MiMedx Group Inc (MDXG) 2012 Q4 法說會逐字稿

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.

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 and Exchange Act of 1934. These statements are based upon the current beliefs and expectations of our management, and are subject to risk and uncertainties.

Actual results may differ materially from those set forth in, contemplated by, or underlined 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 in filings it makes with the Securities and Exchange Commission, under federal securities law.

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

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's been a great deal of progress made as a result of some dedicated, talented individuals. Also, I'd 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 crossed numerous reimbursement barriers, including receiving our Medicare C code for EpiFix wound care allografts, and on the first of January 2013, we received our Medicare Q code for that tissue. In addition, numerous health plans began the reimbursement for our allografts, and we received the first approval by a Medicare intermediary for EpiFix wound care allografts.

Also, we added 28 direct salespeople to our direct sales organization. Our employee base grew from 52 employees to 166 employees. We add some key members to our management team, who primarily joined from mine and Bill's prior organizations. However, we brought the MiMedx 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, and it was followed by 4 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 gain market presence in the wound care market for EpiFix allografts. This was a result of hiring 28 direct salespersons, particularly beginning in the third quarter. By the end of the year we had built 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 salespersons in certain regions of the country, as we obtained a favorable coverage determination from the first of the 9 Medicare intermediaries. We've had further successes during early 2013 with Medicare coverage of EpiFix. Bill Taylor will provide the details.

The use of our allografts has been robust. Physicians are beginning to understand the healing qualities of the amniotic membrane tissue, and continue to press us for clinical studies to support the use of our tissue products in numerous procedures. Therefore, we are quite busy with 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've begun to realize that as the leaders in amniotic membrane tissue processing, we will opportunities to expand the use of our allografts in numerous healthcare procedures. Therefore, it is imperative that we expedite clinical evaluations at a fast pace. Thus, our costs associated with clinical testing were significant in 2012. It 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 in governmental accounts, as well as the expanded reimbursement coverage for EpiFix under Medicare and the commercial side.

We're 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've said previously, it's our goal to become more knowledgeable about the scientific aspects of the potential medical uses of the entire placenta, as well as amniotic membrane. We'll continue to conduct scientific tests that characterize all portions of the placenta in order to guide our products initiatives. We've conducted a substantial amount of testing on the amniotic membrane, and consequently, we'll be in a position to announce some additional clinical initiatives in the near future.

However, we also view the remainder of the placenta as having substantial opportunity for us in medical procedures. Our goal is to find effective uses for all of placenta, not just the amniotic membrane.

We've put a substantial amount of time and effort into 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'll have by-products 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're utilized externally, or internally. We expect this information to be very beneficial in assisting us to determine additional clinical uses for our 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 under 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 approximately double, and be in the range of $50 million to $60 million. Whether revenue is in the lower end of that range, or the upper range 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 9 intermediaries, we have currently received proxy notification from 5. The earliest we expect approval from all 9 would be July 1. However, some of these approvals may not come until the second half of 2013. This means that we will necessarily be conservative relative to hiring wound care sales representatives for the commercial side of our business until we confirm 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 -- 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 to our direct sales organization for governmental accounts until we reach approximately 35 members in that sales organization, which should occur by the end of quarter four.

Relative to our amniotic AmnioFix products, which are used for surgical procedures, and in sports medicine, we're just beginning to conduct and complete clinical studies that would satisfactorily clear our reimbursement for that product line from Medicare, as well as commercial health plans. While our allografts and injectables are being used for these procedures, at the present time they're being paid for as part of the procedure DRG, are being paid for by the patients themselves. So, the growth rate in this area is difficult to predict. However, we do expect to see at least a 50% annual revenue growth in this 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 add salespeople 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 adds to our sales organization.

Let me give you a brief reminder of our sales structure, which should remain intact for an indefinite period. We focused on having direct sales force in governmental accounts, as well as commercial wound care accounts. Each of those sales organizations is currently being managed by a sales executives, Lex Harris in 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 our grafts we'll continue to use our direct sales organization. For the commercial side, we will necessarily be required to use certain dealers and 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 impractical for MiMedx to have its own direct sales force in the numerous clinical disciplines associated with the potential uses of amniotic membrane allografts.

For instance, these various uses could range from plastic surgery to sports medicine with private pay to urology to ENT, and so on. A distribution and sales rep focus from MiMedx is being managed by Bill Cochrane. 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've made some recent progress. We've had the time to devote to clearing up questions associated with that process, and the results of such a move. Expect to have a definitive answer 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.

Thanks, Pete. Good morning, everyone. I also want to thank everyone at MiMedx for all the hard work and great results in 2012. I'm 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 update 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, as well as various private labels that we process and sell for others, two others. Mike Senken will further elaborate on the quarterly and yearly breakdown of these categories.

