MiMedx Group's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Mar. 7.13 | About: MiMedx Group (MDXG)

MiMedx Group, Inc. (NASDAQ:MDXG)

Q4 2012 Earnings Conference Call

March 7, 2013 10:30 ET

Executives

Thornton Kuntz - Vice President, Human Resources and Administration

Pete Petit - Chairman and Chief Executive Officer

Bill Taylor - President and Chief Operating Officer

Mike Senken - Vice President and Chief Financial Officer

Analysts

Matt Hewitt - Craig-Hallum Capital Group

Bruce Jackson - Northland Capital Market

Kyle Rose - Canaccord

Operator

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2012 MiMedx Group Incorporated Earnings Conference Call. My name is Gwen and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to your host for today, Mr. Thornton Kuntz, Vice President of Human Resources and Administration. Please proceed sir.

Thornton Kuntz - Vice President, Human Resources and Administration

Thank you, Gwen, and good morning to 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, 2011, and our most recent 10-Q. We do not undertake to update or revise any forward-looking statement except as maybe required by the company’s disclosure obligations in filings it makes with the Securities and Exchange Commission under federal securities laws.

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

Pete Petit - Chairman and Chief Executive Officer

Thank you, Thornton. We appreciate all of you joining us for our shareholder call for the fourth quarter and the year end of 2012. I have with me today, Bill Taylor, our President and Chief Operating Officer, and Mike Senken, our Vice President and Chief Financial Officer. Of course, Thornton Kuntz and there are some other members of the management team in the room.

First, I’d like to thank our management associates for a very prosperous 2012. There has been a great deal of progress made as a result of some dedicated and talented individuals. Also I would like to thank our Board of Directors for their diligence and oversight, which has kept our progress and procedures moving at the right pace.

To summarize the highlights of 2012, I’ll state the following. Revenues more than tripled from 2011 to 2012. Adjusted EBITDA went from negative to positive. We completed a number of clinical studies, including our first randomized controlled trial. We have crossed numerous reimbursement barriers including receiving our Medicare C-code for EpiFix wound care allografts. On the 1st of January 2013, we received our Medicare Q-code for that issue.

In addition, numerous health plans began to reimbursement for our allografts and we received the first approval by a Medicare intermediary for EpiFix wound care allograft. Also we added 28 direct sales people through our direct sales organization. Our employee base grew from 52 employees to 166 employees. We added some key members to our management team who primarily joined us from mine and Bill’s prior organizations. However, we brought to MiMedx an operational and manufacturing executive from Integra who has had numerous years of experience with tissue processing. Our first patent on our amniotic membrane tissue was issued. It was followed by four more patents in early 2013. We have selected a national exchange to consider applying to for a listing.

Now, I wish to take a few minutes to elaborate on some of these key successes and Bill Taylor will provide additional details. Our revenue growth accelerated dramatically during the year as we gained market presence in the wound care market for our EpiFix allografts. This was a result of hiring 28 direct sales persons, particularly beginning in the third quarter. By the end of the year, we have developed what we consider to be a very strong national presence with our sales force for governmental and military accounts. As government accounts do not rely on third-party reimbursement, we saw immediate results.

In addition, we started hiring sales persons to certain regions of the country as we obtained a favorable coverage to termination from the first of the nine Medicare intermediaries. We have had further successes during early 2013 with Medicare coverage of EpiFix. Bill Taylor will provide the details. The use of allografts has been robust physicians are beginning to understand the healing qualities of the amniotic membrane tissue and continued to press us for clinical studies that support use of our tissue products in numerous procedures. Therefore we are quite busy with the beginning and completing numerous clinical randomized controlled trials and retrospective studies to provide clear clinical and cost information on the performance of our allografts.

We have begun to realize that as the leaders in amniotic membrane tissue processing, we will have opportunities to expand the use of allografts in numerous healthcare procedures. Therefore it is in parity that we expedite clinical evaluations on a fast pace. Thus our costs associated with clinical testing were significant in 2012 and will be even greater in 2013. During 2012 the revenue mix escalated towards the EpiFix allografts which are used for external procedures such as wound care and burns. We expect that trend to continue through 2013 because of the broad acceptance of EpiFix grafts and governmental accounts as well as the expanded reimbursement coverage for EpiFix on the Medicare and the commercial side. We are also conducting more and broader clinical evaluations for our AmnioFix allografts which are used for internal medical procedures as well as the micronized version of that tissue which is used for injections.

Now as I have said previously it’s our goal to become knowledgeable about the scientific aspects of the potential medical uses of the entire placenta as well as the amniotic membrane. We will continue to conduct scientific tests that characterize all portions of the placenta in order to guide our product initiatives. We have conducted a substantial amount of testing on the amniotic membrane and consequently, we will be in a position to announce some additional clinical initiatives in the near future. However, we also view the remainder of the placenta is having substantial opportunity for us in medical procedures. Our goal is to find effective uses for all of placenta not just amniotic membrane.

