MiMedx's (MDXG) CEO Pete Petit on Q1 2016 Results - Earnings Call Transcript

| About: MiMedx Group (MDXG)

MiMedx Group, Inc. (NASDAQ:MDXG)

Q1 2016 Earnings Conference Call

April 26, 2016 10:30 ET

Executives

Thornton Kuntz - SVP, Administration

Pete Petit - CEO

Mike Senken - CFO

William Taylor - President & COO

Chris Cashman - Chief Commercialization Officer

Analysts

Matt Hewitt - Craig-Hallum Capital

Bruce Jackson - Lake Street Capital

Joe Munda - First Analysis

Mike Matson - Needham & Company

Jason Wittes - Brean Capital

Mark Landy - Northland Capital Market

Operator

Good day, ladies and gentlemen. And welcome to the Q1 2016 MiMedx Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call will be recorded. I would now like to introduce your host for today's conference, Mr. Thornton Kuntz, Senior Vice President of Administration. Please go ahead.

Thornton Kuntz

Thank you, operator and good morning everyone. This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based upon the current beliefs and expectations of our management, and are subject to risks and uncertainties. Actual results may differ materially from those set forth in, contemplated by, or underlying the forward-looking statements, based on factors described in this conference call and in our reports filed with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2015.

We do not undertake to update or revise any forward-looking statements, except as may be required by the company's disclosure, obligations and filing it makes with the Securities and Exchange Commission under Federal Securities laws.

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

Pete Petit

Thank you, Thornton. I thank you for joining us for our first quarter conference call. I have with me today, Bill Taylor, our President and Chief Operating Officer; Mike Senken, our Chief Financial Officer; and Chris Cashman, our Chief Commercialization Officer. There are other corporate executives with us.

As we reported in our pre-announcement on April 10, our revenues came in at $53.4 million, which was a 31% increase over first quarter of 2015. Our wound care revenue grew at 32% and our SSO revenue grew at 28%. We have previously mentioned three factors that affected revenue for the first quarter, the revenue is primary affected by the implementation of a new and relatively sophisticated sales management system which required all wound care and surgical sales force actually tag tissues [ph] into the system through their iPhones or iPads. There was some flaws in tagging process which caused a great deal of confusion. However, I would like to point out that when we compare the first 15 business days of January, and the first 15 days of April, our revenues are up over 25% in April. We believe this is a clear indication many of the issues that confronted our sales organization in the first quarter had been resolved. However, I want to make it very, very clear that this is a 25% plus revenue increase in the first several weeks of the second quarter, should not be translated into a quarterly expectation. There are numerous factors that affect this order right during the quarter.

I want to mention one other thing and that is this new sales management system will soon prove to be one of the MiMedx's most effective assets. We've put a lot of time and effort into this over the last year. It will prove to be a very effective way to manage our sales efforts and activities, something we must do at this stage of our growth in order to be maintaining growth rates we expect in the future. It will be an asset that won't be matched by any of our competitors and will just further trench us in terms of our customers and our efficiencies and effectiveness in our sales processes.

Now relative to SSO revenue, our newly acquired surgical biological subsidiary came in short of their projected first quarter revenue. As we discussed on April 11th call, this is primarily related to their new products not obtaining approval through the numerous VAC committees at hospitals. These committees have become a major constraint on introduction of any technology, even when we have GPO contracts and IDN contracts to those institutions. However, once the product is through the VAC committee we believe our contracts can give us a major advantage in the ongoing revenue and ordering processes.

We just completed a three and a half day sales management meeting. I think I can safely say that the two separate sales organizations; wound care and SSO, are beginning to understand and assessing to coordinate and support each other as we begin to separate their functions in our numerous hospital accounts. As my experience in our predecessor organizations that this is a 'process' and it could take many months before sales force officially returned and all management structure changes of this significance are accomplished, plus the added disruption of a new, in our case sales management system. As we clearly indicated on our April 11 call, with first quarter revenues falling approximately $2 million below our lower end estimate, our adjusted earnings per share would be affected as well as our adjust EBITDA.

As our adjusted earnings per share came in at $0.04 per share versus expected $0.06 per share, adjusted EBITDA came in at $9.1 million. Mike Senken will discuss other numerous financial metrics in a few minutes. We recently introduced products that are made from the umbilical cord which are called AmnioCord and EpiCord. In the last few weeks we have seen an enthusiastic acceptance of these new products both in wound care and certain surgical procedures. Since AmnioCord and EpiCord is significantly thicker than our traditional AmnioFix and EpiFix allografts, they can be stitched in the position when required. In addition, they have much more bulk than our existing allografts.

In mid-year we're going to announce the introduction of another product line manufactured from our donated placental tissue. We'll provide the details when we actually launch the product due to competitive issues. With all these new product introductions comes some degree of uncertainty in terms of the revenue ramp rate. Additionally we've already experience some of the slower than expected ramp rate on the Stability Biologics products. However, we already began to ramp up the processing capabilities of the San Antonio facility where we're experiencing product demand where we have production constraints relative to the SB products only. Therefore there is certainly some additional degree of uncertainty relative to the ramp rate on the Stability products.

For these reasons as well as conservatism we are lowering our revenue estimates for the year. We're taking them down to a range of $242.5 million to $250 million. This range will still provide a minimum of 30% revenue rate over 2015. We believe the growth rate for wound care will be approximately 28% and the growth rate for SSO should be approximately 35% to 40% for the year.

There will be a corresponding reduction in adjusted operating earnings, adjusted earnings per share and adjusted EBITDA. Our gross profit margins are projected to be at the lower end of our previous guidance, approximately 87%. This is primarily caused by the Stability Biologics margins on their skin allograft being lower and MiMedx's additional gross profit margins. However, their Physio product should show gross by margin the same vicinity as the legacy of MiMedx products. Stability's products are being produced in the facility in San Antonio that is still maturing in terms of processes, procedures and increased production rates. Therefore as the year progresses we believe the gross profit margin of products produced at San Antonio facility should increase fairly significantly.

I would like now to provide our analyst and shareholders an apology. Because we made the acquisition of Stability Biologics our financial statements will be burned with a number of new 'non-cash' charges through the purchase accounting rules. In addition, there will be some other non-cash items associated with a preferred tax asset. Because of those complexities our seasoned tables in the back of the press release which need to be studied, and I used the word studied. We have tried to simplify things as much as possible, but with these new accounting rules that is difficult no matter what you attempt to do to clarify matters.

As you recall I've been chairman and CEO of public companies for 35 years. I remember the good old days when you had a choice to do an acquisition through a pooling method or purchase accounting methods. There were some tax differences between the two. In pooling you simply add the balance sheet and profit and loss statements together in what about your business. As you should note, probably corporations can no longer do acquisitions through a pooling of interest but most do them through a purchase accounting method. This requires a significant number of write ups, write downs, accruals, the majority of which are non-cash. Therefore the company's income statement gets even more confusing. This is why I always refer to adjusted EBITDA when I'm trying to evaluate the cash producing and asset building possibilities of a public company's income statement. This is also a reason why we will start reporting earnings on an adjusted basis as most companies have begun to do.

When I turn the call with Mike Senken, please settle in for a lengthy explanation of some of these non-cash charges and one-time items that affect our GAAP numbers. However, I would encourage you to focus on adjusted EBITDA and adjusted earnings per share to obtain a realistic insight in the cash producing and asset building capabilities of our business. We discussed on numerous occasions the excellent financial areas that MiMedx has starting with a high gross profit margins. From there down to profit loss statement, matching base decisions on how to invest in numerous parts of the business and obtain a result in good turn in those investments.

Now let me provide a brief update on the status of the FDA public hearings on the draft guidance for HCT/P's. As you may recall Commissioner Califf has cancelled a previously scheduled April 13 meeting right after he was confirmed as the new FDA commissioner, this last week they rescheduled this meeting and added a scientific meeting. When FDA cancelled the first meeting there was indication there would be a scientific hearing proceeding next hearing on the draft guidance documents. The scientific meeting is scheduled on September 8 and the guidance hearing is scheduled for September 12 and 13. They added another day to the schedule which was requested by the industry, and they're holding the meeting in an auditorium that seats 500 people rather than 100 people. So those are both positive matters.

As I previously stated, I believe these two meetings are very good news. It will help clarify these issues considerably by adding a scientific component to the deliberations. All the new commissioner especially need for science related guidance documents and everything else involved in these regulatory processes. As you are aware, MiMedx is very focused on the regular signing post everything we accomplished. After the hearing is complete, there will be a short period of time for comments from industry. We certainly plan to be in attendance and speak of the draft guidance meeting. We already have our reservation. We also requested a time to speak at the scientific meeting. Now after these meetings, comments will be requested from industry. After those are received I would expect it would be late fall, early 2017 before they provides guidance documents or published again for review.

Okay, I'll turn the call over now to Bill Taylor as a number of operational issues to discuss, Bill.

William Taylor

Thanks, Pete. We've already discussed the three key elements that contributed to our revenue short fall in the first quarter, and wanted to spend a couple of minutes on one of those items to describe it in a little more detail. This is related to the tissue tagging process. This process is necessary because in any given hospital we may have as many as three or more sales representatives in the account and having access to sell the same tissue. Most devices in pharma companies do not have this kind of issue, and when they have multiple reps in the same hospital they are generally selling distinctly different products.

In our case they may actually be selling the same product but in a different surgical specialty. For instance a hospital may keep all the tissue in one location. At that location we have multiple sizes of AmnioFix available including for instance a 2x12 cm version. That 2x12 could be used by a podiatric surgeon on a foot and ankle case which may be served by one of our direct wound care reps. That same 2x12 could also be used in a nerve sparing prostatectomy by a surgeon who is served by one of our direct surgical reps. And that same 2x12 could be used by an orthopedic physician on a total knee replacement who is served by a sales agent.

So you can see that the tracking which rep was responsible for the sale is a bit more challenging on our models compared to other companies. So when reps are spending time addressing concerns as to who should or should not have tagged a tissue are spending less time selling. That was one of the significant issues we had in the first quarter. Now we believe that majority of these issues are now behind us and we should not have that kind of disruption again.

Regarding our integration of Stability Biologics, it's progressing forward with a particular attention at present focused on increasing the production capacity in San Antonio. Our processing teams are working well together in streamlining the process in implementing some lean manufacturing techniques to improve overall workflow and efficiencies. While these changes don't happen overnight, we do expect to have some nice improvements over the course of this quarter.

Some of the VAC committees, the Value Analysis Committee, are not moving as fast as we would like with respect to Physio but we continue to get very positive feedback regarding the product performance. We are working with physicians who have been using our products for some time in order to prove some clinical case theories, and we'll leverage those case theories into our upcoming prospective clinical trials.

Moving on to our new products, we've not spoken a lot about our umbilical products, EpiCord and AmnioCord. We first mentioned this class of products at our Analyst Day last year. We started our soft roll out in late Q1 and are in the middle of our full roll out this quarter. As you know we've discussed for quite some time that we are looking for clinical uses for the remaining parts of the placenta that until recently we had to discard. The umbilical cord is one of those pieces. We believe these products are a very good complement to our EpiFix and AmnioFix product lines as they provide a significant amount of growth factors. They are considerably thicker than our amniotic tissue allografts and they can provide more cushioning and protection for the healing process. Yet another new product that we anticipate launching just after midyear also comes from a formerly discarded part of the placenta which is called the placental disk. We expect this collagen-rich product will also have both wound care and surgical operations, and we expect it to be a section 351 product.

We also think we'll have the ability to replace certain competitive products in the market today. Now for competitive reasons we're not going into any more detail on this, but I do ask you to stay tuned overtime. With respect to CollaFix, we don't have much to report other than the initial project continues to move forward as we have anticipated. We've completed the processing transition from bovine source collagen to human placental collagen, and we've proven the fiber strength is equivalent if not slightly better than the bovine collagen source. And as we progress with our development and initial 510K application we will update shareholders accordingly.

Turning to our sales force. We continue to add sales executives and sales managers in all of our business series. We add to our wound care team as we are finding that we're still not fully penetrating in wound care across the country. We still need a denser footprint or adding additional expertise in areas where we are under penetrated. We've also added to our SSO team and are particularly excited about the recent hires that have specific expertise selling adhesion barriers in surgery. We believe that that experience should augment our surgical sales force quite well as we continue to promote the AmnioFix property that's reducing the scar tissue formation.

Our total field sales force now is around 250 people and we continue to add almost every month, and that does not include our team that focuses on managing and expanding our IDN and GPO contracts. Let me talk a little bit about market share. The latest data is presented by Smart Track, shows the continued strength of the MiMedx market share and market share gain. According to Smart Track, the CTP which are defined in the market as Cellular and Tissue Products segment of the advanced wound biologics phase. So the state of this market, the CTP market, ended 2015 on a high note up about 17% reaching $588 million for the year, and quarter four of '15 was up over 15% to $158 million.

