Greetings and welcome to the AxoGen Fourth Quarter 2018 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to you, Kaila Krum. Thank you. Please begin.

Thank you, Gloria, and good afternoon, everyone. Welcome to AxoGen's fourth quarter 2018 and full year financial results conference call. We appreciate you joining us. I'm Kaila Krum, Vice President of Investor Relations and Corporate Development. With me on the call today are Karen Zaderej, Chairman, Chief Executive Officer and President; and Pete Mariani, Chief Financial Officer. The format for today's call will be as follows: First, Karen will discuss 2018 fourth quarter and full year highlights and review our guidance for fiscal year 2019. She will then turn to our key operational and strategic objective. Next, Pete will provide details on the financial results outlined in today's press release. We will then open the call for your questions. Today's call is being broadcast live via webcast, which is available on the AxoGen website. Within an hour, following the end of the live call, a replay will be made available on the company's website at www.axogeninc.com under Investors. Before we get started, I'd like to remind you that during this conference call the company will make projections and forward-looking statements regarding future events. We encourage you to review the company's past and future filings with SEC, including without limitation, the company's Forms 10-K and 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include, without limitation, statements regarding product acquisitions and/or development, produce potential, the regulatory environment, sales and marketing strategies, capital repurchase or operating performance. And with that, I'd like to turn the call over to Karen Zaderej. Karen?

Thanks, Kaila, and good afternoon, everyone. 2018 was an exciting, but challenging year for AxoGen. We added to our capabilities across the organization, including the strengthening of our commercial, clinical, surgeon education and product development teams. Although, we experienced certain headwinds during the year, we're pleased with the foundation we've built and we enter 2019 stronger than ever. We are the leading company solely dedicated to restoring quality of life for patients suffering from peripheral nerve damage. Our purpose-driven team of professionals works with skilled clinicians to further our mission and deliver life-changing evidence-based solutions to better serve this patient population. AxoGen was built on adaptation, along with sound values and business principles. We are confident that the underlying fundamentals of our business are strong and we believe that the execution of our strategic initiatives will drive our long-term sustainable growth. I will now talk through highlights from the fourth quarter and full year. Our total revenue for the fourth quarter of 2018 was $23.4 million, an increase of 38% from the fourth quarter of 2017. For the full year 2018, total revenue was $83.9 million, up 39% from the prior year. Our growth continues to be fueled by growing surgeon acceptance of the increasing body of clinical evidence across our portfolio of products. This clinical data is helping to drive penetration of our active accounts and allowing us to gain access to and develop new accounts. In October, our Avance Nerve Graft received a regenerative medicine advanced therapy designation otherwise known as the RMAT from the FDA acknowledging that Avance, our biologically active nerve allograft, is intended to treat, modify, reverse or cure a serious or life-threatening disease or condition. And preliminary clinical evidence indicates that Avance has the potential to address the unmet medical needs of the disease…

Thanks Karen. Fourth quarter revenue grew 38% to $23.4 million. Revenue growth was primarily the result of increases in unit volume as well as the net impact of price increases and changes in product mix. As in prior quarters, our revenue growth was driven primarily by increased revenue in active accounts and the addition of new active accounts. We had a net increase of 33 active accounts in Q4 and now have 712, an increase of 20% over the prior year. We also continue to see growth in our pipeline of new accounts as surgeons become more familiar with our products and begin to incorporate them into their treatment algorithms. Gross profit for the fourth quarter was $19.8 million, a 38% increase compared to Q4 of 2017. Gross margin was 84.5% for Q4 compared to 84.6% in the prior year's fourth quarter. Total operating expenses in the fourth quarter was $25.6 million, up 59% over the prior year. The increase included additional investments in our expanding commercial capabilities as well as increased investments in clinical, R&D, and general corporate expenses associated with our growth. Operating expenses include noncash stock compensation expenses of $1.6 million in Q4 of 2018 compared to $1.1 million in the prior year. Sales and marketing expense in the fourth quarter was $15.5 million, up 53% over the prior year. As a percent of revenue, sales and marketing expense from the quarter was 66% compared to 60% in the prior year. Research and development spending in the fourth quarter was $3.8 million compared to $2 million in the prior year's fourth quarter. R&D costs include product development, expenditures for our biologics license applications for Avance Nerve Graft support of the RANGER Registry, and other clinical studies, as well as expenses associated with the development of the new…

Thanks, Pete. We have an exciting vision to revolutionize the science of nerve repair. We remain the leading company, solely dedicated to improving quality of life for patients suffering from peripheral nerve damage. We believe that we have developed a solid foundation based on science and clinical outcomes that will allow us to address these important unmet clinical challenges. We are confident that the underlying fundamentals driving our business are strong and we believe that the continued execution of our strategic initiatives will continue to allow AxoGen to deliver long-term sustainable growth. Before taking questions, I do want to welcome our new investors and thank the AxoGen team for their commitment to our mission and to our values. And at this point, I'd like to open up the lines for questions, Gloria?

