% as compared to 86.1% in 2016. 2016 year-to-date gross margins were impacted by $1.3 million in one-time acquisition-related costs. On an adjusted basis, gross margins have improved 110 basis points. Included in the press release is a reconciliation of GAAP gross margins to adjusted gross margin.

R&D expenses for the quarter were approximately $4.7 million or 6.2% of quarterly revenue as compared to $3.2 million in the second quarter of 2016. On a year-to-date basis, R&D spending is up $3.3 million over prior year. The increase is driven primarily by increased investments in clinical trial. The increase is in line with our overall strategy as we migrate towards becoming a biopharma company.

Selling, general, and administrative expense was approximately $55.3 million for the quarter or 72.4% of quarterly revenue, which represents a 220 basis points improvement in leverage versus prior year, driven by greater sales efficiency. The year-over-year increase in SG&A absolute dollar spending was due to the continued build out of our direct sales force in both wound care and surgical markets, increased commissions on a higher sales volume, increased share-based comp, legal costs, and bonus accruals. On a year-to-date basis, SG&A expense came in at 72.7% of revenue as compared to 75.4% in 2016.

The company reported positive adjusted EBITDA of $14.2 million or 18.5% of revenue for the quarter ended June 30, 2017, as compared to $10.1 million or 17.6% of revenue in the second quarter of 2016. For the six months ended June 30, 2017, adjusted EBITDA was $26.6 million or 17.8% of revenue as compared to 17.3% in 2016. Improvement was driven by improving sales leverage somewhat offset by increased spending in R&D related to clinical trials. Included in our press release is a reconciliation of adjusted EBITDA to reported net income.

GAAP operating income in the second quarter was approximately $7.2 million or 9.4% of quarterly revenue as compared to $3.6 million or 6.2% of revenue in the prior year. Adjusting for one-time charges relating to the acquisition, operating income was 9.5% in Q2 2017 as compared to 7.5% in 2016. On a year-to-date basis, GAAP operating income was $13.4 million as compared to $5 million in 2016. Included in the press release is a reconciliation of GAAP to adjusted operating income.

The company booked a tax credit of $1 million as compared to $1.5 million in tax expense in the prior year. The tax credit is due to large compensation-related discrete income tax benefits driven by the exercise in employee stock options. We anticipate an annualized effective tax rate of approximately 35% for the full year and a cash tax rate of approximately 29% for the full year.

The company reported GAAP net income for the second quarter of approximately $8.1 million or $0.08 per basic and $0.07 per diluted common share as compared to GAAP net income of $2 million or $0.02 per basic and diluted common share in the second quarter of 2016. On a non-GAAP adjusted basis, second quarter net income was $8.2 million or $0.07 per diluted common share when adjusting for the non-recurring items as compared to $5.1 million or $0.05 per diluted common share in the second quarter of 2016. Year-to-date adjusted net income was $15.7 million or $0.14 per diluted common share as compared to a year-to-date adjusted net income of $10.1 million or $0.09 per share in 2016. Please refer to the table in our press release for a reconciliation of GAAP net income to adjusted net income.

Turning now to the balance sheet, the company reported approximately $132.5 million in total current assets, including $47.5 million in cash, $60.7 million in accounts receivable, $15 million in inventory, and $9.2 million in prepaid expenses and other current assets. Days sales outstanding for the quarter were 72 days as compared to 83 days at the end of the prior quarter. The positive result was driven by upgrades and continued additions to our collection staff as well as improved business processes. Current liabilities were $51.5 million as compared to $50.7 million at December 31, 2016, with the increase in line with the growth of the business.

Turning now to the statement of cash flow, the company reported positive cash flow from operating activities of approximately $13.5 million for the quarter, driven mainly by improvements in working capital management. The company recorded capital expenditures in the quarter of $1.8 million, including additional lyophilization and laser-cutting equipment in support of higher anticipated production rates. Positive cash flows from financing activities were $4.9 million, including $7.3 million in employee stock option exercises, somewhat offset by $2.1 million in company stock repurchased under the stock repurchase program, bringing total cash returned to shareholders through the board-authorized repurchase program since inception to $71 million as of June 30, 2017. Please also note that the board recently approved an additional $14 million bringing the total authorization to $100 million. And finally, we added a total of 49 employees in the quarter bringing our total headcount to 754.

