MiMedx Group, Inc. (MDXG) Q3 2012 Earnings Report, Transcript and Summary

A very good morning to you all, ladies and gentlemen. Thank you all for joining and welcome to Quarter 3 2012 MiMedx Group, Inc. Results Conference Call. [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.

Good morning, everyone. This presentation contains forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934. These statements are based upon the current beliefs and expectations of our management and are subject to risks and uncertainties. Actual results may differ materially from those set forth in, contemplated by, or underlying the forward-looking statements based on factors described in this conference call and in our reports filed with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2011, and our most recent 10-Q. We do not undertake to update or revise any forward-looking statements except as maybe required by the company's disclosure obligations in filings it makes with the Securities and Exchange Commission under federal securities laws. With that, I will turn 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, and we firmly believe that our amniotic membrane tissue technology will prove to be a platform from numerous innovations for healthcare procedures. The amniotic membrane itself has a significant number of growth factors that we continue to study scientifically. There were number of clinical studies underway, and as you are probably aware, we issued a press release last quarter on our first randomized control trial for EpiFix tissue graft being used to treat diabetic foot ulcers. Those results were very compelling. We have other studies underway 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 clinic effective as well as cost effective in many procedures. In addition, we feel strongly that there will be many uses for the remainder of a placenta. As we go through the expensive developing and collection network nationally, and improving our storage processes, we believe that we will find numerous other uses for the remainder of a placenta as byproducts 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 previously indicated, the company has been filing patents for approximately 5 years. We're 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 and third quarter, something occurred in 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 injectable. 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, and we've now broken through with the government-related business and the Veterans Administration hospitals. At this point, the key to continued rapid growth in revenues relates to reimbursement for our tissue grafts. Over last 1.5 years, we've continued to add to the number of private payer 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. Additionally, we're still working with 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 data is sufficient, reimbursement should be available for EpiFix's product 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 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 will 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 some of the results for publication. As we verify the clinical and cost effectiveness of 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 to Wound Care with certain key sales reps and distributors. Relative to 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 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 minute. In all my years of being the CEO of public companies, I don't think I've ever given our performance during a 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, 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 that 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 a 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 proud to disclose that there have been no adverse events reported related to all those grafts being used. Most importantly, 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 on Brent Miller in as an Executive Vice President. Brent had previously served as Bill Taylor's, number 2, 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 6 other individuals from my and Bill Taylor's previous organization. This brings very experienced people to MiMedx Group, and there is no question about how quickly they settle into their roles. With a rapid growth that we're experiencing, we have to have individuals with whom we are 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 Officer, Don Fetterolf, who is responsible for all 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 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 2 different buildings and that is not as effective as being in one standalone facility. Bill Taylor will discuss that in a little more detail in a few minutes. The executives have found time to call on a number of institutional portfolio managers over the last several months. As soon as we began to expose our company and our potential to these investors, there was an increase in the trading volume in our stock as well as our price. Also stimulated some interest for some industry analysts, and we expect to see some analyst 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've 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.

Thank you, Pete. Good morning, everyone. I'd like to start by once again highlighting that MiMedx tissues 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 have taken the next steps in our growth, we feel it is now appropriate to start the process of giving you more detail. I was thinking, we'll 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 Injectable, 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 catch-all for our other products and tissues, which would include our Dental and Ophthalmic tissues as well as HydroFix. 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 the 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 government sales team at the end of the third quarter was 20 sales professionals. This government sales team also sells AmnioFix and an AmnioFix Injectable, but they're in the early stages in this area, as 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 and Shire and Integra. On the Wound Care side, our strategy is to migrate to a direct sales force over time. So we'll strategically add sales executives 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, 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 businesses. You may remember that over a year ago, we announced an agreement with the 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 contract or 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 backroom paperwork as well as the contracting matters with the complex government system. Our price structure is different with the distributor in the government accounts, because we handle a larger portion of the sales process than with our commercial distributors. Another benefit of this relationship with our government distributor 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 aggregate. Our goal is to have 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 this quarter or 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 with it an important facilities topic that Pete mentioned. As you may remember, we currently have 2 sites in Kennesaw about a 0.5 mile apart, with 40,000 square feet in total, about 20,000 square feet each. 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 5 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 this plan 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 3 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 4 to 5 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 third quarter, the company was granted one U.S. patent for our hydrogel technology, 2 European patents for our collagen technology. In addition, we filed 11 applications this quarter, including one non-provisional application for collagen, 6 non-provisional applications for our amnion technology, and 4 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 2 patents will issue later this year. Moving to the clinical front. In August, we released the result of our first Diabetic Foot Ulcer trial or DFU trial. The results were incredible. As we reported, 92% of the participants, who were treated with EpiFix were healed in 6 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 12 weeks. So basically our results showed a 3x 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 principal investigator cited ethical concerns about prolonging the effective 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 it's called adaptive design is applied to the study protocol. Adaptive design of clinical studies is an approach that can shorten the trial timeframes 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 preplanned changes to trials, after the study has 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 10 years. As we've discussed previously, our clinical studies are designed for reimbursement and sales purposes, not regulatory purposes. But even so, we're 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 2 additional DFU or Diabetic Foot Ulcer randomized controlled trials in process as well as a plantar fasciitis randomized controlled, venous ulcer randomized controlled. We're getting ready to start an epicondylitis or tennis elbow or golfers elbow RCT as well. And we also have an RCT look at AmnioFix as anti-scarring attributes, and we're looking at adding a second one of those, with cranial application late this year or early next year. So we have a number of other studies beyond those that are in the very 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, an 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 9 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 earnings 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 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 $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 will allow 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 due to sales model explained by Bill earlier in the call, where MiMedx maintains the direct sales relationship and uses the 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 our management incentive plan. We would expect investments 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 a 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 for licenses 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 that 2012 contingent liability based upon operating results for the 9 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 sheet 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's 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 tranche, of $0.01 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 and accounts receivable increased to 66 days from 61 days in the previous quarter, due to the ramp up 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 additional accounts payable and accrued expense 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 stockholders equity increased $7.3 million as compared to the beginning of the year to a total of $19.2 million as of September 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&A for us?