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Richard Newitter with Leerink. Please proceed.

Hi, thanks for taking the question. I have one on guidance and then one on your clinical RECON Study. Just on the guidance, can you give us any color on the quarterly pacing. I know you've had some sales leadership changes that happened at the end of the year or-- sorry -- at the very beginning of the year of 2019 in January. And I'm just wondering, what's baked in as you said from the range of rep productivity outcomes with respect to kind of how that plays out in the first half of the year versus second half of the year? And how should we think of the growth trajectory within that backdrop?

Well, hey Rich, how are you? I think the way we think about the range for the guidance is you're right, we had nine reps start in Q4 and we think about the key drivers of our revenue in 2019 being driven by that group of 85 that were here with us by the end of 2018. And so as that group that we hired earlier in the year comes up to speed here at the end of the fourth quarter and the first quarter and then that group in Q4 comes up to speed through the middle of the year, I think that does lead us towards thinking about that productivity increasing across the year and certainly more so in the back half of the year.

So, I guess Pete just -- is it fair to assume maybe something below the average growth rate implied at the midpoint of the guide in the first half of the year particularly in the first quarter, and then maybe something in the second half maybe a little higher? Is that a fair way to think about it? Again I'm just trying to calibrate just given the kind of…

Yeah. No, I get it. I think that's probably a fair assumption or a fair way of looking at it. I think it just depends on how people build their models and how you think about the impact of those Q4 of 2018 new hires impacting the overall average from the start of the year versus what it looks like in the back half of the year. So taking the approach as you just suggested might be a good way of looking at it.

Okay, great. Thanks. And I wanted to just ask on the RECON Study. What exactly is the new update here? Because I know you provided an update that you completed enrollment of the 170 patients with your press release preannouncement in January and that interim statistical look for the deviations was anticipated at that point of time. And now I think you're saying as expected you're starting to go through that interim look. Is that kind of the new information we learned today? And I guess I'm ultimately just -- what are we supposed to make of this with respect to the study? Is this going to require greater than 170 patients required to be enrolled in the study? When is the FDA potentially going to make this determination? Was this agreed upon in the original protocol? It would be helpful I think to get some color on that.

Sure. So the only update on progress is the last time we tried to assist the government with shutdown. And there was no progress with the FDA. The FDA is back at work again. And they've been going through their list of things that they had to do. And they have reached us and we're starting a conversation now to talk about this interim look. In terms of the impact, so first yeah this was the planned analysis when we first designed the study and worked with the FDA. Just recognizing that in 2011 when we're drafting this protocol the data on particularly standard deviation was pretty limited both for Avance because we didn't have as much clinical data, but also because conduits our 510(k) devices we -- there's not data repository that you would have where there is more robust clinical studies. And so we had to estimate the standard deviation of conduits on the basis of literature. And so recognizing at that time that that process has error in it and this pooled standard deviation is one of the key values used and kept for a given power and calculating what your sample size of the study is. So at that time we created a table that's in this statistical analysis plan that says when we have this first 80 subjects or the first 80 enrolled subjects when we have the pooled standard deviation, it will allow us if there is shift from the original assumptions to expand the enrollment to maintain the power. So this is again part of the original protocol. There is a set structure into what we would change given a change in the pooled standard deviation. And then just I'll add what this is and it is not, it is only a look at the pooled standard deviation, no outcomes. We don't see them and neither did the blinded statisticians. So again the only thing they get to see is the standard deviation or l guess the standard -- oh, my God that's not true, is it? The statisticians sees it, we don't see any other outcomes. We only see the standard deviation and neither the statistician or AxoGen sees anything about the individual groups. So we don't have any insight into conduit outcomes or insight into what the advanced outcomes are, just what this pooled standard deviation is.

Okay. But if the FDA comes back and determines that you need to expand the number of patients on this study, is there anything to read into that or is that just truly a statistical phenomenon and then it -- you really can't read positive or negative one way or the other from that?

Yes. You can't read anything positive or negative out of the outcome of the study. The only thing that you can see is FDA's commitment to maintain the power over the study.

