Greetings and welcome to the MiMedx Second Quarter 2024 Operating and Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Notarianni, Head of Investor Relations. Thank you, sir. You may begin.

Thank you, operator, and good afternoon everyone. Welcome to the MiMedx second quarter 2024 operating and financial results conference call. With me on today's call are Chief Executive Officer, Joe Capper; and Chief Financial Officer, Doug Rice. As part of today's webcast, we are simultaneously displaying slides that you can follow. You can access the slides from the Investor Relations website at mimedx.com. Joe will kick us off with some opening remarks and a summary of our operating highlights and Doug will provide a review of our financial results for the quarter. And then Joe will conclude with some additional updates including a discussion of our financial goals. We will then be available for your questions. Before we begin, I would like to remind you that our comments today will include forward-looking statements including statements regarding future sales, adjusted EBITDA, free cash flow and cash balance growth, future margins and expenses and expected market sizes for our products. These expectations are subject to risks and uncertainties and actual results may differ materially from those anticipated due to many factors. Actual results and market sizes will depend on a number of factors including competition, access to customers, the reimbursement environment, unforeseen circumstances and delays and other factors. Additional factors that could impact outcomes and our results include those described in the Risk Factors section of our annual report on Form 10-K and our quarterly reports on Form 10-Q. Also our comments today include non-GAAP financial measures and we provide a reconciliation to GAAP measures in our press release, which is available on our website at mimedx.com. With that I'm now pleased to turn the call over to Joe Capper. Joe?

Thanks, Matt, and good afternoon, everyone. We thank you for joining us on today's call as we are very pleased to report the results of another solid quarter. For the second quarter, we continued to achieve year-over-year top line growth, albeit at a slower rate. There are two factors that impacted the magnitude of our growth; first, we had a very tough comparison due to our strong performance in Q2 2023; and second, there continues to be dislocation in the private office setting caused by certain competitors and providers utilizing artificially high-priced skin substitutes and questionable business practices targeted at Medicare beneficiaries. While less than 25% of our total revenue is tied to Medicare in the private office and adjacent settings, we have felt the impact of this behavior. I assure you we are working on various options in the event no action is taken to curtail these practices. I will speak more on this topic later in the call. Importantly, the remainder of our business continues to flourish. We believe our industry will and must return to a more rational, data driven, regulatory and reimbursement environment. In the meantime, it is important to realize just how well we have positioned MiMedx to navigate these short-term headwinds and we expect to emerge on the other side stronger than ever before. Over the past year, we have orchestrated a significant financial transformation for our company and we remain laser-focused on executing our strategy, which will ensure success for years to come. This much improved financial profile enables us greater flexibility and optionality as we navigate near-term disruption. Moreover I am confident, we have the right plan and team in place to continue our momentum. As an industry leader we continue to provide input and lobby the relevant governing bodies in an…

Thank you, Joe and good afternoon to everyone on today's call. Thank you for joining us. I'm pleased to once again share our results with you all today. As a reminder, as Matt mentioned, many of the financial measures covered in today's call are on a non-GAAP basis, so please refer to today's earnings release for further information regarding our non-GAAP reconciliations and disclosures. Beginning this quarter in order to increase visibility, we added a few tables in the back of our press release that break out our non-GAAP adjustments by expense line item. I encourage you to review these materials alongside my comments today. Additionally, and as a reminder during the fourth quarter last year we bifurcated our GAAP financial reporting to reflect the current and historical results of our recently disbanded regenerative medicine segment as discontinued operations. Accordingly my comments today on our second quarter 2024 results are made on a continuing operations basis and exclude the historical cost of the regenerative medicine business unit, which was suspended beginning in late Q2 2023. For a full discussion of the impact of these discontinued operations, please refer to our most recent 10-K and 10-Q filings. Moving on to the results. Our second quarter 2024 net sales of $87 million, represented 7% growth compared to the prior year period. As Joe mentioned in his remarks, there were several factors that drove this performance in the quarter and I would like to provide some additional color on each of them. By product category, net sales growth was relatively balanced between our wound and surgical businesses, particularly when you consider certain anomalies. Second quarter wound sales of $58 million grew 8% versus the prior year period and second quarter surgical sales of $30 million grew 6% as reported and 13% excluding AXIOFILL…

