Earnings Call Transcript - MDXG Q3 2023

Operator, Operator

Good afternoon, and thank you for standing by. Welcome to the MiMedx Third Quarter ‘23 Operating and Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Matt Notarianni, Head of Investor Relations for MiMedx. Thank you. You may begin.

Matt Notarianni, Head of Investor Relations

Thank you, operator, and good afternoon, everyone. Welcome to the MiMedx third quarter 2023 operating and financial results conference call. With me on today's call are Chief Executive Officer, Joe Capper; and Chief Financial Officer, Doug Rice. As part of today's webcast, we are simultaneously displaying slides that you can follow. You can access the slides from our Investor Relations website at mimedx.com. Joe will kick us off with some opening remarks, and Doug will provide a summary of our operating highlights and financial results for the quarter, and then Joe will conclude with some additional updates, including a discussion of our financial goals. We will then be available for your questions. Before we begin, I would like to remind you that our comments today will include forward-looking statements, including statements regarding future sales growth, EBITDA, free cash flow and cash balance costs, future margin and expenses and expected market sizes for our products. These expectations are subject to risks and uncertainties, and actual results may differ materially from those anticipated due to many factors. Actual results and market sizes will depend on a number of factors, including competition, access to customers, the reimbursement environment, unforeseen circumstances and delays, and other factors. Additional factors that could impact outcomes and our results include those described in the Risk Factors section of our annual report on Form 10-K, and our quarterly reports on Form 10-Q. Also, our comments today include non-GAAP financial measures, which we provide a reconciliation to GAAP measures in our press release, which is available on our website at mimedx.com. With that, I'm now pleased to turn the call over to, Joe Capper. Joe?

