Welcome to AxoGen Incorporated Second Quarter 2020 Conference Call. At this time all participants are in a listen-only mode. A brief 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, Pete Mariani, AxoGen’s Chief Financial Officer. Please begin, Mr. Mariani.

Thank you, Devin, and good afternoon, everyone. Joining me on today's call is Karen Zaderej, AxoGen's Chairman, Chief Executive Officer and President. Karen will begin today’s call with an overview of our second quarter performance and an update on the ongoing recovery in our markets, followed by a review of the recent announcement of our RECON study enrollment and our path to a BLA submission. I will then provide an analysis of our second quarter performance along with a summary of our recent recently announced debt deal with Oberland Capital. Today's call is being broadcast live via webcast, which is available on the Investors section of the AxoGen website. Within an hour following the end of the live call, a replay will be available in the Investors section of the company’s website at www.axogeninc.com. 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 the 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 related to the expected impact of COVID-19 on our business, statements regarding product acquisition and/or development, product potential, the regulatory environment, sales and marketing strategies, capital resources or operating performance. And with that, I'd like to turn the call over to Karen. Karen?

Thank you, Pete, and good afternoon, everyone. Our total revenue for the quarter was $22.1 million, representing a 17% decline versus the prior year period. While COVID-19 had a material negative impact on total revenue, we saw steady improvement across the quarter as our customers reopen their surgical schedules. Our second quarter performance reflects the recovery in our markets that was stronger than we anticipated as well as the priority that surgeons and hospitals have placed on nerve repair with AxoGen products in the early stages of the recovery. Our recovery also reflects the hard work and creativity of the entire AxoGen team to support our customers and their patients in this difficult environment. The recovery varied regionally based on the intensity and trends of COVID-19 in local markets. As elective surgeries resumed, we experienced short-term regional surges in nerve repair cases reflecting the completion of deferred procedures. These recovery surges were typically followed by a return on more normalized levels for the territory. Surgeon interviews that we conducted confirmed that nearly all surgeons had experienced significant disruption to their practice and a reduction in surgical procedures due to COVID-19. But many surgeons believed that they were already caught up with their current backlog of deferred procedures while most others believe they would catch up by the end of the summer. In addition to regional variations, our recovery also varied by nerve repair application with our core trauma business leading our recovery. The recovery of procedures in our breasts and OMS application, as well as our emerging business and the surgical treatment of pain began later in the quarter. Overall, we're encouraged by the execution of our team and the priority hospitals and surgeons are giving to nerve repair with AxoGen products during the recovery. However, we remain measured in…

Thanks Karen. Second quarter revenue declined 17% to $22.1 million. Our revenue declined for the quarter was the result of a 19% decrease in unit volume, partially offset by a 2% net benefit from changes in pricing and product mix. Gross profit for the second quarter was $16.5 million compared to $22.5 million in the prior year. Gross margin was 74.7% for Q2 compared to 84.1% in the prior year second quarter. Gross margin was negatively impacted in Q2 as a result of increased period and variance costs associated with the suspension of tissue processing during the quarter of $1.6 million and increases to inventory reserves. We began a gradual restart of our tissue processing in June, our continuing that ramp in the third quarter and anticipate that gross margins will return to normalize levels of sales and production levels recover. Total operating expenses in the second quarter declined to 18% to $24.8 million, compared to $30.1 million in the prior year. Total operating expenses in the second quarter included $2.2 million in non-cash stock compensation, compared to $2.7 million in the prior year. Sales and marketing expense in the second quarter declined 23% to $14.3 million compared to $18.5 million in the prior year. This decrease was primarily due to reduce compensation expenses, including lower commissions, a reduction in our surgeon education expenses after canceling in-person education programs and lower travel expense as a result of the travel restrictions and canceled programs. As a percentage of total revenue, sales and marketing expense decreased to 65% for the three months ended June 30, 2020, as compared to 69% for the previous year. Research and development spending in the second quarter decreased 5% to $4.1 million, compared to $4.3 million in the prior year. Research and development costs include product development,…

Thank you, Pete. We're encouraged by the performance of our commercial team during the pandemic and believe that our renewed focus on the core trauma opportunity has supported the pace of our recovery and has positioned as well as we enter the second half of the year and continue to develop the nerve repair market. We believe that the regional surges we experienced a surgical cases, reopened indicates that nerve repair with Axogen products ranks high among surgeon priorities and provide additional evidence of our products, clinical benefit and value proposition to patients, surgeons, and hospitals. At this point, I'd like to open up the line for questions, Devin?

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Raj Denhoy with Jefferies. Please proceed with your question.

Hi, good afternoon.

Good afternoon, Raj.

Hi, Raj.

I wonder if maybe I could start with the revenue lines, pretty encouraging to see only down, I think it was 17% for the quarter after the negative 70%. I think you talked about in April. And so it does imply that, very strong recovery in the second couple of quarters – second couple of months of the quarter, but you're still, I guess, pointing to that being mostly recovered procedures as opposed to underlying demand. So what I'm trying to get at is what is that underlying demand right now? And you did talk about it being still below 2019 levels in the back half of the year. And so maybe you could just ground us in terms of where you think we are on that metric.

Yes, so the recovery in the quarter was both, it was both deferred procedures from the March time period that got rolled over into the Q2 time period, as well as current trauma that just happens day to day that as surgical ORs opened up, surgeons were able to do in real time. And so we saw both of those occurring and driving the demand. We definitely saw a third or a spike as various regions opened up. And of course those happened at different times as regions had different time periods of the recovery. As you can imagine, some of the Northeast recovered either late June or even into July and other parts of the country started to recover in May, balanced by some of the pullback that we've seen in some of the regions as COVID starts up again. So from an impact to us overall, we feel that the incidents overall of trauma is still down somewhat, not as much as it was during the full shutdown, believe that the overall incident is somewhat depressed. We believe that from a deferred procedures actually many of them were completed in the second quarter. So those March procedures that didn't happen got rolled over into March, or excuse me into second quarter. There are some deferred procedures that we'll still get wrapped up towards the end of summer, but really we think that again, given the priority that surgeons placed on nerve repair, they moved those procedures pretty quickly into the OR, And so we won't see a big surge from deferred procedures, but we do see the underlying demand continuing to stabilize.

Yes, I guess, I'm trying to understand what level I know you you're not giving guidance and I appreciate that you're operating under pretty limited information, but is that down 10%? Is it down 20? What level of lower demand are we talking about at this point? And I appreciate you also have the ability at speak to July. So I don't know if you want to comment on that as well.

Well, I think we saw good solid trends as we moved into the third quarter and in July. We're encouraged by that. And I'll just tell you my hesitation on giving you a depression of the incidents of trauma and the surgical repair of those procedures is because I still don't know what's going to happen regionally around COVID as it resurges in different places and that's going to affect the trauma rate. And so I really, I just, I don't feel like it's fair to give you a guidance number because it's going to be based on the resurgence of COVID. The underlying demand for the products remain strong and surgeons certainly are prioritizing getting those nerve repairs done.

Understood. You on a separate topic, you were – I guess pretty encouraged by what you were seeing on your transition to more kind of digital or virtual training and even case support efforts. And I guess what I'm asking you about is how permanent do you think somebody might be? I mean, is this something you could see playing out even once COVID adds and you can get back into the hospital. Does this represent some potential cost savings for you longer term? And how do you see this playing out over the next couple of years?

Yes, I think that we have learned, we've been really nimble. We've learned some new skills and build some new capabilities, and I'm pretty optimistic that these are permanent additions to our skillsets and capabilities. And so when we think about the remote case coverage some of the virtual education work that we've developed and the digital marketing tools that we've developed, we think we're going to keep those in our tool belt for the long term. We think they really are beneficial to us.

But I guess, do those replace things you were doing or are those really additive in a sense, I mean, is there the potential that, that you could see permanent reduction in your selling costs for instance from where you were pre-COVID?

Yes, I think that they contribute to sales rep productivity and overall commercialization productivity. So I think they're they are added tools that improve our overall productivity and make us more efficient.

Okay, understood. Thank you.

Thanks Raj.

Our next question comes from the line of David Turkaly with JMP Securities. Please proceed with your question.

Yes, hi, this is actually Dan Stauder on for Dave. How is it going?

Hi, Dan.

Hi, Dan.

Great. So I guess just going back to Raj's question. You mentioned that sales consist of both deferred procedures, as well as some current trauma demand. Could you give us any more color on that? How much contributed from both? Was it mainly from recoup cases or any amount of detail you can go into that would be great?

Well, by far the majority is day-to-day trauma. The deferred cases that rolled in were what was delayed in March. So we saw a procedure start to drop in the early part of March. And some of those obviously rolled in and were deferred procedures, but trauma overall in the peak of April, we estimated was down about 20%. It has come back up from that again, it's highly effected by activity and activities affected by COVID and the lockdowns in various regions associated with that. But we've come up materially from where we were at the low points, both in we believe the incidents of trauma as well as patient's willingness to come into either hospitals or surgery centers to get that traumatic injury repaired.

Great. And then just to follow up on that, as different regions reopened, how much that headwind from the state home order is really waned off, was it really, pretty immaterial in June as construction and other activities were able to resume? Or do you think that's probably here for the back half as well? Thanks.

We still see high regional variations. It definitely waned across much of the country, but we saw impacts in Texas and South Florida and Southern California in the June time period, given the incidence of COVID that was happening there. It is tough to tell for us at this point, whether it's the incidence of trauma or whether it's people's willingness to come or ability to come into get surgery completed. But that's counterbalanced by the opening up of places in the Northeast, which really didn't happen until late June, early July.

Great. Thank you guys.

Our next question comes from the line of Richard Newitter with SVB Leerink. Please proceed with your question.

Hi, this is Jamie on for Rich.

Hi, Jamie.

Hey Jamie.

Hi guys. So I just wanted to kind of come back to just the trends and what you're seeing. Could you potentially comment on, I guess one way to think about it would be, is there a potential that you could hit that second tranche for the new financing agreement with overlay in 3Q kind of help us think, if that's something that could be a possibility and then as you look into 4Q, is it reasonable to think that there could be year-over-year stability or potential growth? Or just based on what you see and what the resurgence you're not thinking that that could be something that's on the table at this point.

We're still seeing or estimating – and again, this is trying to create our own crystal ball around the impact of COVID on nerve repair cases that we would remain below our prior year Q3 and Q4, which is right about where that Oberland – the $20 million, sorry, the $20 million we're already above and that would not be unreasonable to think, we will be above that. The next tranche at $28 million is – would be aspirational.

Got it. Okay. And then just – we've been hearing from a lot of other companies, COVID seems to be accelerating the trend to ASCs. And I think we've kind of talked about this in the past, but can you just comment on how or potentially when you guys believe this could impact your business? And how you guys are potential – or what you guys are potentially doing to capitalize on this at all? Thanks.

Sure. Well, as we've talked about before, there was a change in the Medicare reimbursement rate or [indiscernible] rates for both outpatient surgery and ambulatory surgery centers that was favorable for nerve repair in general and in particular nerve repair with implants, either a connector or an allograft. And so, we see that as a benefit for the long-term. The majority of nerve repair is not actually in Medicare patients. So it'll have to roll through commercial payers as they as – as surgery centers adjust their contracts with commercial payers. And we think that'll take a couple of years to roll through the system. We're seeing good interest in that, but I would not say we've seen a material shift at this point. There's been certainly distraction in this quarter that may have put that as a lower priority. Having said that one thing, interesting thing that we did see again with the emphasis that surgeons really wanted to get their nerve repair patients in, in those locations where they were locked out of hospital OR. So in places, for example, in Texas, as the resurgence happened, they shut down elective procedures in hospitals. And what we saw was a very rapid shift of surgeons moving those patients to outpatient centers or to ambulatory surgery centers and still completing cases where it was – where they felt that was reasonable and the right option for their patients. And so, we do see them leveraging that avenue and we think that bodes well for the future as the payment schedules are adjusted as well.

Okay, Devin?

Our final question comes from the line of Brandon Folkes with Cantor Fitzgerald. Proceed with your question.

Hi. Thanks for taking my questions and congratulations on the success during the quarter. Maybe firstly, could you just elaborate a little bit on the funnel of patients you have been seeing post the quarter [Technical Difficulty] can you just again elaborate on some of the positive shifts that have happened during COVID that you do think will be tailwinds to your business when we come out [Technical Difficulty]. Thank you.

Yes, Brandon, I just want to make sure I got your question because in the first part it broke up a little bit. The second part that I heard was positive shifts. That'll be tailwind for us, but I didn't hear the first part.

Can you just elaborate on the funnel of patients you're seeing in July?

Okay. Well, what we have seen and have been really pleased with is that the surgeons who were active users have almost all frankly returned back to using AxoGen products. And so, we don't have a leaky bucket in that respect of users continue to be users and as their practices ramped back up, they ramped up in using it at the same rate or in some cases even higher rates because there are – we talk about benefits, there are benefits in a COVID environment to do an allograft or Avance as compared to an autograft. It is a much shorter surgical procedure time. There's less exposure. You can do wide awake surgery versus surgery requiring anesthesia. And in some cases, depending on the patient, all of those are healthy benefits for the hospital workers while providing good care for the patient. So we think there are real benefits in doing an allograft repair or an Avance repair in this environment. In terms of our funnel overall to go back to your first part, we also had new users start to use our products, particularly in our active centers. So that's where we have our reps mostly focused is developing our footprint and – in places that we already have a strong surgeon user. We want to go deeper with that user and add in their partners. We are still adding some new active centers, so we'll see some of that in our pipeline, but the majority of our emphasis is going deeper in the centers that we're already in. And so we feel that the pipeline is good and that remain strong interest in it. And we certainly saw that with the virtual education programs that we set up with new and developing surgeons and actually really outstanding engagement from surgeons wanting to be a part of that educational program. In terms of going forward and some of the benefits that we see from the environment we have here, I mentioned before the benefits of using Avance Nerve Graft as compared to an autograph. It is – there are safety benefits to the hospital staff because of reducing OR time and in some cases being able to do wide awake surgery. There are also the learned benefits that we talked about in terms of the digital marketing, the remote coverage. We think that those are really going to help us continue to expand our productivity of our existing sales team and that – that they will pay benefits for the long-term, allowing us to continue to grow in a cost effective manner.

Thank you very much. That was very helpful.

Great. Thank you.

There are no further questions left in the queue, I would like to turn the call back over to Karen Zaderej for any closing remarks.

Thank you, Devin. I want to thank everyone for joining us on today's call. We look forward to speaking with many of you at the upcoming virtual conferences we're attending, including the Canaccord Genuity Growth Conference, August 11 through the 13, the Morgan Stanley Global Healthcare Conference, September 14 through the 16 and the Cantor Fitzgerald Global Healthcare Conference, September 15 through the 17. