MiMedx Group Inc (MDXG) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen, thank you all for joining, and welcome to your Quarter Three 2012 MiMedx Group Inc's Results Conference Call. My name is Lisa, and I'll be your event operator for today. At this time, I'd like to advise you participants are in a listen-only mode, and we will conduct a question and answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this conference is being recorded. I'd now like to turn the call over to your host, Mr. Thornton Kuntz, Vice President of Human Resources and Administration. Please proceed, sir. Thank you.

Thank you, Lisa, and good morning, everyone. This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities and 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 statements, except as may be required by the Company's disclosure obligations and filings it makes with the Securities and Exchange Commission under federal securities law.

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

Thank you, Thornton, and good morning. I have with me today, Bill Taylor, our President and Chief Operating Officer, and Mike Senken, our Chief Financial Officer, and some other members of our executive group.

I hope you've already seen our press release, and therefore, have some of the information on our third quarter results. We'll go into more detail on those results during the conference call.

However, I would like to begin by briefly discussing management's vision as it relates to amniotic membrane tissue technology. Briefly, we firmly believe that our amniotic membrane tissue technology will prove to be a platform for numerous innovations for health care procedures. The amniotic membrane itself has a significant number of growth factors that we continue to study scientifically.

We have a number of clinical studies underway, and as you are probably aware, we issued a press release this quarter -- or excuse me, last quarter on our first randomized controlled trial for EpiFix tissue graft being used to treat diabetic foot ulcers. Those results were very compelling.

We have other studies under way to validate the clinical and cost effectiveness of our EpiFix grafts, which are used externally, and our AmnioFix grafts, which are used internally for surgical and sports medicine procedures.

Our scientific and clinical studies are giving us a great deal of confidence that the uses of amniotic membrane tissue will be numerous, and will be very clinically effective, as well as cost effective in many procedures. In addition, we feel strongly there will be many uses for the remainder of the placenta.

As we go through the expense of developing a collection network nationally, and improving our storage processes, we believe that we'll find numerous other uses for the remainder of the placenta as by-products of our amniotic membrane tissue processing, which, of course, we call a PURION Process.

Thus, MiMedx has truly embarked on a path of scientific and clinical exploration that we believe will lead the company to becoming the worldwide leader in this innovative use of tissue that otherwise would have been discarded as medical waste.

As we've previously indicated, the company's been filing patents for approximately five years. We are at the point where we expect our first patents to begin to issue. We continue to file new patent applications on a routine basis, as our scientific and clinical discoveries dictate.

As you can conclude from our very significant growth in revenues from our second quarter to third quarter, something occurred last -- our third quarter to escalate significantly our revenue growth. From January of 2011 through the second quarter of 2012, our revenue growth was predominantly due to the use of our AmnioFix membrane and injectible. Generally speaking, the use of these grafts relate to surgical and sports medicine procedures.

In the third quarter, we dramatically escalated our revenues associated with our EpiFix grafts, which are used in wound care. As we've indicated, wound care is one of our largest near-term business growth opportunities. We've now broken through with the government related business in the Veteran's Administration Hospitals.

At this point, the key to continued rapid growth in revenues relates to reimbursement for our tissue grafts. Over the last year-and-a-half, we've continued to add to the number of private payer or commercial health plans that reimburse for the use of our grafts. As we continue to publish results from our clinical trials, we expect reimbursement coverage to continue to escalate as health plans become comfortable with our clinical, as well as cost effective, results.

In addition, we're still working with the various Medicare intermediaries to complete their requirements for reimbursement. As you may be aware, we received a Medicare C-code for EpiFix product on January 1, but we soon discovered that many of the Medicare intermediaries would not reimburse for the code without incremental clinical data to support the efficacy, and cost effectiveness of the grafts.

Since that point, we've continued to supply these intermediaries with medical outcomes and clinical study data. Once the intermediaries are satisfied that the data is sufficient, reimbursement should be available for our EpiFix products for Medicare patients and wound care clinics and other hospital settings.

However, what happened this quarter was that we saw an opportunity to increase our presence in the VA Hospitals, where reimbursement is not an issue. So, we aggressively added to our own direct sales force during the quarter, and the results were dramatic to say the least.