Joseph H. Capper, CEO

Thanks, Matt, and good afternoon, everyone. Thank you all for joining us on today's call. It is my pleasure to report on another excellent quarter. As you will hear today, the Company is executing across the board commercially, operationally and financially. In addition to delivering outstanding results for the period, we continued to improve the operational effectiveness of the Company and prepared for the launch of another new product. I will detail these positive developments one-by-one, starting with our strong financial performance. Q3 marked the third consecutive quarter during which we grew revenue by over 20%. This type of consistent sales performance with above-market growth rates is a testament to the team's stellar execution and our sound strategic plan. We've also been clear in our messaging that we expect to generate greater profitability as the business scales. In fact, on our last call, we guided to an adjusted EBITDA margin of above 20% for the second half of 2023, demonstrating excellent leverage as the business scales. I'm happy to report that we did indeed achieve this objective in Q3. We have a powerful combination of highly talented individuals, innovative solutions that help people heal, and industry-leading sales and operations infrastructure. Our multifaceted approach in the Wound & Surgical Markets is generating the impressive results we were targeting when we repositioned the business this past summer. Furthermore, the organization is well-situated to continue our momentum and significant growth for the foreseeable future. More on our long-term growth plan in a minute. First, I'd like to touch on some of the noteworthy accomplishments from the quarter. Q3 year-over-year net sales grew by approximately 21% to $81.7 million, another outstanding growth quarter. Gross profit margin was 82% and would have been even higher, but for contractually committed last time by some lower-margin products. Adjusted EBITDA was $17.6 million or 21.6% of sales, up from an adjusted EBITDA of $2.4 million in Q3 of last year, representing a year-over-year increase of over $15 million. We ended the quarter with $81.2 million in cash, up $12.5 million in the quarter. We announced the collaboration with MediWound, a global leader in wound care, which plans to use our EPIFIX product during the wound healing phase of its EscharEx Phase III Study in venous leg ulcers. We also recently announced the launch of EPIEFFECT, a new product designed to meet the expanded needs of customers in the private office segment. I'd like to point out that our efforts to streamline operations and build on our leadership position in the Wound & Surgical Markets are working as designed and have helped dramatically improve our financial profile over the last few quarters. As you will recall, this was the course we charted when I arrived nine months ago. My intent has been to create value by focusing our commercial efforts and unlocking leverage in the business as we grow. We are clearly on the right track, as evidenced by the nearly 22% adjusted EBITDA margin in the third quarter. Moving now to the Company's progress on our three primary growth drivers. As a reminder, these are the areas in which we are concentrating our time and resources to best position the Company for long-term success. Our highest priority is to continue to build on our leadership position in the Wound & Surgical Markets by enhancing our product portfolio and expanding geographically. For the third quarter, this focus again produced growth in all sites of service. Sales grew by about 18% over the prior year quarter in the hospital sector, which continues to benefit from our two new product introductions late last year. We continue to invest in clinical research and are looking to expand our medical affairs efforts, investments which are critical to support our growth in general and more specifically, in the surgical suite, which is certainly a focus for the customer. In the private office segment, we grew sales by 17%. While still a healthy growth rate, this rate slowed a bit sequentially, likely driven by the massive amount of confusion created by the ill-fated attempt to introduce new Local Coverage Determinations or LCDs for skin substitutes by three of the Medicare Administrative Contractors or MACs. The proposed LCDs, which covered 15 states, were scheduled to go into effect on October 1st and would have set an arbitrary cap of four applications per patient, potentially reducing levels of care. The LCDs also dramatically restricted the number of products and companies eligible for reimbursement. Ultimately, the plan was abandoned but not before creating much confusion. We believe this uncertainty impacted ordering behavior during the quarter, as providers grappled with how they might have to modify care protocols. Our position on this subject has been clear. We will continue to advocate in favor of changes that would level the playing field by eliminating the opportunity to game the reimbursement system while ensuring access to products like ours that have proven to be highly effective. That said, we recently strengthened our offering in the private office setting. The newest addition to our Advanced Wound Care solutions product portfolio, EPIEFFECT, was recently added to the Medicare ASP list, clearing the way for its full commercial launch now underway. EPIEFFECT offers a thick, tri-level configuration of amnion/chorion and intermediate layers with handling characteristics and product attributes that may make it a preferred treatment option for deep tunneling wounds or cases where securing the graft in place with sutures is desired. We are excited to highlight this product with so many of our customers at SAWC later this week. We remain committed to organic product development and innovation of our market-leading placental-derived technology as we see this as an essential element of future growth. Speaking of best-in-class products, as I mentioned, we're pleased to be supporting MediWound, which has chosen to use our EPIEFFECT or EPIFIX product in its Phase III trial for EscharEx, its next-generation product now in development. According to MediWound, by incorporating the market-leading and extensively studied EPIFIX into its trial, it aims to maintain consistency among study subjects and optimize the potential for complete healing throughout the study duration. It's rewarding to receive such high-quality third-party validation of our technology. Finally, we remain encouraged by the strides we continue to make in developing the Japanese market. Those who are familiar with launching new products in Japan know there is typically a longer lead time to realize the potential of a product than in other geographies. However, given the large market opportunity, it is well worth the time and effort. We are encouraged by the early strides we are making and remain optimistic about the future of this business. Our next priority is to develop opportunities in adjacent markets to create additional growth drivers for the Company. As I stated on previous calls, we are evaluating ways to expand our skin substitute portfolio, beyond amniotic tissue, to include xenografts and/or synthetics. Notwithstanding the superior qualities of our placental-derived allograft, this is a market-driven strategy which will open up segments of the market where it is difficult, if not impossible, for us to compete today. We believe this approach will be highly complementary to our current business, allowing us to leverage our entire commercial infrastructure. On the surface, this seems like an area where an inorganic effort could make sense. And given our much-improved financial profile, I know many of you are excited to see us move in that direction. As applicable opportunities arise, we will give them careful consideration. To be clear, any potential inorganic target would have to first and foremost be an excellent cultural and strategic fit, which would accelerate our growth plan. It would also have to have a clear pathway for becoming accretive. Finally, our last objective is to build a corporate discipline around expense management, rationalization, and continuous process improvement. While we continue to exceed the goals put in place to measure our progress in fulfilling this objective, it is really more about building a culture that is focused on getting the best return from our limited resources. It has been my experience that institutionalizing this mindset early on will pay dividends in terms of gaining operating expense leverage as the business scales. During the quarter, we made excellent progress executing against these three strategic objectives. Our results demonstrate that our approach is having the desired effects. We will continue to identify and execute against the most relevant growth drivers for our business, as we see sustained long-term performance as the best way to create tremendous value. Before I turn the call over to Doug, I'd like to provide a few comments on the Series B Preferred Stock repurchase we executed this past Friday. First, I would like to thank Hayfin for their past and continued support of the Company. We could not ask for a better partner. As our stock started to show signs of meeting the mandatory conversion criteria, we began conversations with Hayfin about how we might help them manage an orderly transition. Ultimately, this resulted in us buying back half of their position at $6.13 per effectively converted common share for a total of $9.5 million. A stock repurchase at this point in the Company's evolution would not typically be my highest priority for use of capital. However, this was opportunistic and made good sense since it stopped the 6% preferred dividend on the shares repurchased and was executed at a discount to the convert price of $7.70. Given the rate at which we are building cash, and our much-improved borrowing capacity, we do not see this as in any way impairing our ability to capitalize on strategic opportunities that may arise. Now, let me turn the call over to Doug for more detail on our financial results. Doug?

