Oct 28, 2017
Executives
Thornton Kuntz - SVP, Administration Pete Petit - Chairman and CEO Mike Senken - CFO Chris Cashman - EVP and Chief Commercialization Officer Debbie Dean - EVP
Analysts
David Saxon - Needham & Company Matt Hewitt - Craig-Hallum Capital Matthew O'Brien - Piper Jaffray Bruce Jackson - Lake Street Capital
Operator
Good day ladies and gentlemen, and welcome to the Q3 2017 MiMedx Group Inc's Earnings Conference Call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions].
I would now like to introduce your host for today's conference, Mr. Thornton Kuntz, Senior Vice President of Administration.
Sir, you may begin.
Thornton Kuntz
Thank you operator and good morning everyone. Before we begin, please be reminded that our comments today may include forward-looking statements.
These statements are subject to risk and uncertainty and actual results could differ materially. We list the factors that might cause results to differ materially and our SEC filings which are available on our website www.midedx.com.
We do not undertake to update or revise any forward-looking statement except as maybe required by the company's disclosure obligations in filings it makes with the Securities and Exchange Commission under Federal Securities Laws. During the call, we will discuss non-GAAP financial measures when talking about the company's performance.
You can find the reconciliation of these measures to GAAP financial measures in our press release and on our website. Finally, MiMedx is not responsible for the accuracy of our earnings teleconference transcripts provided by third parties.
The only authorized live and archived webcast are located on our website. With that I will turn the call over to MiMedx Chairman and CEO, Pete Petit.
Pete Petit
Good morning. Thanks for joining us for our third quarter conference call.
I have with me today Mike Senken, our Chief Financial Officer, Chris Cashman, our Executive Vice President and Chief Commercialization Officer; and Debbie Dean also an Executive Vice President. Bill Taylor, our President and Chief Operating Officer is on a well-deserved vacation overseas.
He is not going to be able to participate on the call. As well as Chris Cashman will discuss some of Bill's operating matters.
Let me begin by making some general comments about our quarterly performance and frankly our performance this year. Shareholders seldom I may use the word exceptional, I will generally use the word good to describe the quarter.
As I believe our performance is now becoming exceptional in terms of all the operating parameters. However, I'm certain someone will initially criticize the fact that our operating profit as a percent of revenue should grow faster than 88% considering our revenue growth.
Let me remind you that I've stated on numerous occasions that in our current stage of growth, the company still has opportunities for very high return on our investments. In other words, we have opportunities in terms of our sales force, new product and market development, clinical studies and software management system updates that give us very high returns on our invested dollars.
These investments, as they can pay as you've seen demonstrated very good returns in the future in our view. Please give us a benefit of doubt, when you see us not escalating the operating profits as rapidly as you think we should.
We see these investing opportunities, which we review monthly as we analyze our private loan statements, we will be proactive. This is one of the major reasons we've had our successes that we've had over the past few years with our growth.
Please recall that in early 2016, we had to take operating profits down as we brought 3 new product launch and a production way ahead of schedule. That has paid huge dividends for us in 2017.
And as investments like those that allows us to distance ourselves from our competition and continue to build barriers to entry. And I'll also tell you that our legal expense in the third quarter are higher than our previous trends.
These were to be expected because of the short selling legal message we had to undertake. Those expenses will begin to trail off in the quarters ahead as our legal activities come down.
Also some of our patent expenses have been higher recently as we've taken some other initiatives relative to the preparation for our major [Indiscernible] which is our first trial that will now occur at the end of January in 2018. One other point I want to make relates to the progress we've made in the management touring into biopharma company.
I heard six months ago, when we first announced this initiative that we were being delusional about thinking we could transition into biopharma company quickly. We'll hope that we've begun to disprove that concern.
As you're seeing from our press releases, we now have 4 IND BLA studies underway, two of those are in Phase III, which is a final phase of the studies. We have these studies progressing towards a general tendonitis indication, and osteoarthritis the knee indication.
Both of those have huge opportunities for growth in 2020 and beyond. Our main production facility is now in good manufacturing practices capable of not good tissue practices, which has paired us for a biopharma life.
We have recently added Dr. Gloria Matthews to our staff to focus on our research and development activities.
We will be adding other executives in the future to enhance our biopharma management. Therefore, I realize there is always certain credibility with the rate at which we accomplish our objectives.
But you should realize that our management team is well qualified for the task and the goals we've set and our six year track record of MiMedx should clearly indicate that we are very effective in what we focus on. With all the noise over last several weeks, many people external of MiMedx have perhaps lost sight of the significant progress we've made.
Our management has continued to teach and implement a very specific focus on systems, management accountability. Companies that have that kind of focus tend to be the ones who are more successful and predictable.
Alright, now let me take a minute to highlight just a few of the key outstanding accomplishments for the last several months. And of course we outlined in our press release yesterday a lot of the accomplishments for the quarter.
But in July, we announced that we beat the upper end of our revenue guidance for the second quarter by $1.4 million. We also raised our full year guidance.
And again in October, we announced we beat the upper end of our revenue guidance significantly for the third quarter by $4.6 million and that we're raising our full year guidance again. This was in spite of two major hurricanes hitting the continent of U.S.
during the quarter. And most companies have had problems associated with that relative to the revenue expectations.
In the third quarter, we reported strong Phase IIb trial data for plantar fasciitis, petitioned and at trial and filed INDs for Phase III trials for both plantar fasciitis and Achilles tendinitis. We shipped over 1 million allografts in our history and that was announced in August.
And they have an outstanding safety record. In October we filed and received permission for proceed from the FDA for Phase IIb osteoarthritis for the knee clinical trial.
Now, let me spend a few minutes talking about the MiMedx intellectual property as a reminder of the strong asset base we have in this area. And again this is not Bill Taylor would have normally done.
Intellectual property or IP consist of many assets not just patents, includes issued patents, patent applications, trademarks, trade secrets and knowhow. We take great strides to protect our IP and many of those activities not immediately obvious to shareholders.
We also take great strides in protecting our knowhow and trade secrets. In fact many of the trade secrets only known to small handful of people within the MiMedx organization.
Additionally, our knowhow and trade secrets are a significant element to our technological success and achievements. If all of our patents went away overnight, which obviously will not, we will still have a distinct advantage over our competitors because of the value and differentiation of the trade secrets and knowhow.
I'll highlight another fact that many people do not fully understand. MiMedx has several addition patents that we believe can be ascertained against some infringes and patent lawsuits, and that will continue to protect us in the future.
This is part of our overall patent protection strategy. At the appropriate point in time, we will assert and seek the production of the court with respect to these other patents.
We won't go in any more detail, because we want to give our potential opponents any more information. But understand that we have more happy weapons in our arsenal and we are only in the first stage of this particular battle.
Now as we've said for many years, protection of our patents is important and we will continue to be focused on that effort. That said, having solid patent protection does you no good if you cannot "commercialize" products well.
Even though a number of companies have violated our patents, their revenue growth over the past three or four years, after copying us has been a small fraction of our growth. Why is that they have not been able to copy or emulate our success, even though they appear to be violating our patents.
Pretty simple, MiMedx does not rely solely on our patents to preserve our place in the market, we also have trade secrets, as I mentioned early and more important we have knowhow. Knowhow often translates into any type of intellectual property rights.
Transcends -- excuse me -- know how often transcends any type of intellectual property rights. We also focus on our clinical and scientific excellence and difference from our competitors.
We have a world-class production quality operation and market leading reimbursement sales organizations. They are building a substantial revenue base and taking market share away from the MiMedx was as easy as to send the copy of products.
I think it's safe to say that after four years and infringing on our IP, some of these companies were more than just a few million dollars in annual sales. If the revenue has been limited less than $10 million annually in these categories according to market research group, Smart Track.
Now patents are important, no doubt. However, our success in the marketplace is the most important factor.
We will continue going after infringes and be undertaken by individual results if we lose the patent battle here and there. Our greater goal is to respect and balance in the marketplace.
We've achieved that goal and we expect that will continue for us. As I've said on numerous occasions, the real business battles occur in the marketplace.
We're winning that war and should continue to do so. Our patents will just add to our weapons.
Now let me cover few issues related to our short seller tag. Hope all of you who developed curiosity will refer to our website "on the short selling commentary."
There are a couple of papers that clearly detail the issues surrounding short selling and explain the issues there well. As the various reports and tweets take place, we screen them for reasonableness and issues that should be clarified particularly for regulatory purposes.
The rest of this plough is inconsequential and unprofessional commentary we try not to involve ourselves with tweets. Over the years, MiMedx has successfully reported numerous Short Seller Attacks.
We have done so by meticulously in execution of our operating plan, delivering the financial results we have promised and laying a foundation of continued strong growth. Despite carrying large shortages unfounded concerns for increased competition and to accelerating MiMedx's stock price almost doubled this year.
In recognition of ongoing stellar performance Fortune Magazine write MiMedx number five on Fortune's list that the fastest 100 growing public companies in America. Recently MiMedx has become the target of another conservative Short Seller Attack.
This is a very coordinated effort employing new tactics by a number of hedge funds and individuals. This strategy combines program trading, make it short selling and dissemination of false information via the Internet.
When applied in concert, these activities form a weapon that can be used illegally manipulate stocks and harm innocent shareholders. Of course, a more strategic weapon to combat this circus as I call it, just to continue to relentlessly perform to meet the company's expectations.
We've done that now for over 6 years and we plan to continue. Also to cooperate fully and quickly with any regulators, which we are actually doing.
I've tried to convey through executives could not be more optimistic about our performance in the future. After all these years, defining our all the key asset basis built, mature to the point there are all working in concert.
You can see that from this year's performance and from our forecast for the remainder of 2017. I believe we're continuing to exceed our revenue forecast primarily because the size of our sales organization is allowing us to go much wider and deeper into the still emerging market of advanced wound care and certain surgical procedures.
And this is happening beyond what we originally even predicted. We have launched numerous new products in the last two years and fine-tuned our sales management systems exquisitely.
Our training function has improved dramatically as we bring new sales people into our organization. They can be very productive very quickly.
Again we're broadening our physician customer base rapidly, because of the number of sales people we have across the country. You've heard Christ Cashman talk numerous times about the size of our markets and the fact that numerous individuals who have very problematic wounds that are not coming to closure being located and found and given care with our technology.
Now let me transition again. Remember as these "no-name" publishes continue to treat documents -- short sell documents you must first consider that you're [hiding] and some of their sources are dishonest people.
They are getting the input from a few sales employees who we terminated for cause and we filed lawsuits against. They will find from time to time various other people, we believe it is in their self-interest to denigrate your company.
This is not unusual for a company of our size to have individual or business partners who did not meet our expectations and unfortunately had to terminate our relationships with them. However, as you've seen we are very willing to explain all accusations and innuendo particularly one relates to the company allegedly violating any regulations or laws.