We'll continue to add individuals to our governmental sales organization, and we'll begin to add individuals to our commercial wound care sales organization as we get additional coverage from the Medicare intermediaries on a regional basis.

Relative to the distribution of our AmnioFix grafts, we'll continue to work through our distribution groups, which include both distributors and sales reps. We know that our AmnioFix grafts will find their way into numerous surgical procedures, and we expect that, as health plans are enlightened as to the clinical and cost effectiveness in certain procedures, we'll begin to see more widespread uses.

Dr. Don Fetterolf, our Chief Medical Officer, and his staff are very busy, both starting new clinical studies, and preparing of the results for publication.

As we verify the clinical and cost effectiveness of our AmnioFix grafts, we should see reimbursement coverage broaden, and a faster growth of those revenues should begin.

Now, to summarize our distribution strategy, it is to build a direct sales organization for wound care for government opportunities, as well as commercial opportunities. We will supplement our sales organization in wound care with certain key sales reps and distributors.

Relative to the surgical usage of AmnioFix, we will continue to build the strength of our distribution by adding select dealers and sales reps, and specific [disciplines] as our clinical studies prove our grafts are effective in each area. Thus, we expect over the next several years to build an effective but diverse dealer distribution for our AmnioFix tissue grafts.

Now, I'd like to make some general comments on our operational performance for the quarter. Bill Taylor will add the specifics in a few minutes.

In all my years of being the CEO of public companies, I don't think I've ever given our performance during the quarter an excellent grade. I believe MiMedx Group's performance this quarter could be absolutely classified as excellent. In addition, there are a number of other things that are taking place that we will discuss in our future quarters that should be quite compelling relative to our continuing to build our revenues, and value for our shareholders.

My congratulations go out to all of our executives and management staff for what has transpired in our third quarter.

Now, one word of caution, please do not expect this rate of revenue growth to continue. I expect the growth will be very robust, but this was an exceptional quarter, as we aggressively moved into our own direct sales force for government programs. However, this quarter's results demonstrate the potential excitement related to the use of our grafts by physicians, if reimbursement is reasonable and adequate.

As I previously mentioned, we are aggressively working to bring the Medicare coverage by the various intermediaries into status where our tissue grafts will be reimbursed as they are currently being reimbursed in the VA Hospitals. However, this will take some time, and is going to take some additional work.

During the quarter, we passed the point of having distributed over 100,000 of our amniotic membrane tissue grafts. While we're very proud of that accomplishment, it makes us even prouder to disclose that there have been no adverse events reported related to all those grafts being used.

Most important, during the quarter we added a significant number of members to our management team. A number of these individuals came from our previous organization, Matria Healthcare, and one of the subsidiaries, Facet Technologies. We brought Brent Miller as an Executive Vice President. Brent had previously served as Bill Taylor's number two when Bill ran Facet Technologies. We also brought in Deborah Dean as an Executive Vice President. Deborah was responsible for all the information technology and clinical informatics and related activities at Matria Healthcare.

During the quarter, we added six other individuals from my and Bill Taylor's previous organization. This brings very experienced people to MiMedx Group, and there's no question about how quickly they settled into their roles. With the rapid growth that we're experiencing, we have to have individuals with whom we're familiar, and who can immediately be effective in this rapidly expanding organization.

So, during the quarter, there's been a rapid expansion in the sales organization, and the supporting sales administration staff, and the office of our Chief Medical Office, Don Fetterolf, who is responsible for all of our clinical studies and publications, and interfaces with the various health plans and Medicare intermediaries.

In addition, Dr. Tom Koob, our Chief Scientific Officer, has added to his staff, so we can rapidly complete basic scientific tests, and advanced tests on our tissue and placentas.

Also, we've located a facility that will bring our production operations and administrative teams together again into one building. This will happen in the spring. We've had to expand rapidly into two different buildings, and that is not as effective as being in one stand-alone facility. Bill Taylor will discuss that in a little more detail in a few minutes.

Your executives have found time to call on another institution portfolio manager over the last several months. As soon as we began to expose the company, and our potential to these investors, there was an increase in the trading volume in our stock, as well as our price. It also stimulates some interest with some industry analysts, and we expect to see some analysts' reports beginning to be published on the company during this fourth quarter.

We continue to consider alternatives to our current stock trading platform. We'll keep you informed as to those decisions, however, we're trading very effectively and efficiently at this point.

Again, when you can increase revenues quarter-to-quarter by 60%, increase gross profit margins by 5%, add a total of 21 people to the VA sales organization, and our other organization, and still maintain positive EBITDA, you had an excellent quarter.

I'll turn the call over to Bill Taylor now, and he'll give you some more specifics on our activities. Bill.

Thank you, Pete. Good morning everyone. I'd like to start by once again highlighting that MiMedx tissue serve a regenerative medicine function to many different specialties, including orthopedics, sports medicine, ophthalmic, dental, chronic wound, acute wound, and surgical anti-scarring markets. Besides indicating that our surgical, ortho, and sports medicine tissues were the largest segment of our business in the first half of last year, until today, we have not broken down our revenue by specialty areas.

Because we've taken the next steps in our growth, we feel it is now appropriate to start the process of giving you more detail. Mike Senken will go into more analysis later, but I wanted to highlight the way that we look at our specialty areas, so that you can understand our breakdowns.

The first segment is our surgical and sports medicine area, which includes our AmnioFix, AmnioFix Wrap, and AmnioFix Injectible, all of which also includes our private label versions of the same.

Our second segment is our wound care specialty area, which includes EpiFix, as well as our plastic surgery grafts. The third area is a bit of a catchall for our other products and tissues, which would include our dental and ophthalmic tissues, as well as HyrdoFix.

Let me follow up on Pete's comments on our direct sales force, and their impact on our increased sales this past quarter. Over the course of the third quarter, we've hired 21 sales professionals, including sales management. Of this group, 19 were hired with a specific focus on government accounts, with a specific emphasis on wound care. Add them to the National Sales Director, whom we hired in June, and the total in the government sales team at the end of the third quarter was 20 sales professionals.

This government sales team also sells AmnioFix and an AmnioFix Injectible, but they're in the early stages in this area, as the current results are predominantly in the wound care space with EpiFix. We've been very fortunate to have been able to attract a sales force with considerable experience in the wound care space, with pedigrees from companies such as Pfizer, Advanced BioHealing, or Shire, and Integra.

On the wound care side, our strategy is to migrate to a direct sales force over time. So, we'll strike strategically, add sales executive to our team, as some of the regional MAC barriers come down over the coming months and quarters.

On the commercial front, our strategy is to continue to partner with sales agents and distributors in the surgical and sports medicine specialties, as the breadth and depth needed in the sales channels here are very significant, and we believe it's best for us to leverage these relationships with our external sales partners.

As I mentioned, during the third quarter we brought on our direct sales force for the government accounts market, transitioning this away from our sales agents and distributors. In this area, you may -- we still do partner with a distributor, but in a different way than other areas of our business. You may remember that over a year ago we announced an agreement with a distributor that specializes in work with the federal government.

That particular relationship did not prove as fruitful as we expected, so in the mid-second quarter we ended that relationship, and partnered with a new distributor. This new distributor was much bigger, and more established in the government accounts, particularly the VAs.

In addition to adding our tissues to an existing federal supply contractor, FSS. The company is an SDVOSB, a service disabled veteran-owned small business. Our sales team is the front facing team interacting with the VA physicians. Our distributor handles all the back room paperwork, as well as the contracting matters with the complex government system.

Our price structure is different with the distributor in the government account, because we handle a larger portion of the sales process than with our commercial distributors.

Another benefit of this relationship with our government distributors is that we have a much better visibility to inventory in the distribution channel. While we still have some more work to do, we generally know how many days inventory our distributor has in the aggregrate. Our goal is to have a real time information on inventory levels, and our IT team is working on a system in conjunction with our distributor to complete this system shortly.

With the growth of our business and the addition of a 22-person direct sales force, clearly we need to add incremental personnel to help manage this growth. We're growing faster than we predicted a year ago. As I mentioned in our last quarterly call, we began the year with about 50 employees. Well, we're now around 150. I think this rate of growth of employees should slow a bit over the coming -- this quarter and the next quarter, as we absorb the people we have, we complete our training, and improve the natural inefficiencies that occur with rapid employee growth.