Doug Rice, CFO

Thank you, Joe. Good afternoon, everyone, and thanks for joining us today. I'm pleased to once again be presenting these strong quarterly results to you all today. Before diving in, I wanted to note that many of the financial measures covered in today's call are on a non-GAAP basis, so please refer to today's earnings release for further information regarding our non-GAAP reconciliations and disclosures. First, as Joe mentioned, our third quarter 2023 was the third consecutive quarter in which our net sales growth exceeded 20% year-over-year, despite having one fewer shipping day than the prior year period. Third quarter net sales of $81.7 million also represented modest sequential growth compared to the second quarter of 2023, which is all the more impressive given the traditional Q3 dip in healthcare seasonality as well as the broad-based strengthening we have seen across all of our sites and services during the first half of the year. The commercial team has once again executed across all of the sites and services with strong double-digit growth in each segment, despite some of the confusion Joe mentioned related to the on and off reimbursement changes during the quarter. Moving to gross profit and gross margin. Our third quarter gross profit was about $67 million, an $11 million improvement compared to $56 million last year, and our gross margin was roughly flat on a year-over-year basis at around 82%. In the third quarter, our quality operations and regulatory team continued to make progress on its yield improvement plans, which we expect will benefit us moving forward. These efforts include the introduction of certain automation enhancements that are designed to help us realize additional scale as we grow. As Joe mentioned, gross margin was negatively impacted in the quarter by a contractual last time buy for a non-core market white-label product that we were manufacturing for a third party. This line was essentially being sold at cost, so we expect this pressure on our gross margin to subside moving forward. With that said, we remain focused on continuing to leverage our growing scale and driving our gross margin percentage back into the mid-80s over the long term. GAAP selling, general, and administrative expenses, or SG&A, was $52.6 million or 63% of net sales, compared to $53.5 million or 79% of net sales in the prior year period. The decrease in SG&A both on a dollar and relative basis was a result of our ongoing expense management, which more than offset higher commissions we paid in the quarter due to our higher sales. Our GAAP R&D expenses were $3.2 million, a $2.8 million decrease compared to $6 million in the prior year period. This year-over-year decline in R&D spend was principally driven by the strategic realignment we announced in June of this year, and the associated wind down of the regenerative medicine business unit and its R&D activities. Moving forward, we anticipate our R&D spend to generally be in the range of 3% to 4% of sales, which we believe will provide sufficient support in developing our Wound & Surgical product pipeline. I'm also pleased to report that our investigation, restatement, and related expenses were immaterial for the third quarter of 2023, as we have been able to finalize many of the matters over the last few months. We anticipate spending on these expense lines will be immaterial moving forward. GAAP net income was $8.5 million compared to a net loss of $8.4 million in the prior year period. I share in Joe's excitement to be able to report this year-over-year improvement as a clear sign of the meaningful progress the organization has made over the last 12 months. Adjusted EBITDA was $17.6 million or 21.6% of net sales compared to an adjusted EBITDA of $2.4 million or about 3.5% of net sales in the prior year period. As a reminder, in light of our strategic realignment, we anticipate that after this quarter we will no longer bifurcate our business on a segment basis. Turning to our liquidity. The financial results we have posted over the last several quarters have led to strong improvement in our net cash position, as the business begins generating meaningful free cash flow. At the end of Q3, the Company had $81.2 million of cash reflecting a sequential step up versus June 30 of approximately $12.5 million. With a continued focus on adjusted EBITDA generation, we believe our much-improved financial profile will continue to strengthen and provide us opportunities to grow and diversify the business. Additionally, our healthy cash flow allows us to be opportunistic in improving our balance sheet, as was the case with the transaction, Joe mentioned earlier regarding the $9.5 million repurchase of a portion of Hayfin Series B preferred shares. We are particularly pleased to be able to execute this transaction utilizing less than this quarter's worth of operating cash flow generated, continuing to provide us with other options for growth funding in the future. I will now turn the call back to Joe. Joe?