Frankly, the vast majority of these published material is not credible for "no-name" publishes, to publish something credible, they at least need credible sources. They do not have them.
Cohodes is not calling some of our current employees trying to bolster his uncredible sources. You all know that I've been Chairman, CEO for public companies now for 36 years and no one respect very much laws and regulations of this country.
I'm a person of honesty and integrity as our other executives in this company. We always strive doing the right thing, which is sometimes not the easiest thing.
If we were dishonest that trade would [indiscernible] service years and years ago. Your executives reported branches are not fearful of the regulatory view that is currently taken place by the Securities and Exchange Commission.
We look forward to completing this investigation by the Commission and clearing on all these matters. Now again I remind you of the qui tam lawsuit was filed against MiMedix and resulted in Department of Justice investigation of the company, three years ago.
To me the same allegations were in that suite, The Department Of Justice declined to enter into the case after few months and Organogenesis executive filed a ridiculous action dropped the lawsuit. This situation will clear itself.
However, those individuals and entities that are involved in a short sudden activity there will be long ongoing litigation as a minimum. In addition, we would do everything we can to see these destructive and illegal activities are further regulated because they are manipulating our financial markets and harming small investors.
Let me make one final comment here. You will see shortly, I believe a press release that we have just placed out.
This press release concerns activities of Mr. Marc Cohodes and the fact that he is setting up a website specifically intended to focus on negative comments about MiMedx.
I'd like to call you -- call out you the link we have included in this press release. It's a link to an SEC investor alert entitled updated investor alert, social media and investing stock rumors.
The investor alert warns investors -- warns investors about fraudsters who may attempt to manipulate share prices by using social media to spread false and misleading information about the stock. I'll give you one other quote from this document.
One way fraudsters may exploit social media is to engage in market manipulation such as spreading false and misleading information about a company to affect the stock share price. Wrong doers might perpetuate stock rumors on a social media as well as online bulletin boards and in internet chat rooms.
My comment is to simply reinforce that market manipulation of stocks is against the law, let's get into the rest of our discussion here, Chris.
Chris Cashman
Thanks, Pete and good morning. We are very pleased with the sales results our team delivered this past third quarter.
We grew revenues 31% over prior year's third quarter and over 10% sequentially from Q2 to Q3. Taking a look at the mix, revenues were strong broadly across all facets of our business.
Wound Care grew 24% in Q3 over prior year's third quarter and 13% sequentially quarter-to-quarter. SSO grew 4% sequentially quarter-to-quarter and 56% in Q3 over prior year's third quarter.
As said before and I'll say it again, we are not growing by chance. We have a purposeful strategic plan and well-defined processes that focus our management and their teams to be able to provide these results.
In the early days of our direct sales organization our sales people relationships help open doors and gave our products a chance to be used. Once the physicians used our products, they would see the benefit themselves, particularly in the wound space and it quickly became their product of choice.
We have since changed as an organization, through a very deliberate process. Our sales personnel not only foster good professional relationships, but they also have developed very good planning, forecasting, education and account management skills.
Today the disciplined approach of our new sales management system is a major asset in facilitator of our strong revenue growth. It continues to make a positive impact on our sales productivity in core and organizational structure investments made at the same time.
Due to our continued expansion of our sales force, focus on secondary and tertiary city markets and smaller overall territories, we have the ability to reach more providers and they'll go deeper and broader within these accounts where the doctors expand their usage. We have found many more opportunities than we even thought existed three to four years ago, because of our intense focus on creating this professional sales organization.
We're over 360 employees in our field sales organization now and we expect that this could grow to more than 400 by the end of January 2018, when we attend our national team meeting. Our sales employees are passionate about what they do, they are driven by the impact our products can favorably have on patients' lives and energized by being a part of MiMedx.
I congratulate them and all of our department sales and customer support teams for our Q3 revenue results. MiMedx has built a very strong foundation in both training our commercial sales organization and also externally educating the many care providers who have interest in and are currently utilizing our market leading products.
New positions who did not adopt to advance wound care or skin substitute products in the past are coming forward and want to learn more about our products and then often once educated begin to incorporate these products into their daily treatment protocols. Education has been critically important to growing market share and in expanding the markets.
I just returned from the nation's largest and most well-respected interdisciplinary wound care program called SAWC this weekend, where the MiMedx sponsored breakfast symposium was the best education event that we have had for this type of forum. There were over 125 healthcare providers in attendance.
The content in depth of good clinical and scientific research rivaled what you would experience at a cardiovascular meeting or high-end medical conference. The symposium included the VLU landmark RCT by the principal investigator, Dr.
Christian Bianchi from Loma Linda University Medical Center. All four presenters reiterated the importance of the milieu of growth factors chemokine, cytokines and the mechanisms of action that are part of the tissue source.
Dr. Will Li co-founder of the Angiogenesis Foundation and the moderator of the session spoke to the many possibilities of use and intervention with this technology platform.
The data and content were very well received. I expect MiMedix will continue to take market share and also expand the markets that we are in.
Recall, MiMedix makes up approximately two-thirds of all amniotic spend. I have stated before that the wound market for skin dermal substitute is expanding significantly due to the amniotic and placental based tissue products.
In 2016, the spend grew 16% to 681 million. It is projected that in 2020 the SDS market spend will be at 1.1 billion, with amniotic allografts still making up more than half of this market spend and MiMedx still the two-thirds leader.