This rapid growth brings me to an important facilities topic that Pete mentioned. As you may remember, we currently have two sites in Kennesaw about a half a mile apart with 40,000 square feet in total, about 20,000 square feet each. It's not an ideal situation, but it was the right thing to do early in our growth phase. One building has about 10 months left on our lease, and the other, where our tissue processing is done, has about 22 months left on its lease.

Based on our progress to date, and our growth plan, we've decided to initiate a project to consolidate into a new facility by mid-year next year, hopefully, by late spring. We have identified an 80,000 square foot building about five miles from here that would suit our needs very well. We've executed a non-binding letter of intent, and we'll be asking our board to approve the move tomorrow. If we move as planned by spring, our current corporate office lease would expire, and our current processing facility would then remain operational, and serve as a disaster recovery site, as well as providing secondary processing capacity from our new site.

Moving on to our tissue processing operations, and following up on our expansion that we had in the second quarter, we fully staffed our three lines by late second quarter, and we started building some incremental inventory during the third quarter, as we planned. Our efficiencies went down because of all the new processors, but should improve later in the fourth quarter. You may remember, it generally takes each tissue processor about four to five months to become fully proficient at all the tissue processing areas. So, it does take some time to get back to our targeted efficiencies after tripling our workforce.

We continue to make significant progress on our IP, as Pete had mentioned. During the quarter, the company -- during the third quarter the company was granted one US patent for our hydro gel technology, two European patents for our collagen technology. And additionally, we filed eleven applications this quarter, including one non-provisional application for collagen, six non-provisional applications for our amnion technology, and four provisional applications for our amnion technology.

Further, our legal team has conducted several formal discussions with the patent examiners regarding some of our earlier amnion patents. We remain very optimistic that our first two patents will issue later this year.

Moving to the clinical front, in August we released the results of our first diabetic foot ulcer trial, our DFU trial. The results were incredible. As we reported, 92% of the participants who were treated with EpiFix were healed in six weeks, compared to 8% of the standard-of-care patients. This is very significant, particularly when you consider Dermagraft's Pivotal trial, where only 30% were healed in twelve weeks. So, basically our results showed a three times healing rate compared to Dermagraft in about half the time.

As you know, we actually ended the study very early, because the results were so compelling, and the principle investigator cited ethical concerns about prolonging the effect of treatment on the control patients. After the study termination, the control patients then were offered EpiFix in a crossover study. Once those results are finalized, which should be shortly, we'll report those findings as well.

One more thought related to the early termination of that study. The concept of terminating a clinical study earlier than originally anticipated is not uncommon. It can be an outcome of trials where, what's called adaptive design, is applied to the study protocol. Adaptive design of clinical studies is an approach that can shorten trial time frames, and get technologies to market faster.

In fact, the FDA supports this approach, and issued a guidance document in 2010 related to drug and biologics clinical trial design. Basically, adaptive design allows for pre-planned changes to trials after the study is started.

Specific examples listed by the FDA are sample size, number of patients per treatment, among a number of other items. Drug companies have utilized adaptive design for their clinical studies over the past ten years.

As we discussed previously, our clinical studies are designed for reimbursement and sales purposes, not regulatory purposes. But even so, we are planning on developing our future protocols using those adaptive design techniques that are advocated by the FDA.

Also, in process, as we've discussed before, we have two additional DFU, or diabetic foot ulcer, randomized control trials in process, as well as a plantar fasciitis randomized control, venous ulcer randomized control. We're getting ready to start an epicondylitis, or tennis elbow, golfer's elbow RCT as well, and we also have an RCT looking at AmnioFix's anti-scarring attributes, and we're looking at adding a second one of those with cranial application late this year, early next year. So, we have a number of other studies beyond those that are in the various stages of planning as well.

With that, I'll turn it back over to Pete.

Bill, thank you. I hope that clarified a number of issues, and let's toss it to Mike Senken, our Chief Financial Officer.

Thanks, Pete. Company recorded revenues for the quarter of approximately $8 million, and increase of 270%, or $5.8 million as compared to $2.2 million in revenue for the same period in 2011, a 63% increase over the second quarter, and a $1.6 million improvement versus our plan.

Revenue for the nine months ended September 30, 2012, was approximately $16.5 million, as compared to $5.1 million for the same period in 2011, which represents a 223% increase over prior year. The increase in sales revenue for the quarter was driven by sales of our EpiFix platform to government accounts, predominantly for wound care procedures.