And finally turning now to our guidance, MiMedx estimates third quarter revenue to be in the range of $79 million to $80 million and raising full-year revenue guidance to be in the range of $309 million to $311 million as compared to previous guidance of $303.5 million to $307 million. The company is also raising GAAP fully diluted EPS to $0.22 to $0.24 per share from $0.18 to $0.20 per share in our prior guidance. And the company's maintaining its full year 2017 fully diluted adjusted EPS guidance estimated to be in the range of $0.31 to $0.33. These EPS numbers are based upon an assumption of approximately 116.6 million fully diluted shares.

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

Thank you, Mike. We'll open the call now for questions.

(Operator Instructions) Our first question comes from the line of Matt Hewitt from Craig-Hallum Capital.

Hi, this is Charlie on for Matt. Thanks for taking our questions and congrats on the great quarter. First off, DSOs obviously a great improvement quarter over quarter. Is this kind of the normalized range or are things going to get better from here? And also is AvKARE contributing to that? Obviously, it ended at 6/30. I would think so but what can we expect?

First of all, our target DSOs are 75. We've stated that publicly. And, you know, we hope to stay within that range and we feel good about the way forward, especially when you consider we, as several of the comments have been made, we've purposely moved away from selling through distributors, which tend to drag out your DSOs. As far as the AvKARE impact, there was an impact to that, but quite frankly there were many other impacts that drove down the DSO. It was part of the impact but certainly not the full impact.

Okay, that makes sense. And then I guess related to the AvKARE relationship, in December it took a, you know, it took a $1.8 million allowance, is that final? Is there potential for that to be reversed? Where are we at with that?

When we booked that adjustment as of yearend, it was our intention for that to be final. Because there's a 90-day run out period here, we'll see how much if any of that gets reversed. But as far as any financial exposures going forward, whether it's a hit to revenue or a hit to expense, all of those financial exposures are fully covered.

Okay, all right. And then just related to the new products, it sounds like everything's going well for EpiCord, AmnioFill, and OrthoFlo. Is there any of the three that stand out as a star or how material are they to, you know, driving revenue growth at this point?

This is Bill. I'd say we've got, you know, highlights with really all the products. We've gotten some really good wins with them all. We're not at a point where we're going to be breaking those revenues out or anything yet, but we've got some great traction with AmnioFill, some great traction with EpiCord, OrthoFlo and so forth. So, you know, I think maybe down the road we can give you a little bit more color, but they all are getting some good momentum. And as I mentioned, you know, some of the products such as AmnioFill, if not a clean bucket to say it's SSO because a lot of our wound care reps are selling that product as well, which is great for them because they've been able to expand the bag in their portfolio, give more solutions to the physicians that they work with. But we're quite pleased with the progress of those. Also, just to refresh your memory, EpiCord does have a reimbursement code for Medicare. It falls under our same Q code as EpiFix. And there's a large number of health plans that are covering it as they are covering EpiFix. So, we're getting some really good movement on EpiCord as well. So, overall, we're very satisfied with the progress of our new products.

Yes, that's great. Yes, thanks for all the color and again, congrats on the great quarter.

Our next question comes from the line of Mike Matson from Needham & Company.

So, it's great to see the revenue upside relative to consensus and your guidance in the quarter. But, you know, there wasn't as much upside from an earnings perspective, particularly from an EPS perspective. So I guess what my question is, is you know are you sort of using this as an opportunity to consciously reinvest some of that upside back into things like R&D and SG&A and hiring more reps versus just letting a lot of that fall through to the bottom line?

Mike, this is Pete. I think in the quarters ahead you will begin to see a more rapid increase in percent increase in earnings per share and cash flow et cetera as we've seen in the past. We've continued to make investments beginning in 2016 where we made significant investments. But we're at the point now, R&D will continue to increase a bit, but we should see increasing operating profit margins and EPS.

Okay, and then Mike, it looks like the share count increased you know fairly substantially from the first quarter. And if you look back over the longer run, you know back to 2013, it's up over 20%. So you know just wondering, you know what's driving that, particularly you know both in the short term and I guess in the longer term as well?