For the year, Amniotic Tissue accounted for $234 million of this sub-segment or about 40% of the overall CTP market. That's an increase of over 60% compared to 2014. Our view of the market is a little more broad than the Smart Track's market. MiMedx has been identified by Smart Track as the clear leader of the CTP market with 25% market share. Integra is second with just over 19%. And as I understand that the majority of their revenue is actually the burn area as opposed to the chronic wounds. This data suggests that we are not only gaining market share but we're also expanding the market in advanced wound care as we have predicted over the past few years. The 17% market growth rate is more than double the chronic wound incidence growth rate, so that market expansion growth is clear.

With that now I'll turn it over to Chris Cashman.

Chris Cashman

Thanks, Bill. This past week was a busy week as we had previously stated that we would be revealing our sales management systems and forecasting. We also had our field sales management in last week as Pete earlier shared. We emphasized and talked through the importance of the sales teams staying in the assigned lanes and tagging the tissue appropriately so we can continue to track utilization and tighten up our forecasting and inventory prospects. Gaining greater ability from management to direct the local account executives business and also consigning inventories.

We continue the SMS rollout training on used and future capabilities. We gave them further insight into the dashboards and the analysis that will be possible in the remainder of the year. The RSCs build out regional business plans based on the account executives tactical and strategic initiatives confirmed for each territory. These management reports will ultimately reside in salesforce.com and be interactive allowing for any account to be called up and analyzed as part of the planning and trans-measuring process. Additionally, we confirm quarterly sales forecast with area vice presidents and regional sales directors. They presented their plans, refined the focuses based on management feedback and committed to the guided revenues as they've been communicated. This included in account by account analysis of commercial and federal opportunities in the existing account trends.

We also strengthen alignment of sales focuses and teams with a dedicated morning, spend identifying, collaborating synergistic opportunities and coordinating account transitions for surgical from wound care. As we have now added additional 20 direct account representatives for the abdominal pelvic surgery focus and train them. SSO and Stability were integral to this process to finding cross selling opportunities and tactical steps to be taken in spine and ortho specialty areas.

Now turning to GPO and IDN progress, MiMedx had our highest revenue month in March and best quarter to date with business revenue associated with these contracts. AmnioCord and EpiCord have been added to many of these contracts and will continue to be added through Q2. Facilities continue to sign up and opt in for sole source or committed tier contracts, strengthening our position as the leading placental tissue provider in the marketplace. These GPO-IDN contracted relationships value evidence based medicine, and so our relationships continue to be strengthened in the local facility markets in the wound care clinic and in the operating room.

As you know spring is a busy time for large health care association conferences and regional meetings. We just completed a successful symposium on advanced wound care, better known as SAWC where we had significant booth traffic, a very well attended breakfast educational symposium, booth presentations and nine posters presented. EpiCord was also highlighted. We have in the first week of May the American Burn Association which we will be highlighting our full portfolio burn products, and then the American Neurological Association which we will again exhibit and then have an educational event on the continued adoption of AmnioFix in the neurology procedure base.

Thanks, and I'll now pass it back to Pete.

Pete Petit

Thanks, Chris. We'll I'm going to pass it to Mike here, but again please be patient as he goes through a great deal of data and information. Mike?

Mike Senken

Thanks, Pete. The company recorded revenues for the first quarter of approximately $53.4 million, an increase of 31% or $12.6 million over prior year first quarter revenue of $40.8 million. Wound care revenue of $39.3 million grew 32% and SSO revenue of $14.1 million grew 28% over prior year first quarter. We also added over 300 new customer accounts in the quarter.

Due to the impact of the results of the acquisition of Stability Biologics that closed on January 13, 2016 and the release of the valuation allowance on the deferred tax asset 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.

Beginning this quarter the company will report adjusted gross margin, adjusted EBITDA, adjusted net income and adjusted EPS to normalize results for comparison purposes in addition to reporting GAAP results. Tables are provided in press release which reconciles non-GAAP to GAAP reported results. Now moving on to the results, GAAP growth margins for the quarter were 85.1% as compared to 87.4% in the first quarter of 2015. Adjusting for the amortization of the Stability Biologics inventory setup required by purchase accounting, gross margin was 86.5%. Included in the press release is the reconciliation of GAAP gross margins to adjusted gross margins.

The lower gross margin is due primarily to product mix with an SSO sale. R&D expenses for the quarter were approximately $2.5 million or 4.7% of quarterly revenue as compared to $1.8 million in the first quarter of 2015. The increase is driven primarily by increased investments in clinical trials. Selling, General and Administrative expense was approximately $40.6 million for the quarter or 76.2% of quarterly revenue as compared to $29.3 million or 79.9% of quarterly revenue in 2015.

During the quarter we added 18 direct sales reps, bringing the total direct sales rep count to 251 at March 31, 2016. The year-over-year increase in SG&A spending due to the continued build out of our direct sales force in both home caring surgical costs, new product launch costs, additions to the reimbursement teams and other support area as well as the Stability Biologics personnel and associated costs. Also included in SG&A spending was approximately $713,000 in onetime costs related to the acquisitions.

The company reported a positive adjusted EBITDA of $9.1 million for the quarter ended March 31, 2016 as compared to $8.8 million in the first quarter of 2015. It is the seventeenth consecutive quarter of reporting positive adjusted EBITDA. Included in our press release is a reconciliation of adjusted EBITDA to reported net income. Any improvements were driven by increase in sales volumes. GAAP operating income in the first quarter was approximately $1.5 million or 2.7% of quarterly revenue which includes $2 million in charges related to the Stability Biologics acquisition.

Operating income excluding acquisition related purchase accounting and one time charges were $3.5 million or 6.5% of revenue as compared to Q1 of 2015 operating income of $4.2 million or 10.4% of revenue. Lower operating income in the quarter was driven by the investments in the clinical trial in additions to the sales and marketing organization for both wound care and SSO markets and including the additional personnel added to the acquisition.

The company reported net income for the first quarter of approximately $1.2 million or $0.01 per basic and diluted common share as compared to net income of $4.1 million or $0.04 per basic and diluted common share in the first quarter of 2015. On non-GAAP adjusted basis first quarter net income was $4.9 million or $0.04 per diluted common share which is flat year-over-year. Please refer to the table in our press release for reconciliation of GAAP net income to adjusted net income.

It should be pointed out that in addition to the adjustments for non-cash share based compensation expense there are adjustments on an after tax basis for the cost associated with the acquisition of Stability Biologics as well as the normalization of book tax rates for both years. Turning now to the balance sheet, the company reported approximately $95.2 million in current assets including $15.1 million in cash, $2.5 million in short-term investments which are comprised of fully ensured and liquid bank certificate of deposits, $53.9 million in accounts receivables, $18 million in inventory and $5.8 million in pre-paid expenses and other current assets.