Thanks, Doug. As you have just heard, we had another solid quarter. Net sales were $87 million or 7% in the quarter. Gross profit was 83%. Adjusted EBITDA was $20 million or 23% of net sales in the quarter. We ended with $69 million in cash. We began a limited market release of HELIOGEN, our first xenograft product, and we were excited to see the Nature publication and it’s foreshadowing of the vast potential for future applications of our allografts. Now let's return to a discussion of the reimbursement situation in the private office. On my very first MiMedx earnings call, a year and half ago, we provided commentary on challenges we were facing in the private office and adjacent care settings due to what we described at the time as certain participants using loopholes in the Medicare reimbursement system in order to provide sizable financial incentives to physicians for using their products. Since that time, the situation has gotten dramatically worse as a result of new and intricate schemes designed with the express purpose of self-enrichment by massively overbilling CMS for products with sparse supporting clinical data. Frankly, I'm shocked this has been allowed to persist for so long but remain optimistic it will be addressed in the very near future. To put this crisis in perspective CMS payments for skin substitutes increased by over 260% or $2.5 billion in a single year from approximately $1.5 billion in 2022 to $4 billion in 2023. In recent months the situation has reached a frenzied state causing tremendous disruption and dislocation in the market and MiMedx is not immune. While we have been fairly successful at holding this pressure at bay the impact from what we consider improper business practices has been metastasizing. As a result, we have experienced above-average employee…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Ross Osborn with Cantor Fitzgerald. Please proceed with your question.

Hi guys. Thanks for taking our question. So starting off would be curious to hear, if you think you've seen the worst of the attrition of customers and sales force due to highpriced products. And then going off of this, how should we think about revenue cadence for the balance of the year to get to your mid to high single-digit guidance?

Yeah. I do think we've seen the worst of it. We had kind of a bolus of activity in the second half of the second quarter like I mentioned in my commentary higher-than-normal customer churn and employee turnover. So we moved pretty rapidly to kind of limit the damage there rebuild in the areas that were most affected. Frankly, it was concentrated in a handful of areas which made it a little bit more difficult to cover with adjacent folks. So we've worked through that. We think we're in pretty good shape now and expect that the worst of it is behind us. But that being said, there's still an awful lot of activity around the sales of these as we refer to as artificially high-priced products. So we're going to battle through it. The best thing that could happen is that the government takes some sort of remedial action as soon as humanly possible. We had hoped to see it in the physician fee schedule which was proposed a few weeks ago. We did not. So the next best thing that could happen is for the MACs to implement the proposed LCDs in their current or some similar format. Again, this would curtail most of the behavior because those super high-priced products are not on the approved list. But we have to plan for the worst. That being the case we felt it was prudent to take guidance down to the mid- to high single digits with potential upside that the LCDs are implemented. We plan for no upside in that guidance with LCD implementation because we can't predict when that will happen. But we thought it was the most prudent thing to do. And that assumes kind of a similar run rate in sales to what we're seeing right about now.

Yeah. Ross, I'd also just add that sort of our back half guidance certainly anticipate continued momentum behind our recent launch of our xenograft HELIOGEN. EPIEFFECT is off to a good start this year and certainly gaining traction with AMNIOEFFECT and our surgical suite. And our international business continues to grow. But the vast majority of the turbulence we think will happen as Joe indicated because a lot of this happened in the second half of the second quarter. From a cadence perspective, I'd expect that continue to play out as we recover. And we've already filled almost all the gaps at this point for Q3. And we've also got some traditional health care seasonality playing out in Q3. So I'd say Q3 as being more impacted than Q4.

Okay, got it. That's very helpful. And then lastly for us before I jump back in queue. Could we spend a little bit more time on the RCT for EPIEFFECT just in terms of the size, time line and cost assumptions there?

Yeah, we did not put out the size in terms of number of patients. I would just refer to it as a highly-powered well-designed RCT. It's already been through IRB, so the study is underway. We're at the outset of patient enrollment. We think, time line I think we had talked about probably around a year with interim report out in like the six-month time frame. And I don't think we've put out a number on it. But well within our budget and we'll forecast. So it will have a huge impact on our R&D spend as a percent of revenue.

Got it. Thanks for taking the questions.

Thanks for initiating coverage, Ross. We appreciate our relationship with Cantor.

Likewise. Thanks.

Our next question comes from Chase Knickerbocker with Craig-Hallum Capital Group. Please proceed with your question.

Good afternoon guys. Just first, help me understand a little bit here Joe what was different in Q2, and going forward relative to Q1 and last year? Obviously there's been these high ASP products in the market. Maybe speak to what happened kind of specifically in the second half of Q2 that was driving additional churn of customers and sales reps in this quarter relative to others. Was there new strategy from some of these players or just speak to exactly what was different? Thanks.

I think it's just more of a chase. You've been following us for a while now. We've been talking about this is an issue for a couple of years. Originally we were lobbying to have people -- other participants be required to report their ASP so that everyone's “playing on the even playing field”. Folks were using you may recall WACC in invoice pricing and not reporting rebates so that was causing a lot of issues. And then quickly people started to migrate to the ASP prices. We saw this huge spike up of the number of products on that list. Then we saw companies start to price these things at dramatically high level 10 times what the normal price levels were and using a scheme to rotate multiple products in and out of the market in order to keep that price at those high levels. So I think what's happened is a couple of things. One, there's just more and more people get into the game and there's a lot more product in the market. There's a lot of people making a fortune by doing this. It kind of makes my stomach a little ill when I think about it, because what they're doing is using these schemes to overbill Medicare at this artificially high prices, which hurts the trust of taxpayers and most of all some of those vulnerable members of our society, elderly people who are dealing with chronic wounds. So it's unfortunate. But I think to your point it's accelerated. We did a pretty good job keeping it at bay for a while. We've been lobbying the government to make change and have had no success. So frankly we're probably losing a little credibility in that argument, telling people that this is wrong and shouldn't be doing it. It's tough when everybody else is doing it and you see your friends making a bunch of money. And then doctors are telling you how rich they're getting. So it was -- it's a hot mess and it needs to be addressed.

Do you think there's any dynamic that now that these LCDs are out there and slated to potentially go into effect that there's a little bit of some spurring of usage because some of these loopholes might be closed in the fairly near term?

I would love to see it. I think the fact that the LCDs are looming and we should hear something at any day or any day is helpful. The fact that the Department of Justice is now put a spotlight on it, they're starting to be -- some media coverage is picking up on it. We're lobbying with CMS. We're talking to the MACs. We're talking to lawmakers. We're talking to media. So people are starting to see this for what it is. It's a pretty elaborate scam. And when you look at if you saw the chart from our presentation look at the slope. When you go from like what $500 million or less than $500 million in 2020 to over $4 billion in 2023 there's no other product category that does that. This wasn't the introduction of a new life-saving drug. They’re just using fairly mature products to overbill the government. That's what this is all about. It's a very elaborate scheme to overbill the government and as I indicated some critical some vulnerable members of our society. So it has to change, right? You would think that this is going to get shut down. That being said the people that we're talking to have to work through a process. There has to be a publication of proposed rule changes. There has to be comment periods et cetera, et cetera. So they're working through the process which unfortunately takes time. Yes, it's great that the DOJ is going after people that are really abusing it. But that's -- they still need to close the front end of this problem.

And Chase I would say don't forget that this is one side of service and one payer that we're having this turbulence in. So I would expect that to normalize over time but we believe that generally it's less than 25% of our total top-line. The remainder of the business remains strong and healthy with a lot of growth drivers.