Yes, I mean what drove that increase in the quarter is really our share price. You know under the treasury stock method, you make an assumption on how much stock you're going to buy back based upon exercises. And with a higher share price, the number of shares you're buying back in that formula goes down, which drives the overall number up. So it's just a mechanical calculation that drove it that way. You know, you look at how rapidly the share price grew from the end of March to the end of the quarter and that really is the primary reason. Again, just to point out, we have increased or the board has increased the overall share repurchase authorization and, you know, we intend to try and counter some of the dilution with share repurchase.

And then I guess this would be for Chris and/or Bill, just curious about you know your -- you've hired a tremendous amount of reps over the years. You're continuing to add -- I know you set that 375 target for the year, just are you able to continue to find you know good reps, reps that have the right kind of background or are you starting to have to kind of go outside of the wound care area? And is that going to have any kind of impact on the productivity or the kind of sales ramp that these reps have?

Well, it's Chris. We're certainly finding a -- I'd say we're improving our ability to find even better, more qualified, more experienced representatives. Some come from the wound care space still or tangentially associated, but some are coming out of the medical and life sciences world, you know, more broadly. So I think the answer is that there's still a very large pool out there. We look for, you know, experience and maturity and you know certain best (inaudible) qualities. And we know that we can train them. You know our training program has improved significantly over the last two years, which we're very proud of and so has our medical education as I spoke to earlier. So, we don't see a problem or any type of gap in the ability to, you know, find good people and train them all.

This is Pete. Let me comment on that. We necessarily in our early years of development focused on finding individuals who had some wound care experience, but with the asset base we've built now in terms of our clinical successes, our scientific successes, publications, and a significant increase as Chris stressed in our training activities and training acumen, we can take individuals from general areas of healthcare now and turn them into pretty effective, efficient, wound care sales reps very quickly. So our training program has had a great deal to do with that.

All right. Thanks a lot. Appreciate it.

Our next question comes from the line of Matthew O'Brien from Piper Jaffray.

Good morning, this is JP on for Matt. Thanks for taking the question. My first one was on SSO in the quarter. It was pretty impressive acceleration and definitely above what we were kind of modeling on our side. Trying to just get a little more details about what kind of applications are driving that? Is there any sort of, you know, new contracts that are really driving that acceleration in that -- in the SSO in the quarter?

Well it's a number of things, JP, that I've said. You know we have continued to invest in our SSO organization. We've talked about the process. That it was going to take you know some time. You know it was going to be a little bit more methodical than what you saw on the wound care side of growth over the years and mainly because that's DRG based, you know, within the operating room. So we're not dealing with insurance, but more of a cost and an economic value analysis that's associated in the operating room. Additionally, you know, we're getting through the facts now. We're starting to see more clinical data that is in support of the various applications. We're spending more time and getting more recognition with the AmnioFix line, with our core areas of urology and colorectal. We're expanding into plastic and reconstructive surgery and it's all taking hold. Our GPOs and INDs, again are market leading. They're very strong. They've got 80% tiers or commitments full, sole source commitment levels. And that's very difficult also for competition to be able to, you know, kind of get through or have access to sell. All those aspects are, you know, in a whole are what's creating the value proposition and we're starting to see the returns on those efforts. And additionally as both Bill and I spoke to, the new products now are becoming, you know, taking hold and beginning to grow as well as we expected. And that also becomes a balance, you know because our whole sales force sales that. So, both the SSO organization as wound care are both contributing on those new product sales and, of course, they show up in the SSO area.

Got it. And then on the VLU opportunity, can you kind of walk us through the process of what; a, the opportunity; and b, you know once you have this new data set out, how do you go about, you know, I assume you need to go reimbursed insurance companies and get kind of coverage for that application. Like when can we really see that contributing to growth in terms of VLU sales?

Well, how about we have Debbie talk about the reimbursement part and Chris can (inaudible) and talk about in sales in terms of reimbursement first with Debbie.

Yes, we have -- it actually cracked obviously because the publications been submitted. We have all the numbers around the study. We have the letters and that prep from the payers that it is coming. And so they'll be reviewing that and we hope in short order adding VLU coverage to our already VSU coverage that we have. So they have obviously experience with our product line from a VSU perspective and we'll be sharing the VLU data. And once it's published with them and then expect that coverage will follow that, which will obviously lead into Chris' part of the discussion.