Day sales outstanding for the quarter were 91 days as compared to 93 days at the end of the prior quarter. We continue to add collections in field reimbursements staff to improve collection performance especially with new customers. Inventory turned for 1.8 for the quarter as compared to 2.7 at the end of the prior quarter. The reduction in inventory turns was due to the purchase of inventory as part of the Stability Biologics acquisition as well as our revenue shortfall from plan in the first quarter. Good will and intangible assets were $30.7 million and $33.7 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 $28.8 million as compared to $28.6 million at the end of the prior year with the increase in line with the growth in the business. During the quarter we recorded a preliminary liability of $33.2 million which represent contingent consideration payable to the former shareholders of Stability Biologics based upon a formula of sales with direct production cost for the years 2016 and 2017. Contingent consideration is recognized at the estimated fair value on the acquisition day. Subsequent changes to the fair value of contingent value are recognized in earnings. The earn-out consideration will be payable comprised of 60% cash and 40% in shares of company stock.

Turning now to the cash flow, the company reported negative cash flow from operating activities of approximately $1 million for the quarter driven mainly by the customary first quarter for annual incentives and year-end commissions and approximately $4 million in working capital impact due to the acquisition of Stability Biologics. Cash used in investing activities includes $2 million in fixed asset purchases, $7.6 million related to the purchase of Stability Biologics. Cash flow used in financing activities of the quarter includes $3.5 million for share repurchases bringing the total cash used since the inception of the program to $49.2 million. There is approximately $10.8 million still authorized under the current plan. And finally, we added a total of 56 associates in the quarter bringing our total head count to 600. This includes the Stability Biologics team.

Turning now to our guidance, MiMedx estimate second quarter revenue to be in the range of $55.7 million to $57 million and full year revenue to be in the range of $242.5 million to $250 million. Previous guidance issued on January 10, 2016 was for full year revenue to be in the range of $260 million to $270 million. The company is guiding full year 2016 adjusted earnings per share estimated to be in the range of $0.30 to $0.32 per share as compared to $0.33 to $0.37 per share in our previous guidance.

Please see our tables included in our press release for our reconciliation of GAAP EPS to adjusted EPS and finally, my medics will be participating in the Deutsche Bank 41stt annual healthcare conference in Boston on Thursday May 5. We will hold our annual shareholder meeting at our West Oak parkway facility on Tuesday May 18. Please check the investor relations page on the website for further update.

With that I will turn the call back to Pete.

Pete Petit

Thank you Mike, let me again reference this smart track publication which came out on Monday. We believe the data that we see in there is relatively accurate to very accurate and if you read the report carefully it should clear up a lot of myth that is relative to revenues in this particular sector of healthcare. Let me add one other thing. I know this frustrations with shareholders because I receive calls about our stock performance. We are currently very undervalued or certainly undervalued, let me put it that way.

But today, for instance, the XBI [ph] which is one of the industries we are involved and MBI are down 3.6% and 2.1%. We get dragged around, our stock gets dragged around by these industries because the market is considered bio-tech is high risk asset since last August and we are out of favor at this point in time. Our company in terms of our growth rate, cash development and all of our asset base is certainly not the normal bio-tech companies. Many of those companies don't have revenue at all and if they have revenues and they don't have profits. So at some time of the year when the biotech sector is not as much out of favor. We'll certainly I think move faster than the rest of that group as we become fairly again.

Okay, let me go ahead and open the call up to questions and answers. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Matt Hewitt with Craig-Hallum Capital. Your line is open.

Matt Hewitt

Good morning gentlemen. Thanks for the update and for taking our questions.

Pete Petit

Good morning, Matt.

Matt Hewitt

Couple from me, first, in the SSO segment, how much of I don't know if very is probably the right word, but how challenging is it to get the hospital purchasing managers to open the doors to get these new products in? And how quickly once you're in are you able to make some meaningful progress within those facilities?

Pete Petit

Well Matt, let me make a quick comment and Bill and Chris can fill in detail. It simply comes down to get these assessment committees, they are all today very dominant in most of the medium to large sized hospitals. It's not an imprudent thing to do. The hospitals today are certainly on the cost pressures and doctors can be sometimes whimsical about the products they want to use, these committees have brought a strong discipline to it. We don't have a problem in getting turned down, it's just a case of getting through the process. And so, once we get through the process, physicians generally speaking, if wanted to use a product that's why it got referred to the committee. So it's generally a case of physician have interest in the product and using it, has to be referred to the committee, through the committee then we go from there.

Chris Cashman

The only thing I would add to that Matt would be that usually it is either one doctor or a group of doctors that are interested, he goes through the process. Once approved, then it simply relies on the experience that they have from thereon. I mean certainly the opportunity is open. We bring our clinical and science compare and then it's just a process as to the applications and the procedure expansion from there.

Matt Hewitt

Okay. Thanks. Go ahead.

Pete Petit

I'll just add Matt that in some cases it takes a little bit longer when there are at least a perception of the purchasing agent that there is a lot of products in the category, even though our data many times suggest differently that we're actually different and unique compared to those. So sometimes the more apparently crowded it is, it just takes us a little longer to get through. Doesn't mean we won't get through or have trouble getting through, it's just effect of timing.

Matt Hewitt

Okay, understood. And then one more for me, so I attended the SAWC last week and sat in a number of presentations. And there was a couple of things that stood out; number one, doctors that were presenting all of them, every single one of them said that as a treatment of last resort they were trying EpiFix, AmnioFix and showing remarkable results. They would show the before and after pictures, but it was always as a treatment of last resort. What are the hurdles to make your products a treatment for the frontline? When that patient presents, whether it's a diabetic ulcer or venous leg ulcer, whatever the wound is, what's it going to take your products to move up into the treatment paradigm? Thank you.

William Taylor

Thanks, Matt. I think that's kind of a misperception. Generally when physicians show those kind of posters, it's one of the first time they use the product, okay? And I think we've told people for the last four years, our best-selling tool is very simply saying, here doc, use an EpiFix, use an AmnioFix, particularly EpiFix, use that EpiFix on one of your hardest to treat patients, and you'll be coming back and start treating on all your patients with chronic wounds. So I think that's what generally happens - and at these trade shows, they don't spend a lot of time at the trade show showing the common everyday wounds. They typically want to show case studies on wounds or issues that are particularly difficult. If it's common every day wound, they have a harder time getting their posters published.