Understood. And then just last two from us. If we think about that LCD whenever it does potentially go into effect right. If we think about that first quarter for you guys do you see that as being positive to the trajectory of revenue again in that first quarter that goes into effect even despite having some -- the revenue from EPIEFFECT likely rolling out of the model in that quarter? So again just that quarter having a positive effect, the LCD have a positive effect on revenue that quarter. And then second for Doug just on EBITDA. Do we still expect kind of 20% margins or how should we be thinking about EBITDA through the remainder of the year? Thanks.

Yes. I would expect an uptick in the business soon after these things are implemented. I don't think there is a lot of inventory burnoff when the inventory is priced at $2,000 per square centimeter. I just don't think people are carrying a lot of it. So my guess is we'll probably see the market shift pretty quickly. Doug?

Yes. From just an adjusted EBITDA perspective we didn't guide but the way I think about the back half of the year is we're certainly built to grow we're built to scale and we believe that a lot of the turbulence today is transient. And we'll certainly recover and we want to maintain the good infrastructure that we already have. But I would expect that while we had about 22% EBITDA in the first half of the year we've guided previously that we thought would be north of 20%. I think we'll approach 20%. I think we'll be modestly below 20% for the back half of the year. And I would look at that as sort of gross margin in the low-80s at this point as we have less volume in this particular side of service to cover our fixed costs. And I think the other big driver here is that as the EPIEFFECT RCT ramps up that we would expect R&D to be closer to mid single-digits at that point instead of the 3% or so that they run in the first half of the year.

Chase, it's Joe. Listen I know we're talking a lot about LCDs and I'm sure the rest of the questions we're going to get are going to revolve around this as well because of the nature of the issue. And as you indicated it's been going on for a while. This is really the first quarter that we've talked about it this much and that we've been impacted by it. We do see it as transitory. We don't think it impacts the business long term. It's a nuisance that we have to deal with. However, as difficult as it is to deal with we still recorded $87 million of revenue in the quarter which is tied for the highest quarter we've ever had and we're still generating a lot of cash and a lot of adjusted EBITDA. So we will get through this. As you heard me indicate in the past that once we're on the other side of this reimbursement issue and once we get more stability from a regulatory standpoint we fix regulatory and reimbursement in this industry it's a lot more investable. And I think in the long run this will all play out and we'll look back and laugh about it at some point.

Got it. Thanks for taking questions.

Thanks, Chris.

Our next question comes from Brooks O'Neil with Lake Street Capital Markets. Please proceed with your question.

Thank you very much. Joe as you said a lot of questions a lot of comment on LCDs so following that I've got one more. I'm just curious. Obviously, last year significantly disrupted by proposals from some of the MACs that were subsequently withdrawn. Then they come out with a uniform LCD across seven MACs this year. The one thing I don't think I've heard you guys comment about is do you get any indication from these MACs following the comment period, during the comment period whether they are determined to right this wrong in the reimbursement loophole situation? Or do you think we could see additional wobbling on this topic at this time?

It's a good question, Brooks. And I would say that they're fairly close to the best in terms of giving any sort of implication, whether or not they're going to implement and when they would be implemented. So I can't handicap this for you. I wish I could. I would tell you though that in my meetings with the folks that we've been able to talk to we've had several they're highly sensitive to what's going on, highly sensitive and asking a lot of questions and asking for follow-up calls. So they're doing the work on it, which tells me and again if I apply some level of logic given the escalation of the spend, which tells me some action will be taken in some format soon. But look if I had a crystal ball, I'd have the answer for you buddy.

Right. I hear you. Totally understand. All right let me just ask you one more different question and that is can you give us a sense for the timing of the full rollout of the xenograft product? And I think I heard you use a word that suggested you think the market is big, potentially big. And can you give us any sense for in dollar terms or whatever -- how big you think it is for you guys? And sort of whether you think you can begin to really see meaningful incremental revenue yet this year? Is it more a 2025 event? Is it more a '26 event as you look out into your crystal ball? Thanks a lot.

