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MiMedx Group, Inc. (NASDAQ:MDXG)

Q1 2013 Earnings Call

May 1, 2013 10:00 AM ET

Executives

Thornton Kuntz Kevin Inda – VP, HR and Administration

Pete Petit – Chairman and CEO

Bill Taylor – President and COO

Mike Senken –VP and CFO

Analysts

Matt Hewitt – Craig-Hallum Capital Group

Bill Plovanic – Canaccord

Christopher Laffey – Gilford Securities

Chris Malham – Malham Consulting

Operator

Good day, ladies and gentlemen, and welcome to MiMedx quarter one 2013 Group’s earning call. My name is Angela and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(Operator instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Thornton Kuntz, Vice President Human Resources and Administration. Please go ahead, sir.

Thornton Kuntz

Thank you, Angela. 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 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, 2012. 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 security laws.

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

Pete Petit

Thank you, Thornton. Good morning and welcome to our first quarter shareholder conference call. I have with me today Bill Taylor, our President, Chief Operating Officer, and Mike Senken, our Chief Financial Officer to make comments during the call. There are also other members of the executive team in the room.

As you can see from our press release, we exceeded our quarter revenue forecast for the fifth straight quarter. We’ve been very fortunate to be able to protect our revenues in spite of the very rapid revenue we’re experiencing. There are a number of variables that have to be managed each quarter in order to keep our revenues in the range of our forecast. Up to this point, we managed those variables very well.

We’re still seeing very strong interest in our tissue grafts and injectables, and we expect to see increasing demand from physicians. However, we continue to work very diligently on the reimbursement aspects of growing our business. Bringing new medical technology to the market is always constrained by reimbursement. So far, we’ve been quite a joy in working through this complex area.

We are continuing numerous clinical studies and publishing results for those studies. As a matter of fact, we expect to publish the results of three of our clinical studies over the next several months. In addition, some results of some of our scientific studies related to the characterization and mechanism of action of our tissue graft should be also published then.

Because of the strong interest in our tissue long positions and numerous medical disciplines, we are busy developing randomized control trials and other clinical studies to support various uses in the tissue. Physicians have made inquiries and begun to utilize actuation areas such as urology, ENT, GYN, and numerous sports medicine and orthopedic applications.

Dr. Fetterolf, our Chief Medical Officer, his staff are quite busy developing clinical studies to support these clinical uses and encourage reimbursement. In addition, Dr. Tom Koob, our Chief Scientific Officer, and his staff are continually conducting studies to broaden our knowledge base relative to growth factors and numerous other proteins that contribute to the clinical benefits that are inherent in our Purion process amniotic membrane tissue allografts.

Our management team feels very strong that we will continue our leadership role in the process and delivery of amniotic membrane tissue allografts for numerous medical procedures. The scientific information we’ve developed relative to the attributes of our Purion process grafts indicates our grafts will have clinical as well as cost-savings benefits for numerous healthcare procedures.

While many of these healthcare procedures will be served by our current product lines, we do anticipate that some applications for our tissue will require a different regulatory pathway than our current products, and these regulatory pathways will be for the regulation of human cellular and tissue-based products of Section 364 of the Public Health Services Act.

In other words, in order to pursue these other market opportunities, we may have to comply with the FDA’s PMA or BLA approval process, which are more extensive regulatory pathways. However, these new market opportunities we’re talking about could be substantial in nature. So the future and expense efforts will certainly be worthwhile.

Again, let me reiterate what I just said. Our current 361 regulation for our products offer us huge market opportunities. We’re looking forward to some new scientific disclosures and some new scientific studies, where it allows us to step in to some other new product areas, and that is where we’ll be stepping into some new pertinent [ph] grafts regulatory pathways.

As we look into the remainder of 2013, we see continued rapid revenue growth of approximately 100% year-over-year. We expect growth in the second half of the year to be more rapid because of our reimbursement approvals. Once the company receives additional privilege from the Medicare intermediaries, we expect our revenues to escalate dramatically in those regions where the coverage has been obtained.