Beginning with this quarter, the company will provide a revenue breakdown between key regenerative medicine specialties, as Pete and Bill mentioned earlier.

This was the first quarter where wound care sales exceeded surgical and sports medicine. In the quarter, 61% of our sales revenue was tied to wound care, 34% to surgical and sports medicine, and 5% to other. On a year-to-date basis, surgical and sports medicine represents 51%, wound care represents 38%, and other represents 8% of total revenue.

Adjusted EBITDA is earning before interest taxes depreciation and amortization with the additional adjustment being share-based compensation, the earn out provision related to the acquisition of Surgical Biologics, as well as an intangible asset impairment charge related to the HydroFix platform, which are all non-cash related expenses.

Included in today's press release is a supplemental disclosure that reconciles our reported net income to adjusted EBITDA. The company reported positive adjusted EBITDA of approximately $726,000 for the quarter ended September 30, 2012, which is a $1.7 million improvement as compared to an adjusted EBITDA loss of $934,000 in the third quarter of 2011. This is the third consecutive quarter of positive adjusted EBITDA reported by the company.

Year-to-date positive adjusted EBITDA is approximately $2 million, as compared to a loss of $2.2 million, or a $4.2 million improvement compared to prior year. The improvement over prior year was driven by increased sales volume, and improved average gross margins.

As we mentioned in the second quarter earnings call, the company raised over $4.9 million from the exercise of warrants associated with the October 2010 private placement. The additional capital allowed the company to hire an experienced team of sales associates with deep relationships with physicians serving government medical facilities. The company also decided to increase the number, and accelerate the timing, of key clinical trials for reimbursement purposes.

Additionally during the quarter, we added tissue processors to support the higher production rates driven by increased demand, as well as other support infrastructure in G&A, such as IT, accounting, and management resources to support the anticipated rapid growth of the company.

We indicated in the second quarter call, that all of these investments would result in a third quarter EBITDA below our original target. As anticipated, quarter-over-quarter adjusted EBITDA declined $197,000 due to these targeted investments in people and infrastructure. We expect this trend to reverse itself as the full impact of the sales force further improves our top line results.

For the quarter ended September 30, 2012, reported gross margins were approximately 82%, as compared to 59% for the second quarter of 2011. Gross margins on a year-to-date basis were approximately 79%, as compared to 52% for the same period last year. Overall gross margins improved due to higher sales volume, and favorable product mix.

Quarter-over-quarter gross margins improved due to increased government sales through the sales model explained by Bill earlier in the call, where MiMedx maintains the direct sales relationship, and uses a channel partner for billing as well as after sales service and support.

Operating expenses increased approximately $4.1 million, due to the addition of our direct sales force for government accounts, and to a lesser degree, commercial accounts.

Additional investments were also made in randomized control trials, patent related costs, IT infrastructure support, our reimbursement hotline, and a provision for a management incentive plan. We would expect investment in our sales and marketing organization to increase in subsequent quarters.

The net loss for the quarter was approximately $4.2 million, or a loss of $0.05 per diluted common share, as compared to the reported net loss of $1.7 million, or loss of $0.02 per diluted common share for the quarter ended September 30, 2011.

Included in the net loss is a non-cash impairment charge of approximately $1.8 million related to the write-down to fair value of the intangible assets, the licensees tied to our HydroFix platform. This write-down was taken after a full strategic assessment of the HydroFix platform, where it was decided that there is a limited opportunity for revenue growth beyond current run rates, and thus the HydroFix platform will continue to be a niche product portfolio.

Also included in the loss is a charge of approximately $1.3 million related to the Surgical Biologics acquisition earn out, due to higher than expected sales of tissue products in 2012. The company evaluated the 2012 contingent liability based upon operating results for the nine months ended September 30, 2012, and adjusted the 2012 non-cash earn out liability accordingly.

In addition to the items previously mentioned, the net loss also includes a total of approximately $1.7 million in non-cash related expenses, including $670,000 in share-based compensation expense, $450,000 in amortization of intangibles, including amounts associated with the Surgical Biologics acquisition, $439,000 in non-cash related financing expense tied to debt discounts, and $123,000 in depreciation expense.