Joseph H. Capper, CEO

Thanks, Doug. As you have just heard, we had another outstanding quarter, once again exceeding expectations. Quarterly revenue was up 21% year-over-year. Gross profit margin was 82%. Adjusted EBITDA was $17.6 million. We increased our cash balance to over $81 million, ready EPIEFFECT for launch, and continue to realize margin improvement by driving expense rationalization throughout the organization. For the first three quarters of the year, we have delivered consistently improving performance, with Q3 having our highest quarterly sales and an adjusted EBITDA margin of over 20%. As you may recall, after exceeding expectations last quarter, we raised full-year guidance for revenue percentage growth to be in the mid-to-high teens. Following a similar performance in Q3, we are now again raising full-year revenue percentage growth outlook to be in the high-teens, nearing 20%. As a reminder, sales for the fourth quarter of 2022 were by far our highest quarterly sales of 2022, at $74.4 million, naturally making it our toughest comp for the year. That being said, given the current strength of the business, and with the help of the EPIEFFECT launch, we do expect to close 2023 with another strong performance and ride that momentum into the New Year. As we’ve stated on our last call, we also expect at least a 20% adjusted EBITDA margin for the second half of 2023, and with the recent Hayfin transaction complete, we now expect to end the year with over $80 million of cash. Additionally, all fundamentals continue to point to a double-digit percentage annual revenue growth rate for the foreseeable future. Those of you who have been following the Company for the past three quarters have witnessed a meaningful business transformation, driven by excellent commercial execution, decisive strategic action to reposition the Company, and expense reduction initiatives—all resulting in a much-improved financial profile for the Company. I fully expect that we will continue to execute our plan, close the year strong, and set the business up for sustained long-term growth. In closing, I would like to thank the entire MiMedx team for their outstanding performance throughout the first three quarters of the year. Your enthusiasm and continued dedication to the Company and to people in need of care have been a source of personal inspiration during my short tenure. I look forward to working with you as we seek to maximize the potential of this incredible Company and take it to new heights. With that, I'd like to open the call to questions. Operator, we are now ready for our first question. Please proceed.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Chase Knickerbocker with Craig-Hallum Group. Please proceed with your question.

Chase Knickerbocker, Analyst

Hi, Joe. Hi, Doug. Thanks for the question guys, and congrats on a good quarter. Maybe starting on the physician office segment first. Maybe a little bit of additional color on how kind of customers reacted to that LCD, you know, during the quarter. Obviously, still good growth there. Maybe talk as to why you being listed on that LCD would still lead to some pausing. And then in, if we look at kind of what we've seen so far in Q4, have we seen kind of normal ordering behavior kind of come back now that LCD has been pulled? Just some additional color there.

Joseph H. Capper, CEO

Yes, thank you. We noticed some confusion in ordering patterns during the third quarter, especially in the 15 states affected by the three LCDs. When compared to other MACs, it was clear there was confusion. Feedback from the field indicated that doctors were trying to understand what steps they needed to take and how to adjust care protocols to comply with the full application restriction. There was also uncertainty about which products were included in the coverage and which were not. Consequently, we saw an impact from this situation. The positive news is that overall, that site of service continued to grow at a strong rate. Regarding your question about October, it appears that within those three MACs, ordering behavior has started to return to normal.