Yes. Really excited to get this first one out into the marketplace. And as a reminder this is a collagen-based particulate. So it's going to be used in certain surgical procedures tendon repair, et cetera. So we do think that there's a good application for this product. We plan to launch other products in the xenograft category as well. And as a reminder that just opens up a lot more market opportunity for us. Amniotic tissue only accounts for about 45% in that neighborhood of the total skin submarket with xenograft and synthetics covering the remainder. So big market opportunity for us to probably at least doubling our TAM. These are areas in a market that we have been precluded from competing in for a variety of different reasons. Sometimes it's cost sometimes it's other reasons. People don't want to use amniotic tissue. But I think it's a pretty good size market opportunity for us. We'll see some upside from the product this year but really start to ramp up next year.

Great. Thank you very much. Good luck with the bad guys.

Thanks Bruce.

Our next question comes from Anthony Petrone with Mizuho Group. Please proceed with your question.

Thank you. And hope everyone is doing well. First one just to follow-up on xenograft. Thanks for that detail there. Competing today in 45% of the market xenograft gets you in the remaining 55%. How many products do you need to sort of address that sort of large market opportunity? You have an initial product in. How many more xenograft products do you expect to add? And then just a quick follow-up on LCD. When we sort of revert back to some of the data that was out there in terms of the overall billing into Medicare it was over $1 billion. The expectation is that some of that's going to go away some of that's going to stay. But at this juncture as this process is sort of evolving here and being extended ultimately, what do you think that opportunity is going to be in the US Physician Office once this settles out and we have a definitive path forward from the MACs? Thanks, again.

So let me get back to xeno first. So yes, we need to round out that product portfolio. I want to think of it in terms of similar to what we're doing now in amniotic tissue. We'll have sheets of different sizes and different thickness accelerated use in different procedures, sometimes with a strong potential strength that you can use in more complex surgeries a product that can be sutured et cetera. So I would say -- I can't give you a number whether it's 2, 3, 4, 6, but we're going to have a variety of SKUs that meet the needs of the marketplace so that we can compete at all levels. The question about LCD market opportunity, how much of it is overutilization? How much of the price? Again, if you look at the -- one of the slides we had in the presentation, you can see that the line portion of that is utilization. So there's massive overutilization as a result of the opportunity to make these incredible amounts of money. So I think utilization is cut way back once this is shut down and cleaned up. And obviously pricing goes back in line. And we've done a lot of sort of sensitivity analysis around us once this market is rightsized. How much of it we would have an opportunity to compete for given our current share of amniotic tissue in some of the care settings and then looking at as patients migrate from one care setting to another, it's going to be a sizable opportunity for us Anthony. I don't want to give -- put a number out there, but it will be a pretty decent sized opportunity for us.

Thank you, so much.

Our next question comes from Carl Byrnes with Northland Capital Markets. Please proceed with your question.

Thanks for the questions. Most of my questions have been answered. Do you have any feel or expectations with respect to potential time line of events that might lead the seven MACs to adopt the LCD? Thanks.

No, I wish I did, Carl. Thanks for the question. We talked a little bit about that already. When we asked the question, the answer we get is, we're working through the process. We're working through the process. I would just go back and stress the fact that unlike this time last year, there is a much more heightened sensitivity at least from our perspective of various stakeholders who are involved in setting these rules. In our conversations, people are very in tuned to what's going on. And obviously that means they're getting asked about questions as well. So I think this has been elevated to a fairly high level in the various government agencies that have responsibility to either price or implement coverage determinations on these products. But it can't go on for all. Who knew that you didn't need a gun to rub it back? All you needed was a skin substitute.

Thanks so much.

There are no further questions at this time. I would now like to turn the floor back over to Joe Capper for closing comments.

I appreciate it. Thanks everybody. Appreciate your questions and your participation. Thanks for your continued interest in the company and we will talk to you next quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.