Turning now to the balance sheet. The company successfully strengthened and simplified our balance in the third quarter. We raised over $6.2 million through the exercise of warrants and stock options, including the callable warrants mentioned earlier. As a result, our cash balance at the end of the quarter was approximately $7.6 million.

Also, during the quarter we paid off the convertible note related to the acquisition of Surgical Biologics through the issuance of approximately 893,000 shares of MiMedx common stock, and a cash payment of $177,000.

Additionally, we were able to further simplify our capital structure by voiding approximately $3.3 million contingent warrants, which represents the 2012 traunch of penny warrants issued as part of the October 2010 private placement, and the December 2011 5% convertible debt offering.

The company exercised its right to void the warrants once the closing trading price of MiMedx common stock traded above $1.75 for 15 consecutive trading days, which occurred during the quarter.

Net cash flow from operating activities was approximately a negative $862,000 for the quarter, as compared to a negative $1.1 million in 2011. The improvement was driven by higher sales volume, somewhat offset by the growth in working capital.

On a year-to-date basis, net cash flow from operating activities was a negative $2.5 million, as compared to a negative $5 million in 2011. The 50% reduction in operating cash burn is due to the improving results from operations, somewhat offset by the growth in working capital.

Total assets increased by $6 million from the prior quarter end, including the $5 million increase in cash and cash equivalents.

Average days sales in accounts receivable increased to 66 days from 61 in the previous quarter, due to the ramp of shipments during the quarter as we built the government account sales team.

As discussed in the last earnings call, management made the decision to build inventory in anticipation of a continued increase in demand in the first half of 2013. This planned inventory build resulted in the decrease in inventory turns to 3.7, as compared to 5.0 as of June 30, 2012. We would expect this trend to reverse itself in subsequent quarters.

Total liabilities increased approximately $2.3 million during the quarter to $14.4 million. The increase included the additional earn out provision of approximately $1.3 million, bringing the total liability to $5.5 million, which is a non-cash liability to be paid in MiMedx common stock in April of 2013.

Also contributing to the increase in liabilities was an additional accounts payable -- was additional accounts payable, and accrued expenses of $1.8 million, including accrued sales commissions and management bonus, somewhat offset by a reduction in convertible debt due to the final payment of the convertible note related to the acquisition of Surgical Biologics.

From a liquidity standpoint, the balance sheet has never been stronger. Our current assets were $16.1 million, including $7.6 million in cash, while our cash related current liabilities were $3.8 million, resulting in a current ratio of 4.2.

And finally, our stockholder's equity increased $7.3 million as compared to the beginning of year -- of the year to a total of $19.2 million as of September 31 (sic - 30), 2012. With that, I'll turn the call back over to Pete.

Thank you, Mike, and now we'll turn over to the question and answer period. So, who has some q and a for us?

Certainly, thank you. (Operator Instructions). Okay, your first question is from Bruce Jackson. Please proceed, sir. Thank you.

Thanks, nice quarter.

Thank you, Bruce.

Just a couple of questions about the VA sales force. Were they added at the start of the quarter, or did they sort of come on line over the course of the third quarter?

We had a portion of them at the first part of it, and then came on throughout the whole first quarter. Probably our FTE equivalent would have been between 12 and 14 for the quarter if you average it out.

And then, what are your plans going forward? Do you feel like you are fully staffed with that particular sales force, or might you add a few more people going forward?

We will probably be adding in the neighborhood of anywhere from probably 2 to 5, 2 to 6 more in that area is our current plan. We think that in the neighborhood of 25, 26 people are going to be probably the right number for that sales force.

And Bruce, this is Pete, let me add one thing. We'll be focusing now primarily in the commercial side of the wound care sales force, but we don't plan to add aggressively there until we have the various regionals, MACs, fall in terms of reimbursement. So, as the reimbursement picture changes on a regional basis, we'll add commercial sales people in those regions.

Okay, great. Then, on the gross margin side, the gross margins were quite good. Is that a level that we can expect to see going forward?

Well, from an operational standpoint we certainly think so. We'll let Mike make a comment.

Yes, I'd say, Bruce, conservatively, the gross margins in the quarter were 82%, and you can use that as a baseline going forward.

Okay, great. Thank you very much.

Thanks, Bruce.

Thanks, Bruce.

Thank you very much for your question. Our next question is from Bill Plovanic. Please go ahead. Thank you.