So case in point, the MiMedx's focus in the wound care clinic has been the 1.4 million diabetic foot ulcers and venous leg ulcers. Fewer than 150,000 patients receive an advanced skin dermal substitute like EpiFix annually.
There are still approximately 90% of these wounds available for treatment. The commercial portion of our insurance coverage has been predominantly for DFUs.
Only approximately 30% of these commercial lives covered for DFUs have positive payment policies also for venous leg ulcers. The multi-center, randomized controlled venous leg ulcers clinical study that's now published will have an impact and we believe the annual market opportunity could be more than what we have conservatively shared before.
Based on the latest BOU study results and the 30% market share, the MiMedx wound care products realized today, the additional annual market revenue opportunity is forecasted between $300 million and $400 million. We could begin to see the effect of these positive coverage by second quarter 2018.
Our new product and strategic market initiatives with EpiCord and AmnioCord as well as AmnioFill have made solid contributions to our revenues and continue to find their place in our portfolio. Both AmnioCord and AmnioFill, we call are synonymously well in surgical procedures and in enhanced wound-healing applications.
Both wound and SSO sales personnel sell these products. AmnioFill is being used by doctors to fill deep voids like dehisced surgical wounds, pressure ulcers in the hospital setting, and other muscloskeletal conditions.
AmnioCord often gets used in wound procedures as well when the wound presents with a deeper and more chronic condition as in foot and ankle surgical procedures for example. We are very pleased with the early progress.
With the commitment to the pain management market, we've now hired our first 10 pain market specialists. Our existing large sales force of over 300 working at foot, ankle and lower extremity procedures every day are also educating on the use of AmnioFix.
Our Phase IIb IND study on [PF] has been detailed at the topline efficacy data, showing superior results as compared to placebo. All of these activities are reinforcing our progress in the pain market.
I want to note that we saw improved utilization of our micronized products in Q3 and revenues reside in both wound and SSO sales. We believe our pain management opportunity is still much under-appreciated and not well understood.
Last week Flexion Therapeutics to [indiscernible] received approval for their products Zilretta for use as a single intra-articular injection for osteoarthritic pain of the knee. They deserve congratulations for a job well done.
However, please understand Zilretta is in extended release synthetic corticosteroid. The MiMedx now has 4, not 1, I repeat 4 IND studies of AmnioFix injectables that are in various stages.
Our first is the IIb study for plantar fasciitis , which has shown outstanding results that we've reported on. The next 2 INDs are Phase III studies in support of Biologics License Applications or BLAs in plantar fasciitis and Achilles pain with the ultimate goal to combine into an indication for use in tendinopathy pain.
The most recent IND is the Phase IIb study for use in Osteoarthritic of the knee. These 2 indications for use represent approximately 80% of the more than 15 million injections done each year to treat musculoskeletal pain.
We believe the result of our BLA clinical trials based on the clinical results shown in safety profile to the patient will demand a price per dose of $1,000 or more. This expands the musculoskeletal degeneration market for our first 2 BLA products to more than a $12 billion U.S.
market opportunity. We believe the non-degenerative aspect and potential reduction in opioid use due to our Amniotic injectable product will drive significant adoption.
Again let me emphasize that this is not the action of a steroid, which breaks down tissue. What we have experienced with amniotic allograft in the market through the ACTP regulations is that there has been no adverse reactions attributable to the tissue.
It is a multi-factorial material with the mechanism of action totally different than what is being offered to date. MiMedx has the distinct advantage of having a technology platform that includes over 220 proteins that are growth factors, cytokines and chemokines.
These proteins act as a milieu of components that enhance healing, modulate inflammation and support angiogenesis. It's also been shown that it acts as a stem cell magnet, attracting cells to the affected site and then help orchestrate the response once there.
There is not a competitive product therapy in the market today that has the characteristics of AmnioFix and its ability to enhance healing. So in closing, as Pete also stated, we have been recognized by Fortune Magazine as the number 5 company on the list of 100 fastest growing public companies in the U.S.
The fundamentals of our business are hitting on all cylinders. We believe the momentum in revenue growth that we are seeing in the marketplace is sustainable.
The market uses we're focused in are not saturated. We still have many untapped large market opportunities like pain management of up to $12 billion.
More than 95% of our business revenues come from direct sales to end-use customers. We have an outstanding management team with a well-trained clinical sales force.
We firmly expect to continue the performance into 2018, mirroring the results that we've talked about today. And now I'm going to turn it over to Mike Senken.
Mike Senken
Thanks Chris and good morning. The company recorded revenues for the third quarter were approximately $84.6 million, which represents an increase of 31% or $20.1 million over prior year third quarter revenue of $64.4 million.
Wound care revenue was $61.9 million and SSO revenue was $22.7 million with growth driven by additions to our sales team, new products launched in the second half of 2016 that continue to gain traction in the marketplace and increased interest in our placental technology due to recent positive clinical trial results. This was also the first quarter after the wind down of the AvKARE inventory resulting in increased sales under the MiMedx federal supply schedule as compared to our prior quarters It should be noted that the amount of inventory repurchase part of the contract with AvKARE was nominal and all inventory buyback obligations have been satisfied as of September 30.
Distributor revenue represented less than 5% of total revenue, while we continue to grow the number of active accounts driven by increased direct sales headcount, allowing us to expand into secondary cities. Stability Biologics product revenue for the quarter was $2.2 million as compared to $2.6 million in the prior year.
Revenues for the nine month ended September 30, 2017 was $233.6 million, which represents an increase of 33% as compared to prior year. Year-to-date wound care revenue is $171.4 million and SSO revenue is $62.2 million with revenue from distributors, again representing less than 5% of total year-to-date revenue.
Stability Biologics product revenue on a year-to-date basis was $7 million as compared to $9.8 million in the prior year. GAAP gross margins for the quarter were 88.7% as compared to 87.6% in the third quarter of 2016.
A 110 basis point improvement was driven by higher sales volume, processing yield and efficiency improvements and lower one-time cost related to last year's Stability Biologic acquisition. On a year-to-date basis, GAAP gross margins were 88.5% as compared to 86.7% in 2016.
On an adjusted basis gross margins have improved 70 basis points. The divestiture of Stability should result in a positive impact to our gross margin percentage on a going forward basis as the 2017 average gross margins on Stability related product revenue were below 50%.
R&D expenses for the quarter were approximately $5.5 million or 6.5% of quarterly revenue as compared to $2.9 million in the third quarter of 2016. On a year-to-date basis, R&D spending was $14.4 million or 6.2% of revenue as compared to $8.6 million in the prior year.
The increase was driven primarily by increased investments in clinical trials and patent costs, as we move forward as a biopharma company. Selling, general and administrative expense was approximately $60.2 million for the quarter or 71.2% of quarterly revenue, which represents a 360 basis point improvement in leverage versus prior year, driven by greater sales efficiencies.
The year-over-year increases in SG&A absolute dollar spending was due to the continued build-out of our direct sales force in both, wound care and surgical market, increased commissions on higher sales volume, increased share-based compensation, increased litigation costs and bonus accrual. Litigation cost for the quarter totaled $3.5 million as compared to $1.2 million in the prior year.
These costs are expected to remain at this level for the next several quarters. On a year-to-date basis, SG&A expense came in at 72.1% of revenue as compared to 75.1% in 2016.
Year-to-date litigation costs are $6.9 million as compared to $2.8 million in the prior year. SG&A costs for Stability Biologics, excluding the allocations totaled $4.6 million for the first nine months of 2017.
The company reported positive adjusted EBITDA of $15.6 million or 18.5% of revenue for the quarter ended September 30, 2017, as compared to $11.4 million or 17.6% of revenue in the third quarter of 2016. For the nine months ended September 30, 2017, adjusted EBITDA was $42.2 million or 18.1% of revenue as compared to 17.4% in 2016.
Improvement was driven by revenue growth and improving sales leverage, somewhat offset by increased spending in R&D related to clinical trials and increased litigation costs. Included in our press release is a reconciliation of adjusted EBITDA to reported net income.
GAAP operating income in the third quarter was approximately $8.8 million or 10.5% of quarterly revenue as compared to $4.7 million or 7.3% of revenue in the prior year. On a year-to-date basis, GAAP operating income was $22.2 million as compared to $9.7 million in 2016.
The company reported a gain on the divestiture of Stability Biologics of $4.3 million, representing the excess of payments for net assets and forgiveness of earn- out liabilities over the net book value of assets sold. Included in income tax expense is $5.7 million in tax credits earned as a result of the divestiture.
The positive impact of this transaction was not included in the company's adjusted earnings per share, as it represents a one-time non-operational positive impact to earnings. The company booked a net tax credit for the quarter of $4.4 million as compared to $1.3 million in tax expense in the prior year.
The effective tax rate for the quarter was a negative 33.5%, and reflects discrete tax benefits related to the Stability divestiture of $5.7 million, and $1.7 million primarily related to equity compensation deductions. The effective tax rate exclusive of the Stability tax benefits was 15.4% for the three months ended September 30, 2017, and 28.1% for the three months ended September 30, 2016.
The effective tax rate for the nine months ended September 30, 2017 was a negative 14%, and reflects same discrete tax benefits related to Stability divestiture of $5.7 million, and $5.6 million, primarily related to equity compensation deductions. The effective tax rate exclusive of the tax benefit associated with Stability divestiture was 9.4% for the 9 months ended September 30, 2017, and 31.5% for the 9 months ended September 30, 2016.
As of September 30, 2017, the projected annual effective tax rate is 35.1%. The company reported GAAP net income for the third quarter of approximately $17.5 million or $0.16 per basic and $0.15 diluted common share as compared to GAAP net income of $3.3 million or $0.03 per basic and diluted common share in the third quarter of 2016.
GAAP EPS includes $0.09 related to the Stability divestiture. On a non-GAAP adjusted basis, third quarter net income was $9.5 million or $0.08 per diluted common share, when adjusting for non-recurring items, including the divestiture of Stability, as compared to $6.2 million or $0.06 per diluted common share in the third quarter of 2016.
Year-to-date GAAP net income was $29.9 million or $0.26 per diluted common share, as compared to GAAP net income of $6.5 million or $0.06 per diluted common share in 2016. Year-to-date adjusted net income was $25.2 million or $0.22 per diluted common share as compared to $16.3 million or $0.15 in diluted adjusted earnings per share.
2017 adjusted net income excludes the impact of the divestiture of Stability Biologics as a non-recurring one-time benefit. Please refer to the table in our press release for a reconciliation of GAAP net income to adjusted net income.
Turning now to our balance sheet. The company reported approximately $114.1 million in total current assets and total current liabilities of $35.2 million, resulting in a current ratio of 3.2 as compared to a current ratio of 2.5 as of December 31, 2016.