Okay. Thanks. And if I can actually just squeeze one more in. The timing of some of the management changes in early January, can you just describe a little bit about kind of what went behind the decision making there? How long was it in the works? And, again, the rationale? Thank you.

Well, I look at the talent that we've brought in with Chris and Eric and just recognize that I think we've brought in a couple of very strong executives who have experience in scaling, growing and growth organizations. And leading a commercial team that is used to doing this sort of market development and change management that AxoGen is all about. And so, really excited to have these two folks joining us on the team. In terms of the timing, honestly, we were looking getting through 2018 and transitioning into 2019. So it's not a coincidence. The timing was January, it was just trying to handle it so that we could complete out a good sales year with our sales team and launch into a new sales year, with a strong initiation of the year and our sales meeting with our new sales leadership.

Thank you. Our next question comes from the line of Raj Denhoy with Jefferies. Please proceed.

Hi. Good afternoon. Wondering if I could just start off with the guidance as well. I guess the new range this year, I know you want to give us numbers or numerical numbers and not percent ranges, but it does imply 30% to 35%, which is a bit lower from what you offered, I think, it was November of last year at your Analyst Meeting. And so, I guess, I'm curious about that additional sort of 5% cut in the guidance and the way that that's just conservatism on your part or whether it's perhaps a lingering effect of what you described on the fourth quarter softness with the sales team maybe not being as productive once they caught wind of the sales change. Really, just trying to get what's behind that that conservatism analysis in those numbers?

Well, I think, Raj, as we said I think as we dig into our own numbers a little better and look at what these productivity ranges could look like for the folks who have came in, in 2018. And what it means to drive growth across 2019, I think, being on the low end of productivity range at this point. Given where we're at this point in the quarter, honestly, we actually feel like we're off to a pretty good start here in the first quarter. But we have a lot of growth ahead of us. And I just think it's appropriate for us to stay in this range for now, let's deliver the first quarter, the second quarter and see where we are. But that being said, the group has done I think a really solid job of implementing the changes that we put in place last year. And, I think, we're rolling into this year in a good place for the commercial team. We want to give our new sales leaders a chance to get fully settled and enrolling in. Like we said in the release, they're doing really well. We're excited about the -- just the mood and the tone of the organization right now. We're excited about the opportunities to continue to drive growth in the year. But as we start at this point in the year, we think this is an appropriate range for us to be in.

And maybe just to put a finer point on that, so the dynamic you described in the fourth quarter where, again, there was a little bit of lower productivity as the sales team maybe anticipated some change. Have we now moved beyond that? Can you unequivocally say that the -- that there's no impact at this point from the sales change -- sales leadership change?

Yes, I think, we can. I mean, I think, we could say that the growth that we saw -- we saw nice growth in our direct force -- sales force through Q3. We actually saw it continuing in October and November. The issue that we talked about before really have to do uniquely with the leveling off or the slowing of the growth in December versus what we would have liked to have seen. And we've transitioned well into January and into the first quarter. So I think the team has done really well, as we get started here in the year. Do you have -- yes, okay.

No, I think, that's perfect. I think anytime you change sales leadership, it's a change. And so, sales teams always respond favorably to change. I think we are progressing well on our plan. I wouldn't want to say its zero impact. I think there's always some impact when you change sales leadership. But I think Chris and Eric have both done a marvelous job of diving in and being accepted by the team and really stepping up into what is a very fast-paced changing organization. So I think we're off to a great start.

Okay, that's fair. Maybe just one last one. Just on the chronic neuropathic pain opportunity. I think you said, we shouldn't expect too much contribution this year, but any updates on timing on when we might get more detail on the programs there when you might have -- where it might become more real for you?

I think it's going to take us a few quarters to get some more information to understand a little more on the clinical side, but more importantly thinking about patient referral and awareness and how you can identify the right patients for this and get them referred to the right surgeon. And that's something that we've got some work to do on. So I think it's going to take us a few quarters to get confidence in that.

Great. Thank you.

Thank you. Our next question comes from the line of Brian Weinstein with William Blair. Please proceed.

Hey, guys. Thanks for taking the question. Just to kind of drive a little bit more on the last route of questions there. Can you talk just about specific steps that have been taken by the commercial and sales leadership team since stepping in? And kind of what is the difference in strategy that you think that they're going to employ with the sales force versus kind of what we saw before? Can -- are there any concrete things that you can kind of point to there?

Well, I don't think -- first of all, I think, it is continuing and enhancing some of the things that we've put in place already so -- and continuing to enhance our development programs for -- and coaching programs for sales team. So that we can continue to look at productivity and see if we can improve that productivity from where we are today, both in established reps and in new reps. I think that's a key focus area for both Eric and Chris. So that's certainly, I think, something that we'll spend time on other -- and that you'll see some of it in the script that we had when we talked about thinking about territory alignment and the role of independent agencies. One of the things that we're I think doing a very good job of, is really looking at rep productivity and how much time is spent as windshield time versus selling time. And can we improve productivity by just carving off some of these longer distance more isolated cities that may be better served by an independent agency, rather than have a sales associate drive five hours to go and visit the surgeons there. That's the sort of, I think, experienced approach that the sales leadership is bringing in and it's been very well received by the sales team.

Okay. Great. And then, as a follow-up. Have you guys looked at or considered any other market resizing resources, which may be broader in scope than what you've used in the past to get even more comfortable to validate, again, that this is $1.9 billion market on the trauma side, which you guys have been very clear about kind of where you've come up with those numbers. But is there any other validation work that you guys have done, or are considering doing just to validate that?

Yes. We've actually done a number of projects to look at primary market research with surgeons. It's very hard to quantify this area of -- in particular, the traumatic injury to peripheral nerve. Those who aren't as familiar with the issue is that, this is -- nerves are really a step of a procedure rather than most of the time, a procedure in and of themselves. And so, you can't go to procedure codes. We had started originally thinking CPT codes, which is something that measures the surgeons work. But in surgeons work there many payers limit the number of codes that they will pay in a given procedure, that's typically going to be less than five or five or less. And so often in a trauma, there's a lot of things that are going on in a trauma. And nerve may or may not be represented on the list, but they end up reporting. They do the work but it's just not coded because they don't get paid for that additional work or they don't get recorded for that additional work. And so we've used more empirical methods. We've supplemented that with direct research with surgeons. We will continue to do that. I'm not sure -- I think for us it's a picture that we try and triangulate that says here's multiple ways that we've looked at it and we come up with pretty much the same number each time that we do it. And we've given you one of the ways that we've looked at it but, yes, we continue to think about other ways to evaluate that. And so far when we've done that we've been confident we're still in the right size.

Okay, thank you, guys.

Thank you. Our next question comes from the line of Ryan Zimmerman with BTIG. Please proceed.

This is Sam on for Ryan. Can you guys hear me?

Yes.

Yes, Sam. How are you?

Great. So just a few logistical questions to start. So on the RECON Study and sorry if I missed this, but do you have an estimated time frame of when you may hear back from the FDA about whether they want to see a larger cohort to measure that standard deviation? And then for the rep count of that 115 number, is that including the OMF and breast specialists in there?

So on the first one, no, I don't have a time line. It's always hard to schedule the FDA but I don't think it will be long. It's just -- they're actively discussing it now. And I don't want to put a deadline on that. On the rep count, yes, the 115 number is all quota-carrying reps which includes our specialists.

Okay, great. And then just thinking about productivity into 2019, are you envisioning more growth from that existing 85 rep number from a increasing procedure volume or that increase in procedure value from -- the use of increased products and procedure? And then as a side question on the specialty products in OMF and breast, can you give any more clarity into how much of the guided growth you think will be coming from those segments? Thanks.

So our biggest driver of growth is the number of procedures that's the primary driver. We do look to make sure that we're maximizing maybe rightsizing will be a better way to, rightsizing what the revenue per procedure is. There are actually places that we work with the sales teams to see if we can help choose a smaller size or a more economical product for a particular type of surgical repair. But we also want to make sure that the patient is getting the best quality of care. And we believe for example a Connector Assisted Repair does add value for the patient. And so we would look to have Connector Assisted Repair continue to increase in some of those procedures. In terms of the breakout, we don't actually break out each of the areas or segments. Trauma is by far our biggest segment, but we don't break them out beyond that. From a growth standpoint, while the others are coming off of a much smaller base as a percentage they are growing faster than trauma but not -- but the majority of the dollar growth is still coming from trauma.

Great. And then one quick follow-up. Do you have any frame about what percentage of your current Avance procedures are also including the connectors?

No. We've not put a guidance out there. It is increasing. But it is not at this point the majority of the procedures. I can put that comfortably there. We see actually greater adoption in breast reconstruction and in the OMF segment of Connected Assisted Repair and see it expanding in trauma.

Great. Thank you.

Thank you. We've reached the end of our Q&A portion. Allow me to hand the floor back over for closing remarks.

Thank you, Gloria. Well, I'm going to thank everyone for joining us on today's call and we look forward to talking with many of you at the Leerink and BTIG conferences later this week. Thank you.

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