Yes, I mean as we said earlier, you know there's 500 million lives that potentially you know can be picked up. I mean this is a $75 million to $115 million opportunity. When you look at the interim results that we shared back in March and, you know, is in our presentation on VLU study as compared to really the only other RCT study that's been out there for Apligraf and that study's almost I think 19 years old now. But, you know, they had about 50%, 52% healing at 24 weeks with Apligraf. And in our study we're seeing, you know, that at 12 weeks and going into 16 weeks. So, that's just a significant, significant amount of improvement in the healing here. And I think this is going to be a sentinel study if it continues to pan out, you know, the way we think that's going to make a big impact in the market. So, if you are now from an insurance standpoint, Debbie maybe you could speak to that.

Yes, one other point I'd like to point out as I said in my remarks that the average wound size for VLUs are much larger. And you have to remember, when you think about that, 7.6 in our study, for example, the commercial payer coverage is on a per square centimeter base. So there are going to be larger wounds that are going to be treated. That's just kind of the profile of venous leg ulcers. And so it'll be reimbursed on different basis and it will be covered, you know, in the commercial setting as well.

Okay, but from a timing standpoint, they'll get the data before the end of this year. You'll get some insurance covering the VLU and then hopefully, you know, back half of next year start really selling into that opportunity. Can you just frame up the timing of all these things?

I think you're off a little bit here cause we've already submitted it for publication. We already have the data. So and we believe that it's going to be published very quickly. And as Debbie mentioned, we've already taken that data and approached several of these payers. Obviously, once it gets published we will send them the publication as well. So, we're hopeful that we're going to start moving the needle on some of these payers later this, this year and into next year is what our goals are. So, should be a bit faster than what you described.

And from a commercial aspect, we're very engaged with, you know, the providers that are taking care of these wounds, whether it's a vascular surgeon or other. And so it's going to be a quick adoption once the positive policy comes into play.

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

First, with regard to the hiring targets for the sales reps, can you remind us where you are on that for the year?

Well, as of today, we're just about 350 individuals, Bruce. And we expect to go to 375, maybe a little more throughout the year here so. We're hiring across all three of our areas that we're focusing on now. Of course, wound care still makes up, you know, a good portion of it, but SSO, as you see, because of the results we're going to continue to invest there. And we've just made the decision now to put on direct representatives in the pain management area and capitalize on some new data that will be coming out here, you know, shortly in the near term. So we're going to continue our robust and, you know, crafted hiring. We believe that there's a significant number of procedures that are available to the various products that we have and we're in a great position to capitalize on that.

Then a lot of progress in terms of the new products. You didn't talk about EpiBurn at all. I was wondering if you're getting any traction on that product?

We are. EpiBurn has been received very well. We are pleased with it. We came out or I should say others came out with a burn supplement that was back in Q1 and it was also then presented and that the EpiBurn was probably the majority of discussion at the Boswick Burn meeting in Hawaii this past year as well. So, we're getting very good traction. We're never pleased, but we are reaching a lot of patients. It is used, for obvious reasons, for extremities and face for the aesthetic results and for function. But we're also starting to see now doctors are now expanding as they've gotten more and more comfortable into the torso, the back, and larger areas of the body. So we're very pleased with how that's progressing.

Then one final question for Mike. You've got that earn out liability payment on the balance sheet. When do you think that's going to go down to 0?

So, there are two components to the earn out liability. One is based upon 2016 performance and one is based upon 2017 performance. So we would expect the '16 performance to be reduced in the third quarter and the '17 performance would be same timeframe next year.

This does conclude the question and answer session of today's program. I'd like to hand the program back to Pete Petit for any further remarks.

Thank you. We appreciate you joining us this morning. I don't think our comments and updates could be interpreted as anything but very positive. Management could not be more positive on our outlook and our future. The theses you continue to hear from time to time on the short sell side are generally very minor in nature and if something does come up with that nature, we'll be certain quick to dispatch it and move on. There's very little risk associated with those kind of matters for the company. Again, I cannot emphasis from a business standpoint the progress this company has made and will be making. It's quite exciting to be here at this point in time and the results that we're producing should be recognized for what they. That's very out of the ordinary and very positive. Thank you very much. We'll be in touch.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.