Improvement to the current ratio was driven by improved working capital management. Total assets of the September 30, 2017 were $178.7 million and total liabilities were $36.2 million.
Total assets were reduced by $16.6 million and total liabilities were reduced by $21.3 million as a result of the Stability divestiture. Days sales outstanding as of September 30, 2016 were 65 days, which represents an improvement of 7 days from the end of the previous quarter.
The ongoing improvement is driven by additions to our collection staff to keep pace with the growth in our customer base, as well as improved business processes. Turning now to the statement of cash flow.
The company reported record positive cash flow from operating activities of [$18] million for the quarter, driven mainly by improvements in working capital management. Please note that the company has reported positive cash from operations for 13 of the last 14 quarters, dating back to the second quarter of 2014, with the only negative quarter being Q1 of 2016, due to the payoff of assumed liabilities related to the Stability Biologics acquisition.
Over that period of time, the company generated in excess of $103 million in positive cash from operations. Cash from operations on a year-to-date basis was $42.1 million as compared to $9.1 million in the prior year.
The increase is driven by overall improved operating results and working capital management. Cash used for investing activities for the quarter was $1.4 million as compared to $1.7 million in the prior year, primarily for the purchase of capital equipment.
On a year-to-date basis, cash used in investing activities was $4.1 million as compared to $10.4 million in the prior year, the 2016 investments include $7.6 million related to the Stability Biologics acquisition. During the quarter, the company returned $29.2 million to shareholders under the share repurchase program, bringing the total for the nine months ended September 30, 2017 to $44 million as compared to $6.8 million and $10.4 million for the prior year third quarter, and year-to-date 2016 respectively.
The total amount returned to shareholders, since the inception of the plan was approximately $100 million as of September 30, 2017. On October of 9th, the company announced that the Board approved an additional $10 million and in yesterday's press release, we announced that the Board had authorized an additional $10 million.
This brings the total amount authorized by the Board for repurchases since inception to $120 million. And finally total headcount at the end of the period ended September 30, 2017 was 798 as compared to 640 as of September 30, 2016, and these headcount figures exclude Stability Biologics related employees.
And finally, turning now to our guidance. MiMedix estimates fourth quarter revenue to be in the range of $87 million to $88 million and raising full year revenue guidance to be in the range of $320.6 million to $ 321.6 million as compared to previous guidance of $309 million to $311 million.
The company is raising guidance on fully diluted EPS to $0.31 to $0.32. The company is narrowing its full year 2017 fully diluted adjusted EPS guidance estimated to be in the range of $0.31 to $0.32 as compared to $0.31 to $0.33 in our previous guidance.
The estimates are based on assumption of $116.6 million fully diluted shares. And with that I will turn the call back to over Pete.
Pete Petit
Thank you, Mike. In summary, let me tell you that company should continue to reform very, very well and we'll do it in a relentless manner.
We have a lot more good news coming. The short sellers are so wrong on our situation.
Unfortunately, they're accepting as truth information for these ex-employees who have been dishonest. However, apparently this group has fallen for some of their stories.
Short sellers need to reflect on the fact that these people are acting dishonestly relative to quality employer who is compensating them very well. They did that to us, they're going to do that to other people.
The idea that this company should valued at $1 to $3 a share is just incredibly stupid. This demonstrates a lack of business acumen on the part of the short sell individuals.
Sure, every now and then, they're going to find a situation to have some malfeasance and those conditions are generally pretty obvious. We just had our third quarter financial reviewed by our new auditors, just reflect on that fact as well as our results.
Then reflect on this management's long track record of successful business development and the acquisition those entities for strong shareholder returns. Please give that facts some strong consideration.
Let's open the call for questions.
Operator
[Operator Instructions] Our first question comes from the line of Mike Matson with Needham & Company.
David Saxon
Hi. This is David Saxon for Mike.
So to start, are there any updates on the VLU coverage discussions you've been having with insurers?
Debbie Dean
This is Debbie. We have actually started having conversations.
We've submitted the packets. As you probably are aware, there's a certain amount of information and different things have met according to the payer and so we're in process with those discussions.
David Saxon
And then for the Stability divestiture, can you quantify first margin and DSO benefits that might have?
Mike Senken
As I said in my prepared remarks, the average gross margin on the Stability products was a little bit less than 50% and so, you can do the math on that. And then we did state that we felt that overall operating results as a result of the divestiture would be accretive by $0.02 per share.
David Saxon
And that was on a GAAP basis?
Mike Senken
That's on a GAAP base, that's correct.
David Saxon
And any impact on DSOs or..
Mike Senken
No, with the product that we were selling through that channel, their DSOs are about in line with our overall DSOs. So in the mid-60s which we came in this quarter.
In fact, just to mention, when we did the DSO calculation, we did adjust for the fact that Stability's accounts receivable was not in the balance. Otherwise the number would have been 64 not 65.
So, we did adjust for that.
David Saxon
And then I guess you expect to kind of normalize on the mid-60s?
Mike Senken
That's what we hope. Some of this is driven by how you develop in different markets.
For example, if we grow internationally and you're selling through distributors that could have an impact that brings it up a bit. As we stated on previous calls, our internal target was 75, that was developed really with the mix of direct and distributor higher than where it is right now.
As we said before, we've got less than 5% of our revenue is with distributors and typically the more distributors you have, the more DSO grows.
David Saxon
And then last question, have you ever -- do you currently sell products through physician-owned distributors?
Mike Senken
I wonder where that question came from. No.