So I understand how you get a perception like that, but that's a misperception in that, people only use on those hard to heal wounds, because our data shows and the volume of our graphs that are going do show that physicians are using these on every day chronic ulcers are getting some great results. But what happens with those kinds of train wrecks if you will, those are the ones that are the easiest thing to get doctors to be believers on how well the tissue works and how we differentiate against the competitors.

Chris Cashman

If I can add one more thing to Bill's comments, it also I think is what you're hearing that is very often these patients were not in wound care clinics or they were not with that doctor but they were referred in when the wound has progressed to the point where it's just recalcitrant and not healing. And so, so many other products or alternatives have been tried and EpiFix goes on and hence you might hear that this was the last resort, but it truly is the first time the doctor may have seen them. So they would have used it upfront and earlier, but the reality is and sadly a lot of these patients don't ever make it out of the primary care until again they are in extreme situations.

Matt Hewitt

Do you think that there is some education that's being missed with those primary care physicians? I'm sure your sales force is trying to get the number but do you think maybe that's created a little bit of an impediment or maybe there is some reimbursement? I know you guys have tackled a lot of that and garnered a lot of reimbursement over the last couple of years, but is there still some pockets where last piece once you've garnered the last piece of reimbursement or last physician's trained that you'll see those patients getting much earlier treatment with EpiFix or AmnioFix.

Chris Cashman

I think it's a market dynamic in general. I mean we talk to the wound care centers and program directors, on a constant basis. They are always looking for referrals and the doctors are always working with their peers for their referrals. We certainly have had a concerted effort in education as well as in our marketing programs. But the reality is that these wounds very often present in all different sites of service. And so you heard the numbers that Bill quoted earlier, the market does continue to expand and we think that we've played a part in that and we think that amniotic tissues have played a part in that, EpiFix. But there does need to be more concerted effort to get these patients into wound care centers and treated earlier and I think if that can occur, then you are going to see the cost and economics are going to come into play and the value proposition makes a lot of sense, less amputation.

William Taylor

And I'll add to that, this is central to what we've been discussing for years as well and out of the well over a million people who have chronic wounds that need to be treated with some sort of advanced therapy, when you look at the DFU and VLUs put together, it's over 1.3 million, 1.4 million cases. Only somewhere around 10% or less, probably less than 10% of those cases are actually being treated by some kind of advanced skin substitute. Part of the problem is as Chris mentioned, a lot of these people being treated by primary care physicians that are not experts in wound care and they just some very basic treatment. I think for great news that people that have this condition as - indicated, this market in the last year has grown by 17% whereas the growth in the wounds, the chronic wounds are probably in the mid-single digits.

So what that tells us is we're getting now - more people are being treated now than previously who were not being treated and it's because of the dynamics of where the majority of people are being seen. We're trying to work with a lot of people in the industry right now to help educate these general care physicians to get these people into wound care specialist, because not all these wounds are easy to treat. They are very stubborn wounds and take a long time for them to heal.

Matt Hewitt

Great. Thank you for the question - for answering the questions and keep up the good work.

Chris Cashman

Thanks, Matt.

Operator

Thank you. Our next question comes from Bruce Jackson with Lake Street Capital. Your line is open.

Bruce Jackson

Hi. Good morning and thanks for taking my questions. So two questions, you mentioned the sales rep total at the end of the quarter was 261, can we get the numbers for the wound care and the SSO sales force?

Pete Petit

I don't think we've ever broken those out, Bruce.

Chris Cashman

We did in one of the calls earlier but I don't have them right in front of me. It's roughly - if you look at SSO, that's our direct salesforce, as well as our sales force that manages our sales agents. And rough numbers probably right around 40, may be 40 plus on the SSO side, that would include some of the people from Stability Biologics so that puts us at 45 or so, there may in the balance would be wound care so, that's a ballpark, we might be off a couple of numbers so we might be pretty close.

Bruce Jackson

Okay. And then in the press release you talked about new OrthoFlo II product. Can you tell us just a little bit more about what the features are for that product? How it differs from the first OrthoFlo product and if you are still looking to launch that in the second half of the year?

William Taylor

Well, what we said in the press release is about as far as we are going to go for competitive reasons but I think what we can say is we do expect it to be in the second half of the year. Early second half it will have that out there and it will have some distinct logistical advantages over our competition and initial version of OrthoFlo.

Bruce Jackson

Distinct logistical advantages?

William Taylor

Yes, let your mind wander.

Bruce Jackson

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Joe Munda from First Analysis. Your line is open.

Joe Munda

Good morning guys, thanks for taking the questions. Real quick, on guidance. I went back and looked prior to the acquisition of Stability and the guidance range was about 245 to 255. Now you are looking at 242 to 250. Can you give us some explanation of the delta there and what we are seeing. For the first quarter, I can ever remember wound care on a sequential basis is down so any help there would be great as well.

Pete Petit

Well, first of all this is Pete. Let me just simply say that when you have an issue develop like we had, you become conservative to very conservative. You go back and track what happened and you do all the analytics you can and you get very conservative so let's start there. Now you raised a couple of questions and eyebrows are going up and Mike is trying to pull those metrics up because we don't know. I think you are talking sequentially fourth quarter first quarter, is that what you are talking about wound care being down?

Joe Munda

Yes. I am showing wound care was 39.9 last year versus 39.3 this quarter.

Pete Petit

Well, remember that one of our main issues first quarter was related to the fact that the majority of our revenues come from wound care and our system knew, our sales management system affected our wound care revenues frankly much more than they did SSO because of the large volume there. Our sales efficiency went down considerably in the first quarter in wound care because of the system issues.

Chris Cashman

And if I can just add Joe, also seasonality wise is the strongest revenue quarter and Q1 historically is the tightest just because of the deductibles, coming off from the end of the year, deductibles reset, some insurance policies and all those things so, it was just an aggregate of all that occurring, probably what you are seeing.

Pete Petit

Joe, I didn't want to speak off the top of my head so I looked it up but in the first quarter of last year our sequential wound care was down 8%.

Joe Munda

Okay. I got you.

Pete Petit

We actually performed better than the previous year when we looked at that so.

Chris Cashman

We weren't affected as we should have been.

Pete Petit

I am pulling up the numbers. Okay. So it was we were at 32.2 and we went down to 29.8. Okay?

Joe Munda

Okay. I think I guess on the guidance, between the $242 million to $250 million now, I think Pete you touched on it, can you talk a little bit about maybe what Physio attributed in the quarter, I know you don't break it out. But any thoughts or comments and how would you look at this going forward for modelling purposes would be great.