Great. Thanks, good morning, and congratulations on a great quarter, gentlemen.

Thanks, Bill.

Thanks, Bill.

So, on the gross margin, what is the max gross margin you think you can get to over time?

How about slightly higher than where we are now.

And then, as we look at the VA, obviously, as you started selling into that channel, how much of that is sell through versus how much is initial stock, and what are typically the terms of payment from the VA?

Let me make a comment, and then Bill will finish. Bill, we're very, very focused on understanding exactly where out tissue goes, exactly how to track that, and exactly where we stand with any stock related to dealers, and that sort of things. In the VA, it's much simpler, frankly. We've initiated an IT app here, and Debbie Dean's presence has made that happen very quickly, where we can track actively and rapidly where we stand in each facility. Let me let Bill add to that.

Yes, with that there was some level of stocking, as you would expect, because our sales executive are present for a lot of these procedures, but they're not necessarily there for all of it. So, we do need to have a certain element of stock on the shelves there. So, I think right now, we're targeting right around the cumulative total of about three weeks or so of inventory, and we're tracking to that level. We expect to be able to keep it in that two to three, two to four weeks on a go forward basis, which is a pretty reasonable level throughout the whole system. So, it's a pretty small level throughout our VA system.

And then, just -- I don't know if this is Bill or Mike, but the average DSOs on the VA, is it something that runs longer, or is this normal kind of 60 days-ish type stuff?

Yes, this is Mike. It's normal 60 day type DSOs. We wouldn't expect it -- DSOs ticked up in the quarter a bit, primarily because we were ramping up the sales, and when you do the averages over the course of the year, it doesn't take into consideration kind of your month over month revenue. So, we would expect DSOs to stabilize here.

Okay. And then, I think one of the comments was you needed to get data for the C-code to really get the private pay to adopt the technology. What studies, and when do you think you'll have that data available?

Well, just actually to clarify, we're getting very good payment on the private pay side right now, so for that portion of the market that is private pay, we're getting in the vast majority of the payers are paying on that. But you flip to the Medicare side, the CMS side, which is relative to the C-code, and then our two code that we expect to get, we should find out definitively in the next probably one to two weeks. But we expected the Q-code in January.

We've already got with our clinical study that we have right now, we've submitted that to all but, I think there are ten now regional MACs that cover the 17 or 16 different regional areas. We've submitted those, and we expect to get through several of the MACs, probably by the end of this year, and then we'll have supplemental data from our incremental DFU studies that we'll be submitting to them in the second quarter for any of the MACs that we don't get through.

Okay, and then, just kind of Pete, just to rib you a little, if I look at your original goals that you set out before we started the year, I think, Q3 was the (inaudible), and I think your total revenue number was $23 million. You've met or exceeded every quarter thus far. Should we still look at Q4 as an $8 million goal, or $8.1 million, as originally set, or did you just raise the bar with this quarter?

Well, we explain in our press release that we expect to exceed the $25 million upper end of the goal we set for 2012. So, do a little arithmetic, we will exceed the $8 million number, fourth quarter.

Okay, and then just last housekeeping question, and I'll jump off here. You're capital structure's been a little convoluted. You're cleaning that up. Where do you stand today with shares outstanding, and how much kind of more options, warrants, or converts or stuff do you have out there to give us kind of a full feeling for the full number of shares? And that's my last question, thank you.

Bill, on a fully diluted basis, adding everything in, including convertible debt, options and warrants, we're at a little over 111 million shares.

Okay. Thank you.

Thanks, Bill.

Thank you very much for your question. We have no further questions at this time. (Operator Instructions)

Thank you, Lisa. I'm going to ask Bill Taylor to enlighten us one more time, and clarify some things on the difference between the C-code, which we've had since January 1 of this year, and the Q-code, which will add to that January 1, 2013. Bill.

Okay. The C-code we've had since January is designed for Medicare reimbursement in the ASC, or ambulatory surgery centers, and hospital outpatient. It's called a HCPCS pass-through code. It's essentially a temporary code that lasts somewhere between two and three years, and it's designed as kind of a transitional code. The Q-code is actually a subset of the J-codes, which are drug codes.