Operator
And our next question comes from the line of Matt Hewitt with Craig-Hallum Capital. Your line is now open.
Matt Hewitt
Good morning and thanks for all the details. Couple of questions from me, Mike since you’re on this time, I am wondering if you could help with that the AvKARE relationship.
You had reserved several million dollars against the 90 day repurchase period. And I'm curious if you were able to recognize any of those reserves now?
Mike Senken
Let's say this, the third quarter revenue was not affected by any reserve reversals. We quite frankly will look at that situation for the full year and make a determination at the end of the year.
Matt Hewitt
Another one, Pete maybe this is one for you. So, a couple years ago at analyst day, you hold out a new tagline, 3-in-1 in 20.
Tripling revenues, it appears that you're on track to hit that number, but given some of the more recent issues and increasing legal expenses, is the dollar in earnings by 2020 still on track are achievable and maybe point to some of the areas of ways that you think that you can get there?
Pete Petit
Well, that's a good question. And that's why I commented earlier on the management of operating profit margins.
First of all, we're not concerned about that. We're still -- this last year too and maybe a bit in the next year or in this phase where we just have some really compelling opportunities for investment.
Same time, we've had these legal expenses that have come up, some up again related to this short selling situation. But I think and I'm looking around the table I see the heads going up and down and again company's profit and loss statement is something that this management team gets involved in every month.
We have what's called F&O meeting, finance and operating meeting and we go into the detail. So we know what we're doing.
We keep track of it and we make those investment decisions on a monthly basis. So I think, again, this company will take this -- keep it on 90% of their gross profit margins, we're going to substantially increases in operating profit margin, towards the end of 2018, 2019 and into 2020.
Mike Senken
And Matt, if I could add, to get to the dollar in 2020, obviously the greatest amount of leverage is on the SG&A line. The leverage was even greater than it already is, if it's not for some of these investments, somewhat extraordinary when you start talking about some of the legal costs.
And we expect that to subside certainly over time and then in addition to that is, as you go forward and you move into the pain management market, you're talking about a different level of sales effort more along the lines of the pharma model than what we have in wound care where wound care is much more hands on. So, those two factors alone should get you into the low 50% category, which gets you to that adjusted dollar per share.
Matt Hewitt
One last one from me and this might be for Chris. Given some of this noise -- and I know you guys have been dealing with it quite a bit here recently, but how is that or does it affect the physicians -- are you getting any questions from your doctors and your customers, and if so what are you telling them?
Thank you.
Chris Cashman
Sure, thanks Matt. We deal with more internally here.
Certainly, our management team is aware of what goes on, but on the date-to-day basis, it's not something that we hear much about from our physicians and from our customers. Quite frankly, lot of people just realize it's been associated with the company that these things are false.
And when you read them, they just kind of discount it. So quite frankly our team is very-focused, I won't say that it's never distraction at different times, but they continue to be very disciplined about what they're doing and we've got a good management team that has a good head on their shoulder.
So, not a big deal in the field.
Pete Petit
This is Pete, and I will add something, I got semi-involved when the physician caller came in yesterday and we tried to answer all of our shareholders calls and concerns. And he was a physician who was a practice physician, although near retirement.
And he was outright. He said I just heard about this, he said, this is idiocy, why are people criticizing this company and your product.
I've been using this product for years he said and he just went on and on and on. So it cuts both ways.
Operator
Next question comes from Matthew O'Brien with Piper Jaffray. Your line is now open.
Matthew O'Brien
Can you just kind of stick on some of these allegations that are running around out there and a little bit more? And just given your interaction with the employees that you terminated, what have you learned from a compliance perspective to ensure that some of these issues don't persist going forward and on the compliance processes side?
What have you done to really ramp up your insurances, that there isn't anything nefarious going on, just anything you can provide as we kind of try to draw this whole thing out if it could be helpful?
Pete Petit
First of all, from our standpoint, what was disappointing is us, not finding out about the last December about sales from these individuals going onto their own LLCs and own companies, that should have bubbled up through our compliance system etcetera. A year prior to that, we had a situation of over one of the managers out in the Midwest, it was bubbled up right through our compliance system.
Within 48 hours, it was investigated and he was terminated. This situation, these individuals were lot more shrewd in that particular individual and I tell people, well corporate knows about this Don't worry about it.
Well, I just kind of kept it quiet for too long. So we've done a lot of education and again in terms of what's proper, what is not proper.
We can't -- when you have 300 salespeople out there, you have 800 employees, somebody can go rogue on you and you just have to have a system set up, that will highlight that quickly. We have two very efficient systems, if people would use them.
We have used this as an example to all of the current people -- take the sales people of what went wrong here and how -- basic guide and how they must report this kind of malfeasance quickly, so we can deal with it. So from that standpoint, this could have been a better learning experience even though from a corporate standpoint, there's no malfeasance.
We have some rogue employees. So we've learned a lesson and used that as a teaching moment as I used to call it with my children, as a teaching moment -- broad teaching moment for all our folks.
But in terms of buttoned up systems here, we're in pretty doggone good shape and three years ago we were too. Again I'll refer to by the fact that we've gone through this drill once before.
All the allegations made in that qui tam are basically these same allegations. And we went through that with the Department of Justice and came out within months and they didn't step into that case and the case was dropped.
So we're not naive or not inexperienced in this area and we got pretty doggone good systems, but are there going to be cases that can go off the ramps from time to time, yes. But in terms of this company doing the right things, we know the regulations, we follow them, we educate, we get people to sign documents.
They have been educated, but that doesn't keep some individual from getting an idea and going off base with it. We had a situation in Atlanta that caught our attention.
A week or so ago, it turned out one of our sales people here, was trying to help a friend and he put his name on a corporation, she was setting up. Well, there is nothing wrong with that, but when the short sellers locate that, they try to make something out of it.
We do not sell through pods. All our staffs in Texas, it's just a lot of noise, but they'll dig up a name and they'll relate it to another social media matters, it's time to go and say that's an indication of channel stuffing of something else.
We will review these things as we have been doing on our website, when they've got some anywhere near merit to them and explain them quickly and move on. But it's got very noisy and it will continue to get noisy, because these individuals are very focused on fact their notion and there is no corporate malfeasance here.
And there are some little issues here and issues there, that cropped up, but I think from a corporate entity, we are doing everything we can. And the one thing that came out about the way, the three years ago the OIG investigation, they recommended we add one more person to the compliance staff here, which we did.
So that's the status on that.
Matthew O'Brien
And then heading over, just real quick on the -- you gave the number or the percentage of revenues coming from distributors and OEMs. Can you give us the percentage revenues from independent sales agents?
Mike Senken
I honestly don't know that off the top of my head. I think and I am looking to Chris.
The majority of the sales agent revenue is flowing through SSO and that's the subset of the total SSO revenue. So, again as we've seen some of these allegations, when you talk about different distributors and the like, what's not brought out here is in many cases, these are the distributors, the main product they were selling was not ours, I mean we were kind of an add-on biologic, some hardware or whatever.
So it's not our core wound care business, it's a sub-segment of our SSO.
Chris Cashman
In SSO, we predominantly we use both surgical as well as musculoskeletal, but as we've said to you before, we continue to move more and more towards direct. This has been a focus of ours for several years now.
And we like the direct model, not that there is anything wrong with the 1099 independent, but we put a lot of time into training and compliance, and all the things that we're talking about today, and we like the model where we have 100% of those individuals' times.
Mike Senken
I mean strategically, it makes sense for us, this gives us the ability to interact directly with the docs over the customers. So we know what's going on in the marketplace.
We can monitor what's going on with their inventories. We are not blinded by a distributor, who own the main relationship.
So we moved in that direction. Again, keep in mind that, that agent is just getting a commission, so that commission hits the SG&A line.
It's not hitting the revenue line. We build the customer, we collect from the customer, we manage the customer from that perspective.
Matthew O'Brien
And last one from me just on assets, another great quarter. Just trying to get a sense for, what's driving that the new accounts going deeper and existing accounts, new reps et cetera products, just how sustainable is this not necessarily at this level of growth, but pretty healthy growth as we think about 2018 and beyond?
Chris Cashman
Like I said, it's going to be a little choppy, but the last two quarters has been excellent. And we expect that it's going to continue.
We're forging a new market in the operating room and its enhanced feeling. It's different than what other products that you had more structure and strength, like for hernia repairs as an example have come before.
And so, we're just beginning to hit the stride. These hospitals and surgeons are certainly recognizing the value of amniotic membrane and they certainly recognize the value of the MiMedx through our education and the clinical work that has been done.
What we're seeing is more and more [facts] that are approving the product to be in the hospitals, and we're seeing more widespread adoption once it's in there. So there is a lot to do, a lot more and these markets are very large, but we're very pleased with the progress we're starting to see.
And I think that this is going to be able to continue, certainly for few years if it can -- can't get a 3-in-1 question by 2020 is still a very important piece of our growth.
Operator
[Operator Instructions] Our next question comes from the line of Bruce Jackson with Lake Street Capital. Your line is now open.
Bruce Jackson
Just two question. Can I get the exact sales force count at the end of the quarter?
Pete Petit
Exactly at the end of the quarter was 350.
Bruce Jackson
And then -- in past years you've kind of put out some broad-brush guidance for 2018, around the end of December. Is that kind of still your intent going forward?
Mike Senken
We will always have a Board meeting around December 15 and at that meeting the business plan for the subsequent years thoroughly vetted, work through, and then we release our guidance for the next year, right around that same time. So that's still on the dock at this year.
The Board meetings is going to be in mid-December and we'll let you know when that press release is coming out.
Operator
And I'm showing no further questions at this time. So I'd like to return the call to Mr.
Pete Petit for any closing remarks.
Pete Petit
Okay, well thank you very much for joining us. Again I can't use any other words, but other than fact, we had an excellent quarter.
And -- we are at the point that we expect to continue to produce some exciting results for you. And also I'll say that -- sorry that we're going through this illegal short selling activity.
It's been an interesting learning factor for some of us. And frankly disappointing to see the integrity issues that are wrapped around these things.
If we will just be patience, these things will soon clear themselves. And I believe I could sooner rather than later, I think someone is just absolutely foolish to be shorting this company at this point.
I don't think it takes a lot of investing acumen to understand the asset base we have and the suspicion that this management team is somehow corrupt and dishonest. Just look at our track record and that's all you need to go to -- go from there.
And always little perturbations in the market of this person said that and that person likes that -- those things, we're dealing with them, we take them seriously. And if we have an issue, we'll deal with it, but we don't.
Thank you very much, appreciate your patience and watch for our progress and I guess I could also say I would certainly believe this is a good entry point for investors. Thank you all very much.
Operator
Ladies and gentlemen, thank you for participating in today's call. This does conclude the program and you may all disconnect.
Everyone have a great day.