Pete Petit

Well, let me make a comment to that. Found out in the last couple of weeks, people missed. With Stability Biologics $19 million and $20 million revenue base that you have seen in our publications, our disclosures that were predominantly distributor based revenues. They were buying someone else's product and reselling it. Remember the sales force they developed to do that was one of our primary focuses. We wanted those independent sales reps who had generally meddled in their in the bag etcetera. They became in effect January 1, or towards the end of fourth quarter, a manufacturer which is totally different.

Basically got rid of those other products in general so the revenues basically starting over in January as a manufacturer. So some folks missed that and we discussed that in our introductory call that they were becoming a manufacturer in January and revenues didn't drop to zero but they dropped significantly. Someone asked me did you just take the $20 million revenue to $15 million. I said no, we took them to zero and basically built them up to $15 million. So, you have to take that into account and Physio was a very small percent of revenue from Stability some of the other products were the majority of revenue from the first quarter.

Joe Munda

Okay. But I mean with the guidance you just put out its assuming that it is zero right? I mean, $242 million to $250 million prior to the acquisition was $245 million to $255 million?

Pete Petit

Well, I used the word conservative okay? And we have given you some expected growth rates in wound care. You see what we are doing there and we are just going to be very conservative with the surgical side of the business till we see some of these things developing and hopefully, we'll get back in the mode. We hope and we try to plan to get back in the mode of being right. I mean that's what everybody would like to see including the executive management here.

Chris Cashman

Joe, just to recalibrate, we did that on December 16th, obviously we did anticipate the issues we had in the first quarter here with the system integration and like. So we're starting from a bit of a shortfall to begin with.

Joe Munda

Okay. And then, I mean the last question, as far as that goes - the tissue tagging, what did you guys do before you implemented this system because I'm having a difficult time trying to understand how this has never happened before?

Pete Petit

What's never happened before?

Joe Munda

Where you had multiple reps, I mean the sales force is exponentially bigger than it's been in the prior quarters and how you've never had this tissue tagging issue where one rep, like you were talking about that one guy goes to the podiatrist; the other guy goes to - for the prostatectomy. How did you guys deal with that in the past?

Pete Petit

Joe, remember that and up until the beginning of the year we in essence were using one salesforce and all these different specialties. And so the sales representatives, although they did tag often in the wound side, they did not have to tag all the tissue. Now that we've gone through a re-alignment and now that we have these lanes that we're focusing for these sales teams the tagging has become more important. So when we talk about tagging and some of the hiccups going through Q1, that's why, that distraction of learning that process. So that it feeds into salesforce so that it feeds in inventory, it feeds in our SMS system. That's more about the process or procedures that we're implementing and less about how we did it historically.

William Taylor

Historically it was done automatically, each product line automatically went to one sales rep which is different than the way we're doing it now. So they didn't have to manually do it, it was all automatic.

Joe Munda

So what just left is almost cannibalizing the other up, is that what you're saying?

William Taylor

Not cannibalizing…

Pete Petit

No, no, it's just more of a clean cut now. So if the sales representative sells into the abdominal pelvic area, then that AmnioFix goes to that sales representative territory. If the sales rep is an EpiFix rep then obviously when EpiFix is tagged, it goes to that sales representative. So it actually makes it cleaner now as we've gone through the new alignments for the salesforce.

Joe Munda

Okay.

William Taylor

There were commission issues there and argue much and those kind of things and we weren't effectively managing the SSO part of the business. As it grew, we had to be their part as any company would have done and we now have two separate sales observations.

Joe Munda

Okay, that's all I had. Thanks.

Pete Petit

Thank you.

Operator

Thank you. Our next question comes from Mike Matson with Needham & Company. Your line is open.

Mike Matson

Hi, good morning. Thanks for taking my questions. Pete, I appreciate the commentary around the trends that you're seeing in the first few weeks of the quarter but I guess what I was wondering is, how back-end loaded are your quarters typically? Is there a risk here that you're coming in the quarter, you're growing 25%. I understand you're not necessarily seeing - you're going to do 25% for the whole quarter but you get into the back few weeks of the quarter and some sales don't materialize and end up coming in below expectations again.

Pete Petit

Well Mike, I think in our part of the business generally, the third month of the quarters where our sales organization and the rest of the organization gets very focused on cleaning a lot of matters up. There is tissue out there that's been implanted during the quarter that doesn't get processed until towards the end of the quarter. It happens also on a monthly basis where tissue will be implanted and then the sales people get around to chasing their commissions and cleaning that up at the end of each month. So I don't see those things coming out and glued at the end of - in the third month of this quarter. We've been - I think as open as we can be, and you know pretty much everything we know about what caused the issues first quarter and they are generally systems related. And it's encouraging to us, that's why we gave you the metrics that the first three weeks of the second quarter are dramatically different than the first three weeks of the first quarter because of these, generally systems related issues. So we think we're on the right track now and growth should be more predictable etcetera but because of those kind of questions, we're trying to be very conservative, see where it goes from there.

William Taylor

Just a quick addition to that is, after a tissue was implanted, it can be a week or it can be several weeks after its implanted before we actually get the purchase order. And we don't book the revenue until we get the purchase order. So the tissue might have been inflated 2/3/4 weeks before we actually counted as revenue. So that's an important piece of it. As Pete mentioned at the end of every month, we tend to see an uptick because the reps are chasing down their purchase orders and trying to get the hospital issued, I mean even though the tissue was planted or implanted earlier in the month, same thing at the end of the quarter.

Mike Matson

Okay. And what about sales to the distributor, the stocking distributors on - as the sell side, is that or backend loaded typically?

Pete Petit

Yes, there is a bit of that but we really don't have - we've reduced our distributor relationships considerably. Even in SSO we have - most of our feet-on-the-street or independent sales reps, their commissions - sales agents.

Mike Matson

Okay, all right. And then, you may not answer this but I'm going to ask it anyway, I'm kind of following up on Joe's question. You guided to $15 million of stability sales originally for the year, I think. So can you tell us what - with your new guidance how much you're assuming for stability?

Pete Petit

I will just talk in terms of total assets. We said this on the other call, we got asked the same question. What we want to try to do is - we will do is roll stability up now through the SSO side of the business. So you'll see it in there and we'll give a point, we'll get the point where we answer some questions specifically on their main product lines which is Physio, the bone growth product; and their burn products will give you some insight there but right now I just rolled up through the SSO side of our guidance.

Mike Matson

Okay, all right. It would just be helpful to sort of know the contribution from that versus the base business, kind of - to get that sort of - what's the organic growth?