Chase Knickerbocker, Analyst

Got it. That's helpful. And maybe stay in the physician office segment. If we look at kind of EPIEFFECT's growth and initial launch here. Do you expect it to cannibalize some EPICORD and EPIFIX users, or is this going to be more de-novo uptake or maybe some people who are using your products for commercial patients using something else for Medicare patients? How should we think about the customer set for EPIEFFECT earlier?

Joseph H. Capper, CEO

I think earlier, I'm thinking about it primarily in the private office setting, and it will be used in applications that are not being used today. So it should expand the market a bit, and then there will be some cannibalization situation of the EPIFIX product.

Chase Knickerbocker, Analyst

Got it. And then just last for me. I think it's fair to say that your stock may have gotten caught up in the recent GLP-1 craze we've seen in the markets lately. Maybe just some general kind of high-level thoughts there from you guys, any sort of impact that you expect from the proliferation of these drugs in the mid-to-long-term in the markets that you compete in?

Joseph H. Capper, CEO

Yeah. Chase, yes, I think you're right. The word in the property is a bit of a craze in the marketplace. Here's my thought on it. I worked for three different companies that had some business in the diabetes space. And I would tell you that so I've been in that space, I was in that space for almost 20 years. And I can't remember back 15, 20 years ago when we were appalled at the increase in the rate of diabetes in the United States when it surpassed 8%. Since that time, there have been numerous drugs, products like continuous glucose sensors, automated insulin delivery systems, all kinds of education to help drive down against this supply of diabetes in this country, a lot of diabetic, a lot of diet products. Unfortunately, the epidemic continues to expand in the U.S. So I don't know that it's a product that's going to cure the problem. By all indications, everything that I could tell, these GLP-1 drugs do work. People are losing weight with them, which is wonderful if at some point in the future, these would expand with minimal adverse effects and have some potential impact on the rate of diabetes, that would be wonderful. Do I think it's going to happen? I would say that historical evidence suggests otherwise. So I think it's great. I think the more people can use these drugs, it has a weight loss impact wonderful. I think it's going to translate into a decrease in the rate of diabetes in the United States. I think that is a bridge too far. Evidence suggests otherwise. Even if it did, let's talk for a second about potential impact on diabetic foot ulcer (DFU) indications for use of our product. The evidence suggests that there is not a strong correlation between obesity and lower extremity ulcers. In fact, I think you cited this in your very thoughtful initiation that you published last week. The evidence suggests the opposite. If in fact, DFUs are often associated with people with low BMI, but are just generally unhealthy smokers, hypertensive, with poor diet, etc. I just don't think that behavior is going to change much because we've lost a new drug. I think Ozempic has been out since 2016. At the time it was launched, the incidence of diabetes was somewhere around 9.1%. Two or three years after its launch, the incidence of diabetes in the U.S. was at 11.3%. I can't imagine that COVID did anything positive for that number. So, maybe it will at some point have an impact on the incidence of diabetes in the U.S., but it certainly is not doing so right now. So, I just don't see the correlation at this point.

Chase Knickerbocker, Analyst

Got it. Thanks for those thoughts and thanks for the questions, guys.

Joseph H. Capper, CEO

Thanks, Chase.

Operator, Operator

Thank you. Our next question comes from the line of Anthony Petrone with Mizuho Group. Please proceed with your question.

Anthony Petrone, Analyst

Hi, thanks, and good afternoon. Congrats on a strong quarter here set up into 2024. Maybe I'll pivot back to the LCD, Joe, if I can for a moment. I'm just wondering when you look at sort of the verbiage in late September, there were references to just the implementation timeframe that there wasn't enough time to sort of transition practices over and that potentially could impact patient care. But, you also saw just a certain amount of advocacy from the various different medical societies out there in favor of sort of taking a second look here. So maybe just a little bit behind the scenes. What do you think was the tipping point on putting the brakes here? And as we look at the new sort of just common periods, I mean, what are the next big updates here that we should be thinking about from these local MACs and as well as other MACs that potentially may look to change their policies heading into 2024 and 2025? And then I'll have a couple of follow-ups.

Joseph H. Capper, CEO

Thank you, Anthony. First of all, we really don’t know the reasons behind their decision since they haven't revealed their rationale. Personally, I didn’t think the implementation had much of a chance because it seemed arbitrary and confusing. There was insufficient evidence to justify the cap on applications, and the rationale for excluding certain products and organizations lacked strength. I believe there might be an effort to rectify past decisions. We'll never truly find out, but it seemed like the industry's outcry, both clinically and commercially, indicated this approach wasn't effective. They mentioned plans to further evaluate and gather more evidence to find better ways to manage these local coverage determinations in the future. As I mentioned earlier, we’re actively collaborating with various stakeholders who can influence this matter. We continue to advocate for policy changes that would eliminate the manipulation allowed around product reimbursements while ensuring access for effective products like ours. Do I believe changes will occur in the future? Yes. Do I know what those changes will be? No. However, I can say that among our competitors, we are in the strongest position to support the private office setting regardless of any changes. If we move to a more restricted usage, we have the evidence to back our product. If it transitions to a bundled payment model, our impact will likely be less than that of some other large competitors. We are committed to supporting this sector, which is important for patients who cannot be treated in hospitals, and it continues to grow as a result. I believe we are well positioned no matter the outcome, and we will keep working to influence it.

Anthony Petrone, Analyst

That's very helpful. And then maybe just two nuances in there. I mean, one was the advocacy and push from my medics that all of these products be disclosed on the Medicare B pricing list as opposed to wholesale acquisition cost. Then there was another decision in these LCDs where they actually wanted to limit applications to four for an ulcer, which was below the 10 applications previously. So maybe just on those two specifically, I mean, is there anything that my medics is aware of on those two levers versus certainly going to Medicare Part B is positive for EPIFIX and other products that were included in the 58? On the other hand, limiting the applications per ulcer just seemed like perhaps too limiting. Is there anything on those two levers you can share?

Joseph H. Capper, CEO

No, not really. Again we continue to work with them, and hopefully this gets clearer over time. We've always thought that the application restriction was somewhat arbitrary. There was some good evidence, but it was misconstrued in the way that it's being applied. Hopefully that goes away because that could be disruptive for patients that need more than four applications or they end up going into a more expensive care setting to get treated. So it's not really good for Medicare long-term. As far as continuing to influence the use of the ASP versus the WACC, we think that's the easiest way to go in the near term, it’s kind of the low-hanging fruit. To their credit, the CMS has been pressuring people to move in that direction. As you know, the OIG published a letter earlier in the year, pretty much directing them to adhere to these guidelines. We have seen a lot of products move on the ASP price cuts. If you looked at the list a couple of years ago, there were maybe 12 products on the list, and now it's probably up to around 75. So the market is moving in the right direction. And quite frankly, that could be one of the reasons we performed so well in that site of service for the first three quarters of the year, because the field is starting to level a bit.

Anthony Petrone, Analyst

Last one, and I'll hop in real quick. Just on EBITDA, second half, all three, to exceed 20%. Maybe just high-level, there was a restructuring program earlier this year to help in achieving that 20%. As you look forward the next couple of years, how much of the EBITDA expansion will just be from organic growth as opposed to a follow-on restructuring program? Congratulations again. Thanks.

Doug Rice, CFO

Thanks, Anthony. This is Doug. I'll take your question. We're excited exiting the year with a lot of momentum. We had a really solid Q3. We saw improved execution that will continue into Q4, and now with the new product introduction, we're going to have a lot of upside and growth that will help us scale. We expect our gross margin to stand back up from an EBITDA perspective. We also expect to scale in sales and marketing and realize efficiencies all along our P&L. So, as our growth focus, as you mentioned, from the suspension of our restructuring program helps going into next year, we feel like we have a lot of momentum and the ability to continue to grow into the double digits.

Anthony Petrone, Analyst

Thanks again.

Joseph H. Capper, CEO

And Anthony, the only other thing I might add is just some of those legacy expenses across the board. There's focus. There's SG&A leverage. There's obviously a sense of where the R&D trend line looks and then obviously not having any other ancillary pieces hitting us, whether we adjust them or not, should show a really nice leveraged P&L.

Anthony Petrone, Analyst

Thanks again.