Also, I want to highlight that we recently past another milestone in terms of our distributed grafts. We now have distributed over 130,000 grafts, and we're growing rapidly.

On the operations front, I'm going to highlight 7 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 decided to move into an 80,000 square-foot building, which is about 5 miles from our current location. Since that time, we've executed the lease, and we've nearly finalized all the construction documents, and our goal is to be substantially completed by early May, and to 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 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 lease $200 million to $250 million in sales on a two-shift operation. Combine that capacity with our secondary facility's capacity, we should 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 -- in processing capacity standpoint.

Second item, our placenta recovery network. During the year, we initiated a strategic focus to expand and further development our nationwide placenta recovery network. Today, we recover placenta in 19 hospitals in 5 states. In addition, we're in negotiations with several new hospital systems for recovery contracts that will give us preferred access to 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 outreach of our donor network in order to meet the growing demand for this amniotic membrane tissue allografts.

Number three, our intellectual property. Pete mentioned we'd announced some great news last month in that 4 new patents related to our allografts were issued, which brings our total patent coverage to 5. We expect at least one more to be issued over the course of 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're developing several patent applications around our base -- around our base patents to build a barrier around that key IP, and make it much more difficult for anyone to attempt to even 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 analyze 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 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 studied, PURION process tissue yielded an allograft that is better retained -- an allograft that better retained the overall milieu growth factor, cytokines, and other critical items that generally match the results of fresh tissue, whereas the competitors did not.

We've completed cell proliferation studies, cell migration studies, as well as certain animal models, which show some very interesting results. We have now identified in excess of 60 specific constituencies that are retained in our PURION process tissue. Those increase 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 the 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 decellularize the tissue. It does not decellularize the tissue. The cells remain, but are not alive. Yes, 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're expected to take our understanding of this tissue to yet another level. Interim time points have confirmed earlier hypotheses, and we're very excited about what we've seen 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 bond material made from placental tissue. Look to discuss these results in more detail in the coming four to six months.

Moving on to clinical studies, we've made a tremendous amount of progress on our clinical studies. In 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 HCTPs. Therefore, no 510-K, or PMA, or BLA is needed. The reason we're 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'll recall that we had a 92% healing rate in 6 weeks, compared to about 8% healing rate for standard-of-care over the same period of time. At the conclusion of that first RCT, we offered the 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 4 weeks, remember this is a group tat only had 8% healing in 6 weeks with standard-of-care.

So, more than half healed in 4 weeks or less, and 91% healed in 9 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 at the upcoming Symposium for Advanced Wound Care Meeting in Denver in May this year. So, we'll have a good poster 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're actually looking for additional sites to speed up the enrollment process

The venous stasis ulcer study that was started in the early part of last year is at the mid-way point in enrollment, and we're also looking to accelerate this enrollment by adding additional sites. We're 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 amniotic, or 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 3 to 4 weeks. The interim data looks good, and if the final data is consistent with the interim data, in my view, we'll have some very strong material for publication and sale dates. Study is using what will be launched in a few weeks as our EpiFix Micronized allograft. So, it's similar to our AmnioFix injectable, but it uses our EpiFix configuration.

We're 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 with expects to enroll 10 patients per week. So, if those numbers hold, it should only take a few months to complete the enrollment process. We have a number of other studies under consideration at this time, and we'll report on those in future calls as well. We feel very comfortable with the progress we've made.

The next item, reimbursement. The clinical summary that I just described really feeds the reimbursement story. I've very pleased to announce that we are ahead of our schedule with respect to our MAC, or Medicare intermediary coverage for 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 9 total contractors that service a total of 13 jurisdictions. Effective March 1, we have EpiFix coverage from 5 out of those 9 contractors, and 7 out of the 13 jurisdictions. We are in active discussions with the rest of those contractors, and we're 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 our organization in several key areas earlier this year than what we anticipated. We're looking at our reimbursement call center, and our direct sales force, and making decisions in the coming weeks into what investments we should accelerate, and when. This is a great challenge to have right now. And that leads me to the transition to my final topic, which is regarding our direct sales force.

You will recall that our conversion to a direct sales force essentially began in the third quarter of 2012. Over the course of those 3 months, we added 20 people to our direct sales force, which when including our national director for government sales who started in June, brought the total direct salespeople at the end of quarter 3 to 21. The government total was 20, and the commercial total was 1.

In the fourth quarter, we added 7 people, bringing the government sales force to 22, and the commercial side to 6. 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 in getting through these various MACs very quickly, we've also hired an incremental 14 people into the direct sales force, so far, in the first quarter this year. Our totals now are 27 government sales personnel, and 15 commercial sales personnel, for a total of 42 people.

We're currently evaluating how many more positions we should bring on board over the next several weeks and months. We expect to add another 4 to 6 additional account executives before the end of this month, possibly more. We also have 4 sales executives who manage the surgical and sports medicine distributor and sales agents 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've seen, and what we expect. When building a direct sales force, it's not uncommon for the typical medical sales executive to 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're hiring -- generally speaking, hiring sales executives with extensive period 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 3 or 4 months on average to get to a $1 million per 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 would be like around $1.2 million or so per year for a 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're 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 the $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 in plants, 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, and we're improving these systems every day 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'll turn it back over to Pete.

Thank you, Bill. Okay, Mike.

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 exceed our plan by 17%, or $4 million. The increase in sales revenue for the quarter was driven by both sales of our 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 a 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 of higher sales volume, and improved gross margins. 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, as 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 plan, partially due to the accelerated demand for our allografts, as well as opportunistic hiring, due to the availability of salespeople with strong relationships in the wound care space, and decisions taken by management to invest in certain other strategic areas.

Though a 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 techs and tissue processors in 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 filings.

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 for a loss of $0.02 per diluted common share, as compared to the reported net loss of $2.6 million for 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 HydraFix 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 shares 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 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 improve margins, 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. A 49% reduction in operating cash burn is due to the improving results 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 activities.

Total assets increased by $1.6 million from the prior quarter end. Average days sales and accounts receivable remained 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 break through the MAC groups.

Total liabilities as of December 31, 2012 were $15.2 million, an increase of approximately $823,000 as compared to September 30, 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 2013 will be significantly lower due to the conversion 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 our 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 the 2012 10-K is not impacted in terms of the information reported, please note that this will be the first report which includes the auditor's attestation of the company's internal controls. As a result of this audit, there were no reported material weaknesses.

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

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

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

Congratulations on a great finish to the year.

Thanks Matt.

A couple of questions for me, first the gross margin expansion that you've seen here in the past couple of quarters, and to be honest, I was quite surprised even by the fourth quarter. How should we think about that line going through '13? Obviously, there's 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?

Matt let me toss it back to you. What did you model?

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?

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 a --

Okay. Secondly, and I guess 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?

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 are 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 get clinical, trials started quickly. But -- and that will pace when we enter some of these new 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.

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.

Yes, 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 1, 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 then, 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 had.

So, we made everything consistent, which should remove that variability. In the first, we should be able to see a very standard and slightly elevated price per square centimeter should be July 1, based on 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 1.

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'll have sent in the application by the end of April, just so I understand the timing there?

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.

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

Thank you, Matt.

Thank you, Matt.

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

Hi, good morning.

Hi, Bruce.

Hi, Bruce.

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.

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 be answered 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 living cells. And you can look at the pronouncements from the working group of the FDA on tissue, 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 allografts.

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 reports that 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.

Okay, that's great. Then one other question on the hospital procurement network. I want to make sure I've 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?

What we are talking about is an incremental 40.

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

What we said 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.

Okay, got it. Thank you very much.

Thank you, Bruce.

Thank you, Bruce.

(Operator Instructions). Our next question comes from Mr. William Plovanic with Canaccord. Please proceed.

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

Hi Kyle.

Great. Just a couple of big picture questions. Obviously, you've got 5 of the 9 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 9 MACs by maybe first half of the year, or into the back half, how many patients will be covered at that point?

I don't have the 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.

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

Yes, the first 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 few weeks, or maybe before our 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, and was accepted for that. So, although it won't be in necessarily a publication, we will have the symposium poster published.

Okay, great. And then, just I think you kind of mentioned EpiFix micronized version. 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 in allowing you to target more wounds, or more effectively?

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 a number of them, essentially, kind of shredding it themselves, and impacting the tunneling wound. S

o, we've decided to have an EpiFix micronized version that either could be injected into the dermal layer around the wound bed to help 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 crevices, or in the tunneling wounds. And we have gotten some pretty interesting and good results there. So, we thought it was best to go ahead and introduce the micronized version of EpiFix.

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?

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'll 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 would be available.

Great, okay.

From a coding perspective.

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 lives, patients. Just 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?

We'll I guess -- go ahead.

Well, Bill, first of all, one set of metrics that 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 -- well, good portion of that was in the VA side of the business. They had about 155 commercial sales people, as I recall, reading a prospectus, and about 35 or 40 of their sales persons were in the VA side. So, you might be able kind of go back and analyze their growth rate by that back to some of the things you are looking for. But we don't really have the metrics you're asking for in front of us.

I've got a couple with that are close though. There's a little over 150 VA hospitals across the country. We're at 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 hospitals 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're in, we are not fully penetrated in all 120 facilities yet either.

Thank you very much. Congrats on a great year.

Great. Thanks a lot.

Thanks a lot, Bill.

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

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

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