We have put a substantial amount of time and effort in developing our placenta procurement system through hospitals across the United States. We hope to turn our placenta procurement system into a more effective corporate asset, so that no parts of these placentas are wasted and we will have byproducts from amniotic membrane tissue processing. As we previously discussed with shareholders, MiMedx is sponsoring scientific testing on our amniotic membrane allografts, which is being conducted at very well respected universities.

The results of those studies will further characterize our tissue allografts and the exact modes of action that takes place when they are utilized externally or internally. We expect this information to be very beneficial and assisting us to determine additional clinical uses for allografts. We feel strongly that data will indicate some significantly broader uses of these allografts although the regulatory pathways may be different from our other tissue products which of course are regulated solely on the Section 361 of the Public Health Services Act. However, the size of these markets will be such that those extensive regulatory evaluations will be certainly worthwhile.

As far as our guidance for the year 2013 we expect revenues to be – to approximately double and be in a range of $50 million to $60 million. For the revenues in the low end of that range and the up end of that range will largely depend on how quickly the Medicare intermediaries begin to reimburse for EpiFix wound care allografts and how fast we ramp up our sales force in those territories. Of the non-intermediaries, we have currently recently received positive notifications from five. The early as we expect approval for (indiscernible) would be July 1. However, some of these approvals may not come until the second half of 2013. This means that we don’t necessarily be conservative relative to the high wound care sales representatives for the commercial side of our business and to a confirmed coverage in these areas.

Just for a quick side note, wound care, the Medicare market is about 75% of the total and the commercial is about, our health plan paid is about 25%. So, our focus of course is on these Medicare intermediaries. Relative to our governmental wound care business, we expect to continue robust growth of approximately 15% quarter-over-quarter. We will continue to add our direct sales organization of the governmental accounts to reach approximately 35 members in that sales organization which should occur by the end of quarter four.

Relative to our AmnioFix products which are used for surgical procedures and in sports medicine, we are just beginning to conduct a complete clinical studies that would satisfactorily clear our reimbursement for that product line from Medicare as well as commercial health plans. While allografts and (indiscernible) were being used for these procedures. At the present time they are being paid for as part of the procedure DRG are being paid for by the paces of sales. So, the growth rate there is difficult to predict. However, we do expect to see at least 50% annual revenue growth as product area.

Relative to adjusted EBITDA, we expect to continue to show positive results and increasing adjusted EBITDA each quarter. However, the trade-offs are how fast we must say as sales people to ensure that we take advantage of all our growth opportunities in 2013. Therefore, EBITDA may move up and down from quarter-to-quarter as we make adjustments in our – the ads to our sales organization.

Let me give you a brief remainder of our sales structure, which should remain intact for an indefinite period. We focused on having direct sales force and governmental accounts as well as the commercial wound care accounts. Each of those sales organizations is currently being managed by our sales executive, Alex Harris on the case of our governmental business and Brian Murphy in the case of our Commercial Wound Care business, which includes Medicare.

On the commercial surgical and sports medicine side, we will have basically the same structure. For government use of allografts, we’ll continue to use our direct sales organization. For the commercial side, we will necessarily be required to use certain dealers, independent sales representatives, in addition to some of our own direct sales managers. The reason for this is that the market is so diverse that it would be important for MiMedx to have its own direct sales force in the numerous clinical disciplines associated with the potential uses of our amniotic membrane allografts. For instance, these various uses could range from plastic surgery, the sports medicine with private pay, the urology to ENT and so on. The distribution and sales rep focus for MiMedx is being managed by Bill Cochran. These three executives just mentioned all report to Mike Carlton, our Vice President of Global Sales.

Now, relative to MiMedx beginning to trade on one of the national exchanges, we have made some recent progress. We have had the time to vote to clearing up questions associated with that process and the results of such a move. We expect to have definitive answers for our shareholders by the time we make our first quarter report, which will occur towards the end of April.

Now, I’ll turn the conversation over to Bill Taylor. Bill?

Bill Taylor - President and Chief Operating Officer

Thanks, Pete. Good morning everyone. I also want to thank everyone in MiMedx for all the hard work and great results in 2012. I am proud to be associated with the team here. For the folks on the call, I’d like to also highlight for your reference we just launched an updated website yesterday. So, when you have a minute, please take a look, it also includes a whole new investor page that is much more detailed and better than our previous page. So, please take a look at it when you have a moment.

Before I get into the details of the quarter, I want to briefly review our business focus. MiMedx is a regenerative biomaterials company with applications in several areas of medicine. Our allografts are derived from a very special organ, the placenta and we continue to routinely find new uses and applications for this incredible tissue.

Our current offerings can be grouped into three categories. Wound care surgical, which includes spine, orthopedic, and sports medicine. And then our third is other, which includes our ophthalmic, dental, and other smaller categories. The wound care category is generally made up of our EpiFix brand. And the surgical category consists of our AmnioFix brand draws various private labels that we process and tell to others. Mike Senken will further elaborate on the quarterly and yearly breakdown of these categories.

Also I want to highlight that we have recently passed another milestone in terms of our distributed grafts. We now have distributed over 130,000 grafts and we are growing rapidly. On the operations front, I am going to highlight seven main topics. First is the new facility update, second placenta recovery network, third our intellectual property, fourth our scientific studies, fifth clinical studies, sixth reimbursement, and seventh our direct sales force.

Focusing on number one, our new facility update, as we announced last quarter, we have decided to move into an 80,000 square foot building, which is about 5 miles from our current location. Since that time, we have executed the lease and we have nearly finalized all the construction documents and our goal is to be substantially completed by early May and hold our Annual Shareholders Meeting at that new location. We will let you know if this will be possible as we schedule that shareholders meeting.

Our expectation is that our corporate offices will move by June and our tissue processing will be up and running in the new facility by July. Also recall that we will keep our current tissue processing facility in Kennesaw operational to serve as a disaster recovery location as well as our secondary processing capacity as our processing needs expand. The new facility should support sales of at least $200 million to $250 million in sales on a two-shift operation. Combining that capacity with our secondary facilities capacity we should have the facilities to process enough tissue to support at least $300 million to $350 million in revenue before we need another facility. So, we believe we are well-positioned from a capacity process or a processing capacity standpoint.

Second item, our placenta recovery network, during the year, we initiated a strategic focus to expand and further develop our national wide placenta recovery network. Today, we recover placentas in 19 hospitals in five states. In addition, we are in negotiations with several new hospital systems for recovery contracts that will give us preferred access into – in excess of 40 hospitals nationwide.

We expect that our recovery network will support our donor requirements well into 2014 and beyond. We will continue to broaden the average of our donor network in order to meet the growing demand for these amniotic membrane tissue allografts. Number three, our intellectual property, Pete mentioned we’ve announced some great news last month and that four new patents we look related to our allografts were issued, which brings our total patent coverage to five.

We expect at least one more to be issued over the course in the next month or two as well. The total number of pending applications is approximately 24. Our strategy has been to patent the key elements of the Purion process as well as the resulting EpiFix and AmnioFix graft configurations. In addition, we are developing several patent applications around our base patents to build the barrier of around that key IP making much more difficult for anyone to attempting replicate what we do.

If and when companies appear to replicate what we have under patent protection, we will notify those companies of our patents and then we will have a third-party analyzed their allografts and take the appropriate action based on those results. We feel very confident that our patent portfolio is strong and defensible and we will take any necessary action to preserve our rights under applicable patent law.

Moving on to number four, scientific studies, as Pete mentioned we believe that we are and we will continue to be the worldwide experts in amniotic membrane allografts. Our scientists have completed multitudes of study that quantify and characterize our process tissue. In addition, we periodically send our tissue to outside laboratories in order for us to receive independent results to validate our in-house results.

Recently, we published marketing materials from these internal and external studies that compare specific growth factor content in our tissue compared to various competitive tissues. In all cases, that we study, Purion process tissue yielded an allograft that is better retained, an allograft that better retained the overall milieu of growth factors, cytokines and other critical items that generally matched the results of fresh tissue whereas the competitors did not.

We have completed cell proliferation studies, cell migration studies as well as certain animal models, which showed some very interesting results. We have now identified in excess of 60 specific constituencies that are retained in our Purion process tissue. Those include various growth factors, cytokines, receptors, binder proteins, enzymes, and inhibitors.

We believe there are many more that have yet to be identified as well. This remarkable preservation result is due to very gentle nature of our Purion process, which is safe and very gentle to the tissue and remember it’s very key to remember that this process does not decelerate the tissue it does not decelerate the tissue. The cells remain but are not alive, yet the growth factors and so forth are still active. The university testing that Pete referenced earlier is a combination of in vitro and in vivo experiments and they are expected to take our understanding with tissue to yet another level.

Interim time points have confirmed earlier hypothesis and we are very excited about what we are seeing to-date. We expect to complete these studies and submit them for scientific publications as they are completed. We believe these results will be very impactful and have the potential to open new multi-billion dollar market opportunities for the use of this very special biomaterial made for placental tissue. We can discuss these results in more detail in the coming four to six months.

Moving on to clinical studies, we have made a tremendous amount of progress on our clinical studies as a bit of a refresher for you recall that our current and near-term growth opportunities all focus on our allografts that are regulated under Section 361 of the Public Health Service Act. They are human cellular and tissue products or otherwise known as HCT/Ps. Therefore, no 510(NYSE:K) or PMA or BLA is needed. But the reason we are performing these studies is to augment our reimbursement efforts and our sales efforts not for regulatory purposes.

Also as a reminder, we completed our first diabetic foot ulcer trial mid-year last year and you recall that we had a 92% healing rate in six weeks compared to about 8% healing rate for standard of care over the same period of time. The conclusion of that first RCT, we offer this standard of care patients the opportunity to participate in a retrospective cross-over study meaning we gave them an opportunity to have EpiFix applied. Not surprisingly more than half healed in four weeks, remember this is a group that only had 8% healing in six weeks with standard of care. So, more than half healed in four weeks or less and 91% healed in nine weeks or less. So, again this is the same group that only had 8% healing with standard of care. So, this study has been accepted for presentation of the upcoming symposium for advanced wound care meeting in Denver in May this year. So, we will have a good poster of presentation out of that retrospective study.

Our second and third perspective RCTs for diabetic foot ulcers are also underway, the second has enrolled about half the total estimated participants and is progressing as expected. The third has enrolled it’s first patients but enrollment is slower than anticipated. We are actively looking for additional sites to speedup the enrollment process. The venous stasis ulcer study that was started in the early part of last year is at the midway point in enrollment and we are also looking to accelerate its enrollment by adding additional sites. We are in that process right now. We should be in a position to conduct an interim analysis over the course of the next few months.

Our micronized amnion or our injectable version is being evaluated in an RCT for randomized controlled trial for plantar fasciitis and has completed enrollment. And all patients should exit in the next three to four weeks. The interim data looks good and if the final data is consistent with interim data, in my view we will have some very strong material for publication and sales aids. That is using what we will be launched in a few weeks is our EpiFix micronized allograft. So it’s similar to our AmnioFix injectable, but its uses are EpiFix configuration. We are also finalizing our protocol and IRB submission for epicondylitis RCT, so tennis elbow, golfer’s elbow. We should get this study started shortly. The group we contracted would expect to enroll 10 patients per week, so if those numbers hold it should only take a few months the complete enrollment process. We have a number of other studies under consideration at this time and we will report on those in future calls as well. But we feel very comfortable with the progress we have made.

Next item, reimbursement clinical summary that I just described really feeds the reimbursement story. I am very pleased to announce that we are ahead of our schedule with respect to our macro Medicare intermediary recoveries for our EpiFix Q-code Q4131. Our reimbursement and clinical teams have been working very hard for the past year on this program and that hard work is paying dividends now. The current MAC landscape looks like this there are nine total contractors that service a total of 13 jurisdictions.

Effective March 1st, we have EpiFix coverage now from five out of those nine contractors and seven out of the 13 jurisdictions. We are in active discussions with the rest of those contractors and were hopeful that we will have coverage from them in a reasonably short period of time. Obviously this is very exciting for us and it means we needed to augment organization in several key areas earlier this year than what we anticipated. We are looking at our reimbursement call center or direct sales force and making decisions in the coming weeks as to what investments we should accelerate and win. This is a great challenge to have right now.

And leads me to the transition to my final topic which is regarding our direct sales force, you will recall that are conversion to a direct sales force essentially began in the third quarter of 2012. Over the course of those three months we added 20 people to our direct sales source which when including our national director for government sales who started in June brought the total direct sales people at the end of quarter three to 21. The government total was 20 and the commercial total was one. In the fourth quarter we added seven people bringing the government sales force to 22 and the commercial side to six. Most of those hires were late in the quarter remember these numbers include not only our sales executives but also our regional and national directors, so not all of these people carry a bag every day.

Because of our success in the government accounts and getting through these various MACs very quickly we have also hired an incremental 14 people into the direct sales force so far in the first quarter of this year. Our totals now are 27 government sales personnel and 15 commercial sales personnel with a total of 42 people. We are currently evaluating how many more positions we should bring on board over the next several weeks and months. We expect to add another four to six additional accounting executives before the end of this month, possibly more. We also have four sales executives who will manage the surgical and sports medicine distributor and sales agent sales force. This brings our current total direct and distributor sales force to 46 people.

From a ramp up perspective, let me give you some insight as to what we have seen and what we expect. We are building a direct sales force, that’s not in common for the typical medical sales executive take 12 to 15 months to achieve a run-rate of $1 million to $1.2 million in annual sales when starting with a new company. Because we are hiring, generally speaking hiring sales executives with extensive experience in government accounts and/or commercial wound care, our average ramp up time has been quicker than that.

With our first group of hires, the first 20 or so people we brought into our government sales force, it took about three or four months on average to get to $1 million full year run rate or around $80,000 to $90,000 per month per rep in this group. This rate does include the management personnel in the dollar per person calculation. So, if you exclude sales management, that number will be more like around $1.2 million or so per year for sales executive. Our expectation is that our first group will have had the fastest ramp up rate, because we brought in some of the best of the best early on and future hires will likely take a little bit longer to ramp up. We only have a few government positions to add now and the expectation for new hires is that it will take longer to ramp up to the targeted levels.

On the commercial wound care side, we are just getting started. So, we don’t have any results to report there, but our expectations are that the average revenue at full ramp should also be in that $1 million to $1.2 million per rep. It’s unclear how long it will take our people on average to ramp up to this rate, but we do feel it will be faster than that industry average that I mentioned earlier. Our informatics team has done a great job in implementing tools, where we can track sales implants, consignment inventory, and other information daily and measure performance per rep and per territory on a daily, weekly, and monthly basis. The systems are evolving quickly. We are improving these systems everyday so we can make better decisions as the business matures. I think it’s fair to say that these IT systems are developing at a rate more similar to a much larger company than MiMedx. We view this as a very significant competitive advantage.

That about wraps up the operations update. And I will turn it back over to Pete.

Pete Petit - Chairman and Chief Executive Officer

Thank you, Bill. Okay, Mike?

Mike Senken - Vice President and Chief Financial Officer

Thanks Pete. The company recorded revenues for the fourth quarter of approximately $10.5 million, an increase of approximately 300% or $7.9 million over prior year, a 32% increase over third quarter 2012, and a $2.4 million increase above our plan.

Revenue for the year ended December 31, 2012 was approximately $27.1 million, which is approximately 250% increase over 2011 total year revenue of $7.8 million and exceeded our plan by 17% or $4 million. The increase in sales revenue for the quarter was driven by both sales of EpiFix and AmnioFix platforms including the injectable. In the fourth quarter, 49% of our sales volume was wound care, 44% surgical and sports medicine, and 7% other.

On a year-to-date basis, wound care represents 42% of revenue, surgical and sports medicine represents 48%, and other represents 10% of total revenue. Gross margins for the quarter increased to 83.9% as compared to 67.3% in the fourth quarter of 2011 and 82.1% in the third quarter of 2012. The improvement was driven by volume and product mix. For the year, gross margins improved to 80.8% as compared to 57.4% in 2011 also driven by volume and product mix.

The company reported positive EBITDA for the fourth consecutive quarter. Adjusted EBITDA is earnings before interest taxes, depreciation and amortization with the additional adjustment being share-based compensation any acquisition related earn-out provisions, as well as intangible asset impairment charges, which are all non-cash expenses. Included in today’s press release is the supplemental disclosure that reconciles our reported net income to adjusted EBITDA.

The company reported positive adjusted EBITDA of approximately $434,000 for the quarter ended December 31, 2012, which is a $2.1 million improvement as compared to an adjusted EBITDA loss of $1,639,000 in the fourth quarter of 2011, but a decline of approximately $314,000 as compared to the third quarter of 2012. Year-over-year improvement in adjusted EBITDA is a result higher sales volume and improved gross margin. The quarter-over-quarter decline is due to the acceleration of investments, including our direct sales force, which I will discuss in a few moments.

Year-to-date positive adjusted EBITDA is approximately $2.4 million is compared to a loss of $6.3 million or an $8.7 million improvement year-over-year. The improvement over prior year was driven by again increased sales volume and our improved gross margins. Partially offsetting the improvements were increased expenses in R&D and selling, general, and administrative expenses.

Beginning in the third quarter and continuing through the fourth quarter, the company added staff ahead of our plans partially due to the accelerated demand for allografts, as well as opportunistic hiring due to the availability of sales people with strong relationships in the wound care space and decisions taking by management to invest in certain other strategic areas.

Our headcount at year-end was 166, which represents an increase of 32 associates in the fourth quarter as compared to the end of the third quarter and an increase of 144 as compared to the end of 2011. Increases in the quarter included additional recovery tax and tissue processes at manufacturing, additional sales folks as Bill mentioned, customer service and marketing associates as well as additional resources for the reimbursement hotline, which was brought in house in the fourth quarter as well as IT and accounting resources to support the growth of the business.

In addition, the company decided in the third quarter to increase the number and accelerate the timing of key clinical trials for reimbursement purposes. This resulted in increased R&D spending in the fourth quarter of 2012 as compared to the third quarter of 2012, as those trials began enrolling patients. R&D spending was also impacted in the fourth quarter by increased spending on patent filing. We indicated in the second quarter call that these investments would result in an overall reduction in near-term positive EBITDA and we expect this trend to reverse itself as the full impact of these investments further improves our revenue results in future quarters.

The net loss for the fourth quarter was approximately $1.6 million or a loss of $0.02 per diluted common share as compared to the reported net loss of $2.6 million or a loss of $0.03 per diluted common share for the quarter ended December 31, 2011. Included in the quarter loss are non-recurring, non-cash related charges of approximately $247,000 related to the Surgical Biologics acquisition earn-out due to higher than expected allograft tissue processing revenue and approximately $486,000 tied to the debt discount on our notes.

In addition to the items previously mentioned, the net loss for the quarter also includes a total of approximately $1.2 million in other non-cash related expenses including $780,000 in share-based compensation, $263,000 in amortization of intangibles, and $111,000 in depreciation expense. The net loss for the year was approximately $7.6 million or $0.09 per diluted common share as compared to a loss of $10.2 million or $0.14 per diluted common share for the year ended December 31, 2011. The reduction in net loss was the direct result again of revenue increases and improved gross margins. Included in the net loss for the year are non-recurring, non-cash charges including the impairment charge related to the HydroFix platform of approximately $1.8 million, additional earn-out provision related to the acquisition of approximately $1.6 million, and approximately $1.5 million in debt discount related to our two notes payable, which I will discuss in more detail later in my balance sheet comments.

Excluding these non-recurring charges, our net loss would have been $2.7 million. Additionally, the net loss includes the following other non-cash items including approximately $2.5 million in share-based compensation, $1.4 million in amortization expense, and $465,000 for depreciation expense.

Turning now to the balance sheet and statement of cash flow, the company continued to strengthen and simplify its balance sheet in the fourth quarter. We reported approximately $18 million in total current assets, which includes approximately $6.8 million in cash, $7.6 million in accounts receivable, and $3 million in inventory. The company reported approximately $5 million in current liabilities including $1.3 million in accounts payable and $3.7 million in accrued expenses. The resulting current ratio as of December 31, 2012 of approximately 3.6 represents a significant improvement as compared to a current ratio of 3.0 as of December 31, 2011 when viewed on a comparable basis.

Turning now to our debt, the line of credit with related party was retired through the issuance of approximately 1.4 million share of MiMedx common stock in the fourth quarter. The remaining debt of approximately $4 million net of the discount of $1.3 million was retired in early 2013 through the issuance of approximately 5.3 million shares of MiMedx common stock.

Net cash flow from operating activities was approximately a negative $924,000 for the quarter as compared to a negative $1.7 million in 2011 and a negative $862,000 in the third quarter. The improvement over prior year was driven by the higher sales volume and improved margin, somewhat offset by the growth in working capital. For the year net cash flow from operating activities was a negative $3.4 million as compared to a negative $6.7 million in 2011. The 49% reduction in operating cash burned is due to the improving result from operations somewhat offset by the growth in working capital.

Cash used for capital expenditures was $181,000 for the fourth quarter and $583,000 for the year. Most of the expenditures were tied to the ramp up in tissue processing activity. Total assets increased by $1.6 million from the prior quarter end. Average day sales and accounts receivable remain roughly flat at 65 days as compared to 66 days in the previous quarter. As discussed in the previous earnings call management made the decision to build inventory in anticipation of increased demand in the first half of 2013 due to the impact of the Medicare Q-code driving commercial wound care demand. The planned inventory build resulted in a reduction in inventory turns to 2.8 as compared to 3.7 as of September 30, 2012. We would expect this trend to reverse itself in subsequent quarters as we braced through the macros.

Total liabilities as of December 31, 2012 were $15.2 million, an increase of approximately $823,000 as compared to September 30th and equivalent to December 31, 2011. The quarter-over-quarter increase was due to current liabilities increasing by approximately $1.5 million driven mainly by increased employee related costs including bonuses as well as sales commissions to both employees, third party sales reps, and distributors due to the higher wound care sales. Total liabilities at the end of the first quarter of 2013 will be significantly lower due to the convergent of the senior secured promissory note into approximately 5.3 million shares of common stock, which occurred in early 2013 and payment of the earn-out liability also in MiMedx common stock which should take place before the end of the quarter. Total stockholders’ equity as of December 31, 2012 was $20 million, an increase of $8.1 million as compared to December 31, 2011.

And one final note, due to the increase in the company’s share price resulting in the value of our public float exceeding $75 million as of June 30, 2012 MiMedx will be reporting as an accelerated filer effective the first quarter of 2013. Although its 2012 10-K is not impacted in terms of the information reported, please note that this will be the first report which includes the auditors’ attestation of the company’s internal control. As a result of this audit there were no reported material weaknesses.

With that now let’s turn the call back over to Pete.

Pete Petit - Chairman and Chief Executive Officer

Thank you, Mike. Thank you, Bill. While we have given you a great deal of information and commentary so let’s throw the call open to questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Mr. Matt Hewitt with Craig-Hallum Capital Group. Please proceed.

Matt Hewitt - Craig-Hallum Capital Group

Congratulations on a great finish to the year.

Bill Taylor

Thanks Matt.

Matt Hewitt - Craig-Hallum Capital Group

A couple of questions from me, first the gross margin expansion that you’ve seen here in the past couple of quarters and to me also it was quite surprising by the fourth quarter. How should we think about that line going through ’13, obviously there is some mix will determine that, but how should we will be thinking about that, is there additional expansion possible once you get the new facility online or have we kind of hit a peak?

Pete Petit

Matt let me toss it back to you, what did you model?

Matt Hewitt - Craig-Hallum Capital Group

I think I was a little bit closer to 82.5% given the strong performance in Q3. But is this 83% to 84% is that kind of a peak maybe or is there still some opportunities especially it sounds like you’re doing some studies on additional uses of the placenta as you find those could we see further expansion?

Pete Petit

I think we could, I think we all need to be conservative. But I think maybe in the range that we have just reported is probably reasonable. But there are ways for us to raise that and over the 2013 year we will talk to you about doing that but that’s maybe a good place to do…

Matt Hewitt - Craig-Hallum Capital Group

Okay, okay. Secondly I guess a more of a strategic or business opportunity standpoint. What – have there been some new applications that you found for EpiFix in particular I guess over the past few months or quarters I know Mohs surgery was a new area that you found some opportunity. But what other areas are you seeing traction or seeing interest from doctors or practitioners?

Pete Petit

Well, we want to be careful here, we’ve given shareholders a great deal of information. Bill’s commentary was full of a lot of detailed information. But we also want to be careful until we get some of our clinical studies done. Doctors – I can’t emphasize enough how well received the allografts or when doctors began to realize the healing qualities of the tissue. So, we get all kind of phone calls coming at us and what we need to do and are doing is picking the best opportunities and try to hit clinical, trials started quickly. But and that will pace when we enter some of these markets. So, we just need a little bit of time to and maybe at the end of the first quarter we can talk in a little more detail. But I think we have probably given you what we probably feel comfortable with this morning.

Matt Hewitt - Craig-Hallum Capital Group

Okay. The pricing I know that you made some changes at the start of the year if I am not mistaken as far as how you are pricing EpiFix, correct or help me understand when we will start to see that impact, is that in Q2 I am trying to remember how that was going to work?

Bill Taylor

Yeah I’ll take that one Matt. Last year we had a pricing structure that was focused on a particular graft price and was not focused as cleanly on the square centimeter price the way that Medicare reimburses. So, we changed all that effective January 1st, where all of our sizes are based on a square centimeter price instead of a targeted price per graft. So, what that will do is over the – well let me just take you step back in 2012 our month – our quarterly ASP varied a lot and because we had differences in our different SKUs so the reported ASP was different, so that our reimbursed, reimbursable amount would have a lot of variability. So, that was one of the issues we have. So, we made everything consistent which should remove that variability and that first we should be able to see a very standard and slightly elevated price per square centimeter should be July 1st based on all the changes because we will report our first quarter average sale price and then CMS will add 6% to that and then that will be the new reimburse price effective July 1st.

Matt Hewitt - Craig-Hallum Capital Group

Okay, thanks for refreshing my memory there. Lastly just a clarification on the listing if I heard you correctly you’ve answered or you’ve worked on a number of the questions major market listing is that going to be by the end of April or you will have sent in the application by the end of April, just so I understand the timing there?

Mike Senken

Matt the reason why we are a bit vague on that is as you’re working with these exchanges you go through a number of submissions of information in Q&A and you wait to get feedback. So, we have to be a little bit vague on the exact timing of that, but recognize we are moving as quickly as we can.

Matt Hewitt - Craig-Hallum Capital Group

Alright, great. Thank you. And again congratulations on a great 2012 and looking forward to the growth here in ’13.

Pete Petit

Thank you, Matt.

Mike Senken

Thank you, Matt.

Operator

Our next question comes from the line of Mr. Bruce Jackson with Northland Capital Market. Please proceed.

Bruce Jackson - Northland Capital Market

Hi, good morning.

Pete Petit

Hi, Bruce.

Mike Senken

Hi, Bruce.

Bruce Jackson - Northland Capital Market

As you know the FDA has been making the rounds of all the tissue banks recently, I was wondering if you could just refresh us on your most recent dealings with the FDA and if there are any outstanding issues.

Pete Petit

Sure, I’ll take that one too. We’ve had two audits from the FDA in the past probably 22 months or so. The one in 2011 was a standard audit. The audit that we had last year which I think was around May if I remember correctly, May or June something like that. And that one was a targeted inspection. The FDA had a question because they had audited one of our distributors who is a tissue bank and had – they had a question that couldn’t answer by the distributor, so they came in and that got sorted out.

The second thing is they were asked by CBER which is the biologics division of the FDA, they had a question relative to our injectable and it mainly focused on living cells. Their biggest question was do we have living cells in our tissue and of course the answer is no, our cell – the cells are not alive. Obviously there is a lot of scrutiny there relative to the living cells. And you can look at the – from announcements from the working group of the FDA on tissue that the tissue reference group has pronounced with every year going back to like 2007, you can reference there what they – how they view living cells and amniotic tissue and other types of allograft. So, we had a clean inspection report on both of those audits, no 43 was issued on either one of them and we have copies of the inspection report to show that everything was clean. So, the inspector replied with all of our scientific data to CBER and CBER had no further questions. So, I think we are in good shape there.

Bruce Jackson - Northland Capital Market

Okay, that’s great. Then one other question on the hospital procurement network I want to make sure I have got the numbers correct. So, you are at 19 right now and I think you said earlier you are talking to some new hospital systems and were those hospital systems an additional 40 or is that the total number you will be at after you get the new procurement contracts?

Pete Petit

What we are talking about is an incremental 40.

Bruce Jackson - Northland Capital Market

Okay, incremental 40. And then when you get to that incremental 40 what level of revenue does that support?

Pete Petit

Although we have in the past is that conservatively 30 hospitals should easily be able to supply a $100 million in revenue, so 300 hospitals, $1 billion in revenue. So, pretty straight forward math on that. Now obviously early on we want to have excess capacity in those hospitals because our growth is somewhat unpredictable its – we know its fast, but we don’t necessarily know how fast, so we want to have excess capacity there.

Bruce Jackson - Northland Capital Market

Okay, got it. Thank you very much.

Pete Petit

Thank you, Bruce.

Mike Senken

Thank you, Bruce.

Operator

(Operator Instructions) Our next question comes from line of William Plovanic with Canaccord. Please go ahead.

Kyle Rose - Canaccord

Great, this is actually Kyle in for Bill. Can you hear me, alright?

Mike Senken

Hi Kyle.

Kyle Rose - Canaccord

Great, just a couple of big picture question obviously you’ve got five out of nine MACs signed up so far, just wondered if you could break that down into covered lives perspective, I mean, how many covered Medicare lives are there right now and then once we get up to that those nine MACs by maybe first half of the year or into the back half, how many patients will be covered at that point?

Bill Taylor

I don’t have exact number on the lives in front of me, but I can tell you it’s approximately 30 of the 50 states, so about 60% of the states we have coverage in.

Kyle Rose - Canaccord

Great, okay and then I mean going back to the study that was end earlier this year, any expectation for that to be published or when we can see the full trial results?

Bill Taylor

Yeah the post RCT for diabetic foot ulcers has been submitted for publication. We do not have a publication date yet, but hopefully over the course of the next weeks or maybe before next conference call we may have some further information on that. And then we are also as I mentioned on the cross over study that was submitted for the SAWC was accepted for that. So, there won’t be necessarily a publication we will have be symposium poster published.

Kyle Rose - Canaccord

Okay, great. And then just I think you kind of mentioned EpiFix, micronized version I wondered if you could just kind talk a little bit more about the pros and cons of that product and how that differs from EpiFix as it currently stands and what that does as far as product allowing you to target more wounds, what more effectively?

Bill Taylor

Sure, it’s pretty interesting on the EpiFix side. We’ve had a lot of physicians who want to have a micronized version because of tunneling wounds and other kinds of wounds that are hard to put a membrane into it. So, we’ve had number of them essentially kind of shredding it themselves and in packing the tunneling wound. So, we have decided to have an EpiFix micronized version that either could be injected into the dermal layer around the wound bed to help to kind of jump start the healing there or could be factored either in a powder form or in a paste form and put into the kind of underneath the (indiscernible) or in the tunneling wounds. And we have gotten some pretty interesting and good results there, so we thought it was best go ahead and introduce the micronized version of EpiFix.

Kyle Rose - Canaccord

Now does that have the same reimbursement codes and the same Q-code or does that – is that going to be another process that the team will have to go through?

Bill Taylor

We expect that to be different and we actually applied for the Q-code in December. So, by May we should understand the pathway that the FDA is looking for and find out if they have accepted the application. But it’s our belief is that its more like a drug because it’s a milligram reference as opposed to a per square centimeter reference. So, we should find out in May then what the situation is relative to that application. And then that would we will find out that’s when they will give a preliminary decision is in May, final decision is in November with then if it is accepted then it will be January of 2014 when it will be available.

Kyle Rose - Canaccord

Great, okay.

Bill Taylor

From a coding perspective.

Kyle Rose - Canaccord

And then just one final question, obviously significant growth in the back half of the year in the VA market, I just wondered obviously taking share there, just wondered if you can kind of provide a little more color on what that market looks like just from a market size perspective. And covered life patients does anything, any more granularity we can kind of dig into on that side as we go into ’13 having the full year with the VA initiative up and running and then that’s it?

Bill Taylor

We’ll I guess – go ahead.

Pete Petit

We’ll there are first of all one set of metrics it might be useful for you, because what you are asking specifically we don’t have in front us, but one set of metrics might be the rate at which Advanced BioHealing Group and a lot of that good portion of that was in the VA side of the business. They had about 155 commercial sales people as I recall reading prospectus and about 35 or 40 of their sales persons were in the VA side. So, you might be able kind go back and analyze their growth rate by that back some of things you are looking for. But we don’t really have the metrics you’re asking for in front of us.

Bill Taylor

I’ve got a couple with that are close – there is a little over 150 VA hospitals across the country were roughly 700 clinics and we reported the end of Q3 call that we were in about 80 of those VA facilities. We are in about 120 now all those 700 clinics do not do wound care. So, there is a sub-segment of that most of the VA hospital do but there are a few that do not have very much wound care there. So, I think there is still room for us to grow significantly in the VA area, but that will give you a little bit of a frame of reference on the ability to grow. And of the 120 that we are in we are not fully penetrated in all 120 facilities yet either.

Kyle Rose - Canaccord

Thank you very much. Congrats on a great year.

Bill Taylor

Great. Thanks a lot.

Pete Petit

Thanks a lot, Bill.

Operator

There are no other questions at this time. I’ll now turn the call over to Mr. Pete Petit, Chair and CEO. Please proceed.

Pete Petit - Chairman and Chief Executive Officer

Thank you, Gwen. I will appreciate your time and join us on the call. I hope we have been informative. We will continue to try to give you as much information as we can. It doesn’t perhaps compromise us in terms of competitive issues and so on. Thanks so much, looking forward to reporting here at the end of April on our first quarter results.

Operator

Ladies and gentlemen, thank you for your time today. This concludes the presentation. You may now disconnect. Have a wonderful day.

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