Joseph H. Capper, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Carl Byrnes with Northland Capital Markets. Please proceed with your question.

Carl Byrnes, Analyst

Thanks for the question and congratulations on your quarter and the progress here. I think most of my questions have been addressed. But I was a bit curious if you see an opportunity for further purchases in the Series B preferred, such that it's done and organized in orderly fashion. And then I have a follow-up to that. Thank you.

Joseph H. Capper, CEO

Yeah. So just a little more clarity on that. I think I mentioned in my commentary that this was not my highest priority for the use of capital at this stage of the company's evolution. However, it was opportunistic. We got real close to the mandatory conversion a few months ago. In fact, we were above the $7.70 mark for several days. As you may recall, it requires us to stay above that for 20 out of any 30 consecutive trading days. So it did not trigger but prompted us to start having conversations with Hayfin about what their long-term intent is with the common stock once it converts. They were pretty transparent that it's typically not their approach to hold that stock for a long period and would likely look to exit it in some organized way. So that’s how conversations evolved. It was very opportunistic. Why we didn't buy all of it we only bought half of it. It was just to keep some dry powder because we are looking to do other things with the business. They also agreed to a 12-month lockup on the other half of the equity, whether it converts or not. So we felt like any potential disruption as they exited the position was limited quite a bit because of our repurchase agreement with Hayfin to lock up the other half for the time being.

Carl Byrnes, Analyst

Great. Thanks. That's very helpful. And then segueing to EPIFIX in Japan. Do you have any updates with respect to the number of doctors that have been trained to use the product?

Joseph H. Capper, CEO

Well into the hundreds, I think several hundred. I think about one point you may still have the number of 500, it continues to grow. We're getting nice feedback from the physicians. Several physicians have used the product in various procedures. They have reordered the product, and they have gotten paid on the product. All these are very important steps when you're talking about developing a new business in a new market. I want to remind everybody that this is a first of its kind in the Japanese market. So this will take time to develop and get physicians comfortable with how to use it and, as importantly, whether or not they're getting paid for it. So we're seeing pretty significant percentage growth in utilization, but off of a very low base, right? So, we're pretty optimistic about what this could look like a few years down the road, but again it's very early on.

Carl Byrnes, Analyst

Understood and congratulations again. Thanks.

Joseph H. Capper, CEO

Thanks, Carl.

Operator, Operator

Thank you. Our next question comes from the line of RK with H.C. Wainwright. Please proceed with your question.

Swayampakula Ramakanth, Analyst

Thank you. Thanks for taking my question. This is RK from H.C. Wainwright. So a couple of quick questions. And looking at what the total revenues for this quarter and comparing it against last quarter, it's kind of similar numbers. I see that the guidance you gave is higher teens. So what's the push hard pull on these numbers just on a high level on the business? And also trying to see what's the probability that it'll get into the lower twenties, based on what you're seeing?

Joseph H. Capper, CEO

I think that the first part of your question was what happened from Q2 to Q3. Your comment was relatively flat sequentially, which is a home run for this business, right? As you know, these types of businesses typically have a seasonal decline in Q3, which we did not experience this year. On the contrary, we were able to tick the business up a little bit. We also had one less workday, so seasonal decline, one less workday and flat to up is a home run, in my opinion, in this business. I think the second part of your question was, why would we not continue to see something in the low 20s as we move through the rest of the year and into next year. The comp for Q4 2022 is by far our toughest comp for the year. The revenue was clear in a way the highest revenue that the business experienced last year. As you recall, that was the quarter in which we launched two new products in the surgical setting and revenue was somewhere around $74.5 million. So, double-digit growth off of that would be a meaningful number. We think we're well positioned to do that. We think the business will close out in the high teens, if not 20%, but still a pretty good hill to climb to get those numbers. And as you know, the fourth quarter can be disruptive depending on how holidays fall, etc. We think this year we have great momentum going into the fourth quarter. Clearly, our sales organization is executing better than other organizations in the market. We have the strongest leadership team than any other company in the marketplace. So I think we're well positioned to continue to drive that momentum. We're launching another product, EPIEFFECT, into the private office segment now, taking time to ramp up any new product, so that rollout will happen over the next two, three quarters before we see the full effect of it, but we could get a nice impact from that in Q4. So, look, could we get there? Maybe. But these numbers are pretty darn good numbers.