The way EpiFix is reimbursed is in the section of CMS that is for drugs, and non-implantable biologics. And the code that they've specified is considered a skin substitute code, although we're much more of an allograft. But the way they actually set it up for chronic wounds is considered a skin substitute category, and that's a Q-code.

And Q-code will not only be for the ambulatory surgery center and hospital outpatient, but will also be for the physician's office. What is does not cover are surgery cases, in-patient in the hospital, which typically fall under the DRG for those cases.

So, again, Q-code will get in all the Medicare cases from the physician office to the ambulatory surgery center hospital outpatient, and we expect to get that in January of 2013. You recall back in May, we received preliminary positive indication that we would receive a Q-code. The final determination is supposed to be out the first week or so of November.

Thanks, Bill. And I think we have an added question from Bruce Conway.

Yes, we do. Please go ahead. Thank you.

Hi, Pete, I just wanted to echo congratulations. You came in well above what I was hoping to see for the quarter, and just thanks, thanks from me, and all my friends down here who are invested with you. I have two questions, really, for the future. One, how -- I don't know if you've had time to consider, but when do you think you might be able to take this product overseas? And second, just a little more color on which exchange we might go to at some point down the road?

Okay, Bruce. Well, thank you for your comments. First all, relative to overseas, we already have some distributions in Europe with EpiFix, AmnioFix. I'm going to let Bill give you a little more detail on that. And management will begin to focus now on moving up and improving where we trade. Although, frankly, we're quite happy with the results we're seeing in terms of volume, and of course price.

Agreed.

We're not having any complaints anymore, so the platform is certainly more than adequate. On the other hand, we want to help our shareholders by moving to one of the other more mature exchanges. We'll focus on that shortly, but I think one of the issues that people might be concerned about is the Sarbanes-Oxley issues. Well, we've been complying with those. At the end of this fiscal year, our auditors will certify our Sarbanes-Oxley procedures. I think we'll certainly be where we're supposed to be there.

So, the issues associated with where we're trading, we've just been busy doing a few other things, as evidenced by the quarterly results, and we'll get around to dealing with those matters shortly. Now, I want to let Bill give you a little more detail on the European situation.

We are already in Europe. It's not been a major focus for us, but we have been essentially utilizing distribution that we had set up originally for our HydroFix product line, and we've got -- we are almost ready to sell into the U.K. We've been going through the registration process there. We are already in Italy. We've already sold into Ireland. And also, moving over into the Middle East a little bit, we've sold into Saudi Arabia, and in Asia, we've sold into South Korea. And I think we are also -- have the ability to sell into Spain.

I don't think I've missed anybody. I think that pretty much covers it. We were actually evaluating how we can expand our presence now in Europe. We want to be a little careful to not spend a lot of time and attention there until we make sure we've properly addressed the US market, because we have so much opportunity here. So, we don't want to get too de-focused. But we have some opportunity. We expect to see our sales there grow over the coming quarters.

Great. Thank you.

Thank you, Bruce.

Thanks, Bruce.

Well, thank you very much for your question. (Operator Instructions).

Okay. I don't think we have any more questions.

We have no questions at this time. I'd now like to turn the call over Mr. Pete Petit for closing remarks. Thank you.

Well, thank you, Lisa. And I'll comment again on what a beautiful British accent you have. It's great to have a little international flair this morning.

For our shareholders, I appreciate your comments. We've had a lot of comments come in this morning. Your management team is working very hard, very diligently, and very effectively. And we hope to continue to report, frankly, expect to continue to report good results for you. There are a number of issue we're working with on a day-to-day basis in terms of -- particularly, in terms of reimbursement. Those are issues that are very, very important to a company that is in our stage of growth.

And I think we have the professionals here that know how to work through those issues, and help bring the reimbursement side of things into proper focus, and get through the concerns and constraints that the reimbursement organizations may have with a company that in our state of growth, and with a new set of grafts that are apparently very clinically effective and cost effective, but they want absolute proof of that. So, we'll continue to go down that path.

So, thanks so much. Look for press releases from us, because we expect to be releasing some other news here as the quarter progresses on a number of issues, and we'll go from there. And thanks so much for your support and confidence.

Thank you very much to all the presenters. Thank you very much, ladies and gentlemen, for your participation in today's conference. This concludes your presentation. You may now disconnect. Have a good day. Thank you.