Chris Cashman

I think you've got to look at again what we did it as stability as a couple of different things. One of them is, if you give us access to their rep network and that should contribute revenue 'from our base business'. As Pete mentioned, we have reduced our dependence upon distributors in the SSO market but we got to replace it with something and so you're replacing it with these reps. So a portion of the acquisition was really - to take advantage of their rep network. And on top of that you have new products like a Physio. So I don't think it's as clean as you think it is Mike.

Pete Petit

Well, at same time Mike, I probably understand we're one of the reasons for the question is, we need to be graded on how well we do acquisitions. You guys want to figure out as we go through the next couple quarters that we blow it here with a bad acquisition or we've got an acquisition that's going to pay off nicely for us.

William Taylor

Like our first one.

Pete Petit

Like our first one. So I think you're going to find out that we've done a good job with this but at the same time we'll give you some more metrics that you can wrap your forecast around and understand how where we do those kind of business transactions.

Mike Matson

Okay. And then just of the original guidance that you've given for stability down under $15 million. How much of that would have been for - was that all from the stability products themselves or did that include some of the cross selling that Mike was referring to?

Pete Petit

It included a little bit of still some distributor but that wouldn't have lasted much it passes first and certainly second quarter. But most of it was their particular product. [Cross Talks] Yes, they get - when they cross- sell our products they get credit for it.

Mike Matson

Okay, all right. And then can you break out the growth of government commercial sales was in the press releases time?

Mike Senken

Mike, we're not going to break out those specifics anymore.

Mike Matson

Okay.

Mike Senken

We have said before we have a process going on where as we announced a while ago that we are starting to sell, in some cases, direct to the government as opposed to sell through distribution, and that program and that conversion continues. But in light of competitive situations and the like we really don't want to get down into that level of detail, and also recognize the sensitivity of these relationships.

Mike Matson

Okay, I understand. That's all I have, thanks a lot.

Mike Senken

Thank you, Mike.

Operator

Thank you. Our next question comes from Jason Wittes with Brean Capital. Your line is open.

Jason Wittes

I wanted to ask first about your - you made a comment with SSO and going through the committees and having the clinical data in place. I guess I'm wondering, do you have all the clinical data in place for all the products that you offer? And could you kind of delineate kind of which products you think have data in place and which may not, and how that's impacting the decisions of these committees?

Pete Petit

There is a protocol we always have data, the question is, is it enough. You start with some - with case studies, then you go with a published case study series, then you get in randomized controlled trials. Bill, Chris, you want to…

Chris Cashman

Well, I think obviously the Amniotic lines are well known, you've got a plethora of 25 plus clinical trials, six RCTs done, the Amnio Online, another 27-28 industry - I'm sorry, physicians sponsored, so clinical trials on top of that. So the science in the clinical and our core businesses is incredibly strong and of course, from that come more the flow AmnioCord, EpiCord and so they are all further well covered and understood, both scientifically and what the clinical possibilities are. As you start to look at - CollaFix, that will become well studied as we go through the 510(k) process. We do have some historical data on that that will show of the research work on strength and viability.

As you look forward on the stability side, again, we understand it from a scientific standpoint, we continue to study it, we share that with the committees and part of the packages. We've got some case worked as well and we're - I think we've said in the past that we're now seeing out the clinical trials that we want to do next, both for a Physio as well as on AlloBurn, those two lead products. So we continue to build that, it doesn't necessarily always mean that you don't get through with that, you do. And they'll also do their own work internally within the facilities, and that's an important criteria here too. So it really ends up being there.

And let me add one last thing, the GPO and IDN arrangements that we have are also a key piece of this because they've come to expect a certain data portfolio from us, and we've worked well together. So that also lends creating some credibility to the process.

Jason Wittes

Okay. So I was thinking also, that's very helpful. But I was thinking for some of the surgical operations, for instance, prostatectomy and things like that. You mentioned that it's being used as a barrier plus, I think you're saying you can make claims that it also reduces scar tissue? Is that something that's accepted by the committees or is that something that you're building the data case for, how do we think about without - in those circumstances?

Pete Petit

We have 16 to 18 clinical studies going right now, and again I'd add to those, we're spend millions and millions of dollars a year with all types of surgical clinical studies plus additional wound care clinical studies. And it's - you'll never have enough in my opinion, you never have enough clinical data and scientific data to just keep pounding away, pounding the why, each committee is different, each hospital is different. But Jason, we will just continue to pour a lot of our assets into these studies and try to stay way ahead of the needs.

Jason Wittes

Okay, thanks. For me one other question I'll jump back. You mentioned stability had a lot of impact, had some - a lot of different impacts on the balance sheet. I'm looking at DSO, they look like they actually going down a couple days which was good but I'm wondering if there is Stability impact on accounts receivable and how that may translate on DSOs?

Pete Petit

Stability DSOs are in line with our direct DSOs.

Jason Wittes

Okay. Fair enough, I'll jump back in queue, thank you guys.

Pete Petit

And do understand that this management team, we understand the importance of bringing DSOs down so does up board and we work at that continuing. Mike's added a lot of staff on the collection side, just a small physicians that offices we keep adding. We added or some new clients each quarter, 404 in quarter four. Just keeping up with that keeps us busy but we understand the importance of cash just gang of understand the collection issues.

Jason Wittes

I appreciate that as well, thank you.

Operator

[Operator Instructions] And we have a question from Mark Landy with Northland Capital Market. Your line is open.

Mark Landy

Good morning folks thanks for taking my questions. I guess it's been delved into a lot so I will try to keep my questions short and maybe look at it this way. How should we think about the Stability earn out based on when you announced the transaction versus now guidance, how does that change?

Pete Petit

Well, as you know it's a 2 year earn out and it's based on their contribution margin, I will call it gross profit margin which doesn't have normal overhead embedded in it so it is an easy to calculate metric but it does hold them accountable for producing that have good strong contribution or gross profit margins. And so they should be quite focused on that as they are and we are helping them with that.

The projections that we probably published that become part of the purchase accounting added non-cash charges may change so, quarter by quarter we will see where that goes but we took their forecast, took them down somewhat but over the next year, the first year I can't tell you where it will be. Their Physio product has huge potential, there other products have strong potential, we just have to see them going through the manufacturing facility out the door and get bailed in revenues. So we are still going to play that by ear by the risk, that's why we do transaction in nature which has an earn-out associated with it.

With new products new companies in the manufacturing field here, there was too many questions. We weren't going to do more than the down payment we made and the rest of it we have to see how it plays out so, that's about all I can say about it.

Mark Landy

So Mike from an accounting perspective, is it going to be an annual adjustment or will you adjust it quarterly?

Mike Senken

Well, you have to review it on a quarterly basis. The valuation that we developed initially is preliminary and we are looking at that to see whether or not any changes are appropriate. But we are allowed by GAAP to take a look at that. But at a given point in time, once we solidify what those projections are, then what you do is you analyze that earn-out on a quarterly basis and if you have sufficient evidence that it's going to be higher or lower then you book it in that given quarter.

Mark Landy

Okay. Fair enough. Alright, I guess there is a question for Bill. Bill relating to the answer you gave on OrthoFlo, I just wanted to get some clarification. I think the way I read the press release is that there is new product coming in the OrthoFlo family which is yet to be announced and then there is an update or second generation of the current product which has been already released. Is that the correct way to read it or is it one product that you are updating?

William Taylor

You may have confused yourself, it's one it's updated, you can look at it as new product in the OrthoFlo line but it's the same thing. So there is not two different OrthoFlos but just one.

Mark Landy

And is that for the same indication?

William Taylor

Yes, same indication yes.

Mark Landy

Alright then, I just got to make sure that you don't give us the reasons for the changes and what you learnt from the initial roll out. I think you are ready to over set that internal correct.

William Taylor

That's right.

Mark Landy

And I just maybe having a look at the prior guidance versus the current guidance so not getting to hold the numbers to decimal points, it seems that wound care for the most part, is in line with what guidance was practiced stability and FDA, the majority of the shortfall there has been a reduction in stability, not stability, SSO from the prior guidance given in December. But if we have a look at the make-ups of where the headwinds have come from, I think you've mentioned manufacturing constraints, delays, and with value-added committees. And then obviously salesforce disruptions, I mean that's a combination of obviously adding stability and then also which was discussed at the analyst meeting, splitting your internal salesforce into the two distinct channel; the SSO and wound care, which in its own creates a lot of headwind. Can you just help us understand how you resolve those as you go through the year? Which are the easy one to resolve? Is the manufacturing constrain something that's - either got to grasp around, they can get through they can get through within the next quarter. Data full value-added committee, his data is six-month process. So now as we look at the year and we see the current headwinds, how do we think about those kind of trailing all that we can get to just a normalized sales business?

William Taylor

Maybe I can quick comment, it's - I think all of us would simply say quarter-by-quarter here. Those had when should diminish. We keep bringing clinical data and here, every week every month, that's impactful. The manufacturing efficiencies at our San Antonio facility are proving. rapidly, MiMedx's has done an excellent job over the last four or five years of improving our manufacturing facilities, becoming very, very briefly integrated.

In terms of our processing, we're doing the same thing with our same management team to assist surgical biologics while improving those processes and their San Antonio facility. So I expect we'll have a really effective that will improve quarter-by-quarter. And then there is sales issues we've had with our sales management system. It's a process there, it's a system improvement that you make each month ago by. But at the same time it's management finally learned the system using it very effectively, individuals themselves begin to use it very practically. And again quarter-by-quarter, we should get increase in efficiency there.

I will start on the operations. I too just talk a bit more than Chris can talk a little on the sales but. I have likened this to on the stability side. Very much like several years ago when we acquired Surgical Biologics, it took us the first couple of months to really understand the operations and what we could do to streamline it. And really the next three months there was a noticeable improvement in the operations, gross margin, streamlining, updating even in the same facility, increasing capacity where you know by using some linked manufacturing techniques and then probably over the course of about a year or 18 months, we continue to make improvements.

I expect with stability we're going to be doing the same thing so. We've got a pretty good handle now on some things that we can do in the short-term, improve capacity, improve margins, we'll be implementing several of those things this quarter. The bigger impact will likely be in the third quarter but we should still have an impact in the second quarter, and continue to roll that out through the year. Chris?

Chris Cashman

Yes, I would put it into three categories on the sales side. The VAC committees will continue to progress, as we go through these quarters there will always VAC committees at various hospitals but I think that as again more reference centers, and as we have more successes within these GPO, IDN aligned facilities, that will get better as the quarters go on but it is a process and it will certainly continue through this quarter Q2. Secondly, as feature the SMS system, gets ingrained this past quarter, now we're more into business planning and getting better returns on that. And I'll add to that that in my comments we've added now 20 new additional direct surgical reps for the abdominal pelvic area; they need to get established, they need to get integrated in the process, they need to get - obviously, a fine understanding of the VAC committees and the processes and their facilities and their territories. As we get better at that, then you'll see continuing returns on those efforts. Where wound rep normally took up to six months to begin to get established historically, I think because we're starting work from ground zero in the surgical area, it might take a little longer, maybe six to nine months, directionally.

And then the final part of that is the integration of stability into our SSO network and the Regional Sales Directors, we used to manage those agents as well. And again, we had great meetings this past week, looking across selling opportunities and how to manage the various agency networks and how to get the most out of that. So that's going to continue through this quarter and again. But I think it is a quarter-by-quarter thing as Pete said, I just want to give it a little more color.

Mark Landy

Just two quick follow-ups. Bill, where are you on your yields. I mean where are they now and where do you need them to get to? And then just lastly for Chris, Chris as you go out as independent guys, independent reps and you renegotiate contracts with them, are you able to do that all at once now? Do you have to wait until the anniversary and do the enrolling? That's all I have.

Chris Cashman

On the agency agreements, we do look at those continually. They are obviously, usually annual agreements, they can be renewed, they have quoters within them. So we look at the quotes, we look at the performance, we decide whether or not to renew and move forward. So we're not really doing it all at once but what we are looking at quarterly to decide whether the relationship is bearing fruit and whether or not, we want the continued investment.

And on the yield questions, without getting into any detail here I can say that we're almost never satisfied with the yield that we get out of any of our production, we always want to find ways to increase the yields. I will say on the stability side, after our reviews there is substantial room for improvement and efficiencies there, much like there was on the surgical biologic side five years ago when we acquired them. So we expect to see some pretty significant changes over the coming quarters.

Mark Landy

Okay. So good work to do on stability. All right, thanks guys. I appreciate the time.

Chris Cashman

Thanks.

Pete Petit

Thank you.

Operator

Thank you. I'm showing no further questions at this time. I would like to turn the call back to Pete Petit for any closing remarks.

Pete Petit

Thank you. Well, it's been almost an hour and a half. I hope we've conveyed a good deal of information that's informative and help you put the pieces together. I think that a track record up to this point has been almost flawless. We apologize for the mist but you've seeing the way professionals - give me professional experience to become executives, manage things and we'll pick it up from here and hope we continue to make good progress here quarter-to-quarter. And again, our goal is to meet and exceed. Thank you very much.

Operator

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

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