Swayampakula Ramakanth, Analyst

Yes, I agree with you. I wasn't negative about it. I was trying to explore what additional factors could help increase this. Thank you for your answer. My other question pertains to looking for opportunities beyond just launching another product in the fourth quarter, as you previously mentioned. Additionally, considering your plans for a buyback and maintaining some flexibility, what kind of opportunities are you aiming for as you move into 2024 and 2025?

Joseph H. Capper, CEO

I believe you are talking about possible inorganic opportunities. As I've mentioned on various calls, we have decided that expanding our skin substitute product line to include non-human skin substitutes, xenografts, and synthetics is a smart move. Adding these products to our portfolio would double our total market available just in the U.S., especially since the use of amniotic tissue is limited in certain market segments. This expansion is a top priority for us. It also allows us more opportunities within the surgical suite, which is another area we are focusing on. We would prioritize products that enable us to move in that direction more quickly. Beyond that, any developments within the wound care continuum that allow us to enhance our offerings while utilizing our existing commercial and operational infrastructure make sense. You can imagine the types of products we might pursue, but our top priority is the expanded skin substitute line. Additionally, we are working on developing placental-derived allografts and have a robust pipeline for those, as well as potentially developing xenografts internally. However, we are also exploring external options, as you know this can expedite our plans. In my view, acquisitions should only be pursued if they will accelerate our strategic plan, not just for the sake of making acquisitions.

Swayampakula Ramakanth, Analyst

Thanks for taking all my questions.

Joseph H. Capper, CEO

Thanks, RK.

Operator, Operator

Thank you. Our next question comes from the line of John Vandermosten with Zacks. Please proceed with your question.

John Vandermosten, Analyst

Thank you and good afternoon, Joe, Doug and Matt. I wanted to understand the medical collaboration a little more. That sounds like a great opportunity to get involved with clinical trials, you know, more further proof that the FDA has recognized a new product. Are there any other opportunities like this? With MediWound does that guarantee that your product will be used with their device if it's approved?

Joseph H. Capper, CEO

Yeah. First, yeah, we're excited about it and we're glad to be supporting that trial. We think it's important. It's probably going to be the largest DFU trial in at least a decade, and the product looks very promising. EPIFIX was selected because it has more evidence and more around its clinical efficacy than any other product in the category. So they know it works. They want to ensure closure throughout the trial so they get the best results. I think they said that in their press release when they announced. As far as other opportunities, we're always looking to work with people who have complementary products. I don't have anything to talk about today, but certainly, working with other people in and around our product category makes a lot of sense.

John Vandermosten, Analyst

Okay. And then thinking about free cash flow, should we expect a sequential expansion in that in the fourth quarter?

Doug Rice, CFO

Yes. John, we're really pleased with where our free cash flow ended up in the quarter, sequentially an increase versus Q2 of $7 million. I would expect Q4 to look similar. I think there's a lot of puts and takes in Q4. But, we signaled in our prepared remarks that we expected adjusted EBITDA to be north of 20%. That's what it was in Q3. We would expect the same in Q4. I would expect that our free cash flow would look similar.

John Vandermosten, Analyst

Okay. Good. And I wanted to expand on the earlier analyst question about EPIEFFECT. Do you feel that having more products in the wound product portfolio will actually provide some kind of synergistic benefit there or might there be, you know, cannibalization in the group of products?

Joseph H. Capper, CEO

Yeah. I think a little bit of both. Clearly, EPIEFFECT can be used in other procedures, which we talked about specifically when suturing is required. So it's going to expand utilization, but there may be some cannibalization of the EPIFIX as well.

John Vandermosten, Analyst

Okay. Great. Thank you for taking my questions.

Joseph H. Capper, CEO

Thanks, John.

Operator, Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Joe for closing remarks.

Joseph H. Capper, CEO

Thanks, operator, and thanks for your questions and your continued interest and support in the company. That concludes today's call and we will talk to you after our next quarterly report. Thank you.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.