Also I’m sure you’ve taken note of the fact that the company’s common stock is now trading off of NASDAQ Capital Market. We’re very pleased to have made this move and hopefully our listing will continue to increase interest in our stock and the company. Many institutional investors have investment policies that do not permit them to vet companies whose stock is not trading on a major exchange.

The results are our move to NASDAQ. These institutions will now be able to consider investment in MiMedx.

On that note, I’d like to personally invite you to attend our shareholder’s meeting. This will be held in the lobby of our new building on May 9th at 2:00 pm. While we’re not occupying a new building at that point, the modifications will be sufficiently completed so that we can hold our shareholder’s meeting in the lobby of the facility.

This facility is going to improve the efficiency and effectiveness of our management, employees, because it will bring us altogether in one facility. The facility has sufficient space for many years of rapid growth both on our production capabilities as well as administrative requirements.

Now, Bill Taylor, our President, Chief Operating Officer, will give you an update on some other issues.

Bill Taylor

Thanks, Pete. Good morning, everyone. As Pete mentioned, we’ve been able to predict our revenue growth pretty well in spite of the rapid growth we’re experiencing; I’d also add, in spite of a very challenging reimbursement system. The factors that can influence this growth are many, but I think our team is doing a pretty good job managing those variables.

One larger variable is the new building move. We were fortunate enough to locate an 80,000 square foot standalone building that was ideal for our current and future needs, the major undertaking to make such a move and certain members of our staff have been quite focused on making this a smooth transition.

In order to help mitigate the risks associated with such a move, we’re taking several steps to keep the business running smoothly. First and foremost, we’re splitting the move into three distinctly different steps. The first step is to move corporate and R&D into the new facility. We currently expect to do this in the first half of June.

During the move week transition, we will either continue to ship out of our old building or we will temporarily relocate shipping to a processing facility. The second step will then be to quality and validate our new processing equipment in the new building and move about 1.5 of our processing technicians into that new building.

Processing in two facilities will be a little bit inefficient and could slightly affect our margins in the third quarter, but we feel it’s a prudent thing to do in order to ensure that we do not have a disruption in supply. We project this second step will occur in July or August. Then the third step will likely be in the fourth quarter, and then we will move the balance of the processors to the new facility.

To date, this project is on schedule, and I will remind you again, as Pete mentioned, that our shareholder meeting will be held in the lobby of that building next week on May 9th, and we look forward to seeing some of you there.

We continue to make good progress in the reimbursement area. Since we received our Medicare Q-code on January 1st, five of the nine Medicare intermediaries are MACs, have begun to reimburse for our EpiFix wound care allografts. We’re quite busy providing clinical data to all the other MACs and it’s our goal to be approved by all nine of the MACs by the end of the summer.

We expect to have sufficient published clinical studies at that point to satisfy their requirements. In addition to our Medicare focus, we’re continuing to work with all the health plans across the country, in education program on the clinical and cost effectiveness of our allografts.

On the publication front, I’m pleased to announce that our first EpiFix RCT paper has been accepted for publication in the International Wound Journal. Once we have a publication date, we’ll let you know. So we’re very pleased to have been accepted in this very well-regarded peer-review journal.

During the first quarter this year, we added 20 people to our direct sales force, including both commercial wound care and our government direct sales force. At the end of March, we had a total of 28 people in our government-direct sales force and 18 in our commercial wound care direct sales force, and 5 in our orthopedic and sports medicine sales force, which manages our sales agents and distributors. That brings our total to 51 sales professionals. So far this quarter, we’ve added five more direct sales reps for a total sales count of 56.

Our hiring pace is dependent on several factors and our best estimate is that we’ll ramp up to between 70 and 80 sales professionals by the end of this year. We add this direct sales force to our legacy business, which includes our ophthalmology and dental distribution partners, and our surgical and sports medicine distribution network, and we feel that we have a very solid corporate asset in the sales team to drive our projected growth and make or exceed our projections.

I’d like to remind everyone that our models have our direct sales force averaging between $1 million and $1.2 million in revenue per rep per year. The length of time to ramp up those kinds of volumes ranges from as low as four months up to eight months or more depending on many different factors.

With that, I’m keeping it very short today and I’ll turn it back over to Pete.

Pete Petit

Thank you, Bill. Mike Senken, our Chief Financial Officer. Mike?

Mike Senken

Thanks, Pete. The company recorded revenues for the first quarter of approximately $11.6 million, an increase of 212% or $7.9 million over prior year and exceed our guidance for Q1. We experienced significant growth over prior year in wound care, which increased 434%, and surgical and spors medicine, which increased 133%, as compared to prior year.

Breaking down the sales by therapeutic area. In the first quarter, 54% of sales volume was wound care, 40% surgical and sports medicine, and 6% other, as compared to 32% wound care, 54% surgical and sports medicine, and 14% other in the first quarter of 2012. Commercial wound care volume ramped up during the quarter as MAC approvals became effective and sales people were hired in those territories.

Gross margins for the quarter were 84% as compared to 74% in the first quarter of 2012. The improvement was driven by the higher percentage volume in wound care, which is sold on a direct base versus surgical and sports medicine, which is predominantly sold through distribution.

The company reported positive adjusted EBITDA for the fifth consecutive quarter. Adjusted EBITDA is earnings before interest, taxes, depreciation and amortization with the additional adjustment being share compensation, acquisition-related earn out provision, as well as intangible asset impairment charges which are all non-cash expenses.

Included in today’s press release is a supplemental disclosure that reconciles a reported net income to adjusted EBITDA. The company reported positive adjusted EBITDA of approximately $1.1 million for the quarter ended March 31, 2013, which is $800,000 improvement as compared to an adjusted EBITDA of $314,000 in the first quarter of 2012.

Year-over-year improvement in EBITDA is the result of higher sales volume and improved gross margin. The company continues to invest in infrastructure to support our growth. Total headcount increased by 22 in the quarter to 188 including the 20 sales and support staff that Bill mentioned earlier.

Research and development cost were 11% of revenue and in line with our plan. R&D spending increased approximately $962,000 as compared to the first quarter of 2012 due to increased investments in scientific studies, clinical trials and patent-filing cost. All of which represent key investments which will position us for future growth.

SG&A expenses were $9.6 million as compared to $3 million in the first quarter of 2012. The increase was driven by the move to direct sales first for wound care in both the government as well as commercial market.

In the first quarter of last year, there were no direct sales people. At the end of the first quarter, we had 46 direct sales people. The net loss for the first quarter was approximately $1.6 million or a loss of $0.02 per diluted common share as compared to the reported net loss of $1.1 million or a loss of $0.01 per diluted common share for the quarter ended March 31, 2012.

Included in the first quarter loss is a non-recurring non-cash related charge of approximately $1.3 million related to acceleration of recorded financing expense from the conversion of approximately $5 million of senior secured promissory notes during the quarter. Excluding this one-time item, the net loss would have been approximately $292,000.

In addition to the items previously mentioned, the net loss for the quarter also includes a total of approximately $1.4 million in non-cash related expenses including $985,000 in share base compensation expense, $263,000 in amortization of intangible and $99,000 in depreciation expense.

Turning now to the balance sheet, the company continues to strengthen and simplify its balance sheet in the first quarter. We now have zero debt on our balance sheet as compared to $9.8 million in debt as of December 31, 2012 as a result of the decision by all of the holders of the senior secured promissory note to convert the stock along with the company making the final earn out payment associated with the acquisition of Surgical Biologics.

The senior secured note conversion resulted in the issuance of approximately $5.3 million shares of MiMedx common stock, and we issued approximately 1.2 million shares to the former owners of Surgical Biologics in full satisfaction of the 2012 portion of the earn out liability.

We reported approximately $21 million in total current assets including $5.7 million in cash, $9.8 million in accounts receivable and $4 million in inventory. The increase in accounts receivable was a result of higher sales volume including increased revenue to new commercial wound care customers which ramped up towards the back half of the quarter.

We decided to further increased our inventory in anticipation of the facility move later this quarter as well as the higher revenue expected in the second half of the year driven by further penetration into commercial wound care account.

The company reported $6 million in current liabilities including $1.1 million in accounts payable and $4.9 million in accrued expenses and other current liabilities. The current ratio as of March 31st, 2013 of approximately 3.5 is slightly lower than prior year at 3.6 reflecting the increase in inventory and accounts receivable.

And final note, the company will be presenting at the Craig-Hallum Institutional Investor Conference in Minneapolis on Wednesday, May 29th, and at the Jefferies Global Healthcare Conference in New York City on Monday, June 3rd. Please refer to the investor section of our website for future notices on upcoming investor conferences.

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

Pete Petit

Thank you, Mike.

Let me toss it back to Bill Taylor for a couple of other comments. Bill?

Bill Taylor

Yes. I just want to mention relative to our IP and our patent portfolio, you’ll recall that we had one patent issued in late 2012. We had another four amniotic issues in the first quarter of this year for total of five amniotic tissue patent.

We expect this quarter to have in the neighborhood of two or three additional patent to be issued as well. And if you’ve noticed, probably in the press release, we filed last quarter approximately 11 additional amniotic patents. So we’re very active in the IP field in and around the space that we’re in today filing both new patents as continuations on our earlier application. So I think we’ve got a very robust start on our IP portfolio.

Pete Petit

Thank you, Bill. And we consider our patent council as one of the best in the country, so we’re quite busy and quite focused in that area building that asset based with this company.

One other comment I’d like to make is I mentioned in the press release that while we’re continuing the fourth positive adjusted EBITDA and have for five consecutive quarters, we balance each quarter with our decisions in terms of adding new sales personnel and which clinical studies we’re going to emphasize. We balance them all EBITDA so that we maintain positive EBITDA, which is somewhat like cash flow.

With our revenue growth, we create when we add sales when we ask additional studies, versus our company paying a strong profitability. This company has a capability and will to a very strong profitability as soon as we achieve some basic infrastructure and back off a bit on this additional sales personnel.

So we balance our cash needs very carefully. Our chief financial officer is quite busy on bringing a lot of credit from one of the major banks to the company. And I assure you that this management team is very focused and knows how to manage cash very carefully.

So concerns about the strength of the balance sheet, the strength of our cash position, well, it should be something you focus on. I can assure you this management team understands those factors very clearly and will continue to manage those assets very carefully.

Let’s stop there and turn the meeting over to questions. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Matt Hewitt from Craig-Hallum Capital Group. Please go ahead.

Matt Hewitt – Craig-Hallum Capital Group

Good morning, gentlemen.

Bill Taylor

Hey, Matt.

Matt Hewitt – Craig-Hallum Capital Group

Congratulations on another strong quarter, another strong performance. The last quarter you provided and update on some of your initial hires into the government market and how they had performed exceptionally well, meeting your targets for them on an annual basis and they’re getting there much quicker than you anticipated. You provided a little bit more color here this quarter.

I’m curious, the people that you’re attracting at this point, the new editions here in the first quarter and even in the second quarter, what type of trajectory are you anticipating from this group? And as they get into the commercial market versus a government market, what type of traction and ramp are you anticipating there versus the government market?

Pete Petit

Matt, I think some of the parameters that Bill Taylor has provided certainly continue to haul. But in the government side of things, most people came to us ramped very, very quickly on the commercial side because in each region where there is a lack of intermediary we don’t add sales people in that region until MAC gives us approval for reimbursement.

And we get them started, but there’s also – it takes a little bit of time for that area and that region and the providers to kind of ramp up in terms of getting certain at the MAC intermediary is reimbursing. There’s some slowness in systems coming up and our reimbursement codes appearing on the provider computers, et cetera. So that’s going to be a little bit slower. And I think Bill gave you the outside area there of maybe eight months. So we’re balancing things carefully and we make those decisions with individuals both on expectations, what they’ll be doing and also expectations on how quick the legion, with your putting a man, will ramp up in terms of reimbursement.

Bill?

Bill Taylor

Yes, and I’d just like to add that, generally speaking, the ramp up in the government accounts will be a little quicker than a commercial typically because they have a tighter customer concentration, smaller number of facilities. But the facilities, obviously, are very large with large volumes. So once they get in, they can move sales a lot quicker.

On the commercial side, typically, our commercial sales executives will have more accounts and you have more committees to get through. So it will take a little bit longer in general for the commercial to ramp up.

Matt Hewitt – Craig-Hallum Capital Group

Okay, that’s helpful. Thank you. Are there any metrics that you can provide or maybe a little bit more color, I should say, regarding your initial traction outside of the VA given the receipt of the Q-code? Are there any – maybe one or two customers that you could point to that a year ago weren’t using your product, now they’re using it almost as a standard of care within their practice? Anything along those lines?

Pete Petit

Well, first of all, there are some major national players in the wound care clinic area, and we’re very focused on those large national companies, in addition all the local regional companies. I think we’ve made clear impact with the larger companies, people know the executives on those large companies, and I’ve talked CEO to CEO to one of them.

So I think we’ve positioned ourselves to be a major provider of our tissue to those large organizations. And then, the rest of it is just day-to-day presence of our sales organization in a local community in front of all the wound care centers. So that’s how the commercial side will build force. And again, I think we’re doing everything that this management team knows how to do and, frankly, I think most of you know we’re a pretty experienced group of individuals to be certain that we build this market and break it in time and when we finish, it’s a solid, solid foundation.

Bill?

Bill Taylor

Another way to look at this on the wound care side is looking at all of our direct accounts that we’re selling into. And if you look at all of our accounts, whether it’d be physician’s offices or hospitals, wound care clinics, I think the first quarter number of accounts we shipped into compared to fourth quarter was up by about 35% or 40% in terms of number of accounts we shipped into. And then, also, our month-over-month revenue grew considerable during the quarter. So we’re on a really nice trending rate right now relative to our commercial wound care business.

Matt Hewitt – Craig-Hallum Capital Group

That’s great. Thank you for the help there. Maybe shifting gears a little bit. Competitive response, obviously, you’ve attracted some strong count on the sale side from some of your peers. Has there been any response whether it’s pricing or marketing or any way for them to try and maintain their share, or what have you seen on that front?

Pete Petit

Well, I think the best way to put it in perspective is that we are a new disruptive technology in the wound care sector, and other areas were just new technology, basically, period. So having been on both sides of this kind of thing before, there’s only so much when new technology begins to plant itself in your market, particularly when it’s cost-effective, it’s more cost-effective with your existing product. And from the study, it shows it’s more clinically effective. It’s tough.

So I won’t say that what we’re doing is easy, because it’s not, to plan things very meticulously in this company. But we don’t see – frankly, if I was on the other side of the table, I don’t know what I’d be doing differently than they’re doing, that they’re trying to motivate, emphasize, and of course, try to keep people from leaving their organizations and come in to ours. And I just would rather have my job than theirs.

I think we’re in a very ideal position and we continue to build our foundation very carefully, whether it’s on the sale side as an asset, on the reimbursement side as an asset, patent side as an asset, the procurement side of our placenta as an asset. I think we’re doing all the right things.

Bill?

Bill Taylor

I would echo what Pete said. I think it’s a good summary.

Matt Hewitt – Craig-Hallum Capital Group

All right, maybe two more for me and then I’ll jump back in the queue. First, once the patents were issued late last year, early this year, I know that there were some competitors out in the market that were making a little bit of noise trying to mimic what you have done with your Purion process, in particular. I believe there was going to be some letters going out. Have you been able to – or have they responded appropriately post those letters?

Pete Petit

Letters have gone out to everyone that we’re aware of. We’ve gotten some responses and they’re awaiting our response. So there’d be a point where we will respond and we’ll see where that goes. But we will enforce these paths, we will.

Matt Hewitt – Craig-Hallum Capital Group

Okay. And then lastly for me, and this might be more geared towards Mike. How should we be thinking about the cost of this facility move given it’s going to hit here in the second quarter. Is there a dollar range that we should be thinking about in our models?

Mike Senken

Well, with the move to the new facility, Matt, there’s a plus and a minus. The reduction in expense is the lease in the facility we’re sitting in right now. So that comes off the books. To think about it on incremental basis, it should have very little impact, I think, overall from a percentage standpoint in terms of our overall overhead spending relative to everything else that we have.

So again, it’s a lease, it’s a very economic lease, and I don’t think you really need to put it in your model as having a negative impact.

Matt Hewitt – Craig-Hallum Capital Group

No, but there will be some moving costs and that kind of thing. I mean, is that a $100,000, $200,000, or is it negligible and not necessary? Does that make sense?

Mike Senken

I think there’s those type of one-time costs in there. Obviously, we negotiated a fairly good lease in terms of building out the facility and wrapping that into the lease payments. But, yes, in terms of move costs, a couple of $100,000 is probably a good number.

Matt Hewitt – Craig-Hallum Capital Group

Perfect. All right, thanks. I’ll jump back in the queue.

Pete Petit

Thanks, Matt.

Bill Taylor

Thanks, Matt.

Operator

Thank you. Next question comes from Bill Plovanic from Canaccord. Please go ahead.

Bill Plovanic – Canaccord

Hi. Great, thanks. Good morning. So I think you gave us some clarity with the existing MACs that you’re working on and by the end of the summer, kind of puts a stick in the sand, that means before the end of September, basically. Is there any more clarity you wanted to provide on where you are with them? Is there anything specifically holding them up or is it just kind of a classic governmental pace of things?

Pete Petit

Well, each MAC is different, of course. They’re owned by different other organizations. So they’re all different. We’re very, very involved with all of them in terms of our staff interfacing with their staff, our chief medical officer is facing other chief medical officers, those kind of things.

We got five right off the bat, so to speak, and there’s four more. And I’d say those four more have given us a message – or at least two of them have given us a message. We’d like to see more published clinical studies. Well, we just told you that we expect to have three more here very shortly. And then we’ll have a scientific study that will also have some impact.

So we’re doing what they have asked us to do, and that’s a normal process here. We will be doing these studies routinely quarter-by-quarter, not only for reimbursement purposes, but also to help physicians who are interested in using our tissue in certain places, give them some clinical data and information that will help them make their clinical decision.

So there’s nothing that we have to do that we haven’t done. The process has been going on for, frankly, a year and it’d hopefully be finished up by, let’s just use your date, September 30th, and see what happens.

Bill Plovanic – Canaccord

So of the four, if two are looking for more data, what are the other two looking for?

Pete Petit

Going through their process, plus there’s been some changes out there with some of them losing territory gain and territory things like that. So that slows some of their decision-making process up.

Bill Plovanic – Canaccord

Okay. And then just to piggyback on a previous question, the new facility, there will be some one-time moving expenses, which is normal. Is it on an ongoing business? Does it add roughly how much your PNL annually?

Bill Taylor

I would say 600,000?

Bill Plovanic – Canaccord

Per year?

Bill Taylor

Yes. Yes, right around there, 600,000-700,000.

Pete Petit

Yes.

Bill Plovanic – Canaccord

Okay. Okay, nice cycle number. And then –

Pete Petit

But Bill is going to keep us from sitting on apple crates and have people living in closets.

Bill Plovanic – Canaccord

Yes, I know. I’ve been there, and it’s tight. I’ve heard a lot of discussion on this call about, yes, you’ve done a good job thus. It’s hard to kind of give guidance when you’re growing this fast.

If we look at Q2, 3, 4, you’ve provide a frame work for how those look. Any change to your thoughts on how the sequential progression of the quarters will play out or the ranges for the next couple of quarters? And that’s my last question. Thank you.

Thornton Kuntz

Well, Bill, thank you. No, I think as we sit here today, we’ve got the same perspective we had three months ago and things seem to be working out pretty much the way we thought it would. Bill?

Bill Taylor

No, I think the ranges that we’ve given are very reasonable. We’re managing things, as I mentioned, on the sales force. I think we’ve got between our direct sales force and our distributor partners. I think we’ve got a great framework to make sure that we meet or exceed those numbers.

Bill Plovanic – Canaccord

Great. Thank you very much.

Pete Petit

And I’ll just add that I think we get through the second quarter and this MACs fall into place in the third quarter. And then the latter part of this year, the things really began to move perhaps even faster, but we’ll just have to see how that goes.

Bill Plovanic – Canaccord

Okay. Great. Thank you.

Pete Petit

Thank you, Bill.

Bill Taylor

Thanks, Bill.

Operator

Next question comes from Christopher Laffey from Gilford Securities. Please go ahead.

Christopher Laffey – Gilford Securities

Hello, Pete.

Pete Petit

Good morning, Chris.

Christopher Laffey – Gilford Securities

Thank you for a terrific quarter and your leadership. It’s been phenomenal. I wonder if this is appropriate time for you to discuss a little bit about the sports medicine business.

It’s kind of new to a lot of us and I don’t know how much you can talk about it. But if could, it’d be hopeful.

Pete Petit

Okay. Well, I’ll make a couple of quick comments and then let Bill elaborate maybe a little more deeply. But as we mentioned, we’ve got physicians quite interested in a lot of areas, ENT, OBGYN, neurology, et cetera. But sports medicine, particularly with our injectable product, we’ve been there for over a year, we’ve made some additional improvements we’ve make in that injectable product and we’re in a process of getting fairly aggressive because we’ve gotten at the right comfort level on what this injectable do.

So I will let Bill elaborate on some of those details. But again, some of it is we want to play some of our cards close to our best until we might do official launches and things like that. Bill?

Bill Taylor

Yes. Our sports medicine and orthopedic market are kind of very tightly connected. And there are a number of areas that we’re looking at in shoulder surgery, knee surgery, et cetera. One of the most exciting ones we have is with our micronized product for essentially elbow and plantar fasciitis, the bottom of the foot injections.

There are very, very large numbers of cases where not only surgical procedures but very large number of people that after stop playing golf or tennis or running, because of the pain that they have and they don’t want to go all the way to the surgery to get it corrected. So there’s a very large market out there that’s being treated by steroids, which obviously only mask – the issue mask the pain as opposed actually treating it, and other therapies like PRP, platelet rich plasma.

And by getting some very good results on our injectable for epicondylitis, which is the tennis and golfer’s elbow and plantar fasciitis. And what we’re doing initially is more of a targeted launch with targeted position, more of a limited launch footing there.

And then once we gather some more data and information, then we’ll do a more nationwide full scale launch there. So all of our early indications looks very good. We’ve got actually a poster that was accepted to the foot and ankle meeting coming up I think in July regarding plantar fasciitis.

We’ve also submitted that for publication, and I believe that was just accepted in a journal publication as well where we basically had a very, very high resolution rates in the first four, five weeks after injection.

So we’ve got some really good results there. And over the coming probably quarter or so, we’ll be able to share more with you and the kinds of results we’re getting. But it’s very, very promising.

Christopher Laffey – Gilford Securities

Thank you. Could you also just briefly describe how you’re making inroads on the burn market for treating veterans for VA guys, whatever that market maybe?

Pete Petit

Well, we’ve known for a long time that our tissue is very effective relative to burns. However, this is one area where those some inexpensive products to cover large areas of burn patients where we’re not as cost effective.

However in some of the specific areas such as around joints and knuckles where there’s movement, our product is very effective, but not in the large areas. However, we’re busy in designing a new tissue for this market and that we think we can get down in a price range where we’ll be competitive for large areas.

So the burns is an area we’re focus for. We’ve got a lot of background clinical data on it and we will be stepping out in that market in months ahead.

Christopher Laffey – Gilford Securities

Great. Thank you.

Operator

Okay. We have a question from Matt Hewitt from Craig-Hallum Capital Group. Please go ahead.

Matt Hewitt – Craig-Hallum Capital Group

Just one follow up. I’m trying to recall, I think it’s this quarter where we’ll start to see the price change impact when you went to the square centimeter change and I think that was January 1st. But we will start to see that in the second quarter, correct?

Bill Taylor

We see a little bit of improvement on our reimbursement for the first square centimeter price for Medicare at this quarter. But the full impact of our price changes from January 1st won’t be in effect until July 1st because basically we just yesterday had to report our first quarter average sale price. And that gets implemented and factored for third quarter pricing.

Matt Hewitt – Craig-Hallum Capital Group

And now if I recall correctly, based upon, I think it was Q4 average price and what’s the new pricing was going to be, it was like a 30% increase, correct?

Bill Taylor

Well, Q4 was, let’s see – the first quarter reimbursement, which was based on Q3 numbers was $153 per square centimeter. So, that’s what it was reimbursed in the first quarter this year.

This quarter will be, I believe, $162 per square centimeter and it will have a nice bump up. And we expect from our first quarter sales based on our price changes early this year.

Matt Hewitt – Craig-Hallum Capital Group

Okay. Great. Thank you.

Operator

Thank you. (Operator Instructions) Next question comes from Chris Malham from Malham Consulting. Please go ahead.

Chris Malham – Malham Consulting

Hi. Congratulations on terrific performance again. Quick question, you’ve alluded to some pending studies in research and announcements that will be coming out. But I realize you may not be able to go into a lot of detail, but can you expand or add any color to that at all?

Pete Petit

Well, Chris, good morning. And again, I’m just a member of this very, very intelligent management team here. So it’s very much in group effort by a lot of very talented individual.

Let me just leave it at this because we have a number of clinical studies underway. Some of them randomized control trials. I don’t want to advertise exactly where all those are. But just understand we’re going as fast as our little aches can carry us to get those studies started, implement and completed and then published.

On the scientific side, this tissue has a lot of very, very positive attributes. I’ve challenged our team here to be the world’s most knowledgeable organization about amniotic membrane tissue and its possible uses and its uses and its methods of action and characterization, et cetera.

So we’re quite busy billing and hopefully what will be a fundamental base of scientific as well as clinical information about what this tissue does. I don’t think you can get to where we want to get to without being those kinds of experts. And we intend to do that.

So let me just stop there and say in the next quarter there’ll be announcements, a quarter after that, there’ll be announcements. We’ll have continuing announcements of clinical results and some scientific results that make physicians, patients, reimbursement system quite comfortable with what this tissue can do for certain medical procedures.

Chris Malham – Malham Consulting

Thanks very much.

Pete Petit

Thank you, Chris.

Operator

Okay. I would now like to hand the call back. That’s our last question. Thank you.

Pete Petit

Thank you, Angela. Let me just rewind things up by saying I think we’ve had another very productive quarter. At this point, we expect the second quarter to certainly be in the range that we’ve provided and we’ll have more exciting development during this quarter also.

Thanks for your confidence and management and thanks very much for your investment in the company. Thank you.

Bill Taylor

Thank you everybody.

Mike Senken

Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes your call for today. You may now disconnect. Thank you for joining and have a good day.

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