[Operator Instructions] Your first question is from Bruce Jackson.

Just a couple of questions about the VA sales force, were they added at the start of the quarter or do 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're 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 in the neighborhood of 25, 26 people are going to be probably the right number for that sales force.

Bruce, this is Pete. Let me add one thing. We'll be focusing now primarily on 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 [ph], in terms of reimbursements. So as the reimbursement picture changes on a regional basis, we'll add commercial sales people in those regions.

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.

Our next question is from the line of Bill Plovanic.

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 our tissue goes, exactly how to track that and exactly where we stand with any stock related to dealers and that sort of thing. In the VA, it's much simpler, frankly. We initiated an IT half [ph] here and Debbie Dean's presence has made that happen very quickly, where we can track accurately and rapidly, where we stand in each facility. Let me let Bill add to that.

With that, there was some level of stocking as you would expect, because our sales executives are present for a lot of these procedures, but they 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 3 weeks or so of inventory, and we're tracking to that level. We expect to be able to keep it in that, 2 to 3, 2 to 4 weeks, on a go-forward basis, which is a pretty reasonable level throughout the whole system. So it's a pretty small level throughout that VA system.

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

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

Well, actually, just 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 if you look to the Medicare side, the CMS side, and then our Q-code that we expect to get, we should find out definitely in the next probably, 1 to 2 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. Although, I think there are 10 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.

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 [indiscernible] and I think your total revenue number was $23 million. You've met or exceeded every quarter thus far. Shall 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 explained in our press release that we expect to exceed the $25 million upper-end of the goal we set for 2012. So Bill, on arithmetic, we will exceed the $8 million number in fourth quarter.

And then just last, the housekeeping question and I will jump off here. Your capital structure has 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?

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

We have no further questions at this time. [Operator Instructions]

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 we'll add to that, January 1, 2013, Bill?

Okay. The C-code since we've had since January is designed for Medicare reimbursement in the ASC or Ambulatory Surgery Centers and Hospital Outpatient. It's called the HCPCS pass-through code. It's essentially a temporary code that lasts somewhere between 2 and 3 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 that 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've actually set it up for chronic wounds is considered as 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 it does not cover are surgery cases in-patient in a hospital which typically fall under the DRG for those cases. So again, Q-code will get in all the Medicare cases from the physician's office, the Ambulatory Surgery Center, Hospital Outpatient and we expect to get that in January of 2013. You'll 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.

And I think, we have another question come from Bruce Conway.

Yes, we do.

I have 2 questions really for the future. One, I don't know if you had time to consider, but when 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?

First of 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. We are not having any complaints, any more. 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, where we've been compliant with those at the end of this fiscal year. Our auditors will certify our Sarbanes Oxley procedures. I think they'll be -- certainly will be where we're supposed to be there. So the issues associated where we're trading. We've just been busy doing a few other things, as evidenced by the quarter, the results and we'll get around to dealing with those matters shortly. Now I will 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're 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 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 there to not spend a lot of time and attention there until we make sure that we've properly address the U.S. market, because we have so much opportunity here. So we don't want to get too defocused, but we have some opportunity. We expect to see our sales there grow over the coming quarters.

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

Thank you. For our shareholders, I appreciate your comments. We've got 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 report good results for you. There are number of issues 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 it's 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 and a proper focus and get through the concerns and constraints that the reimbursement organizations may have for a company that's in our stage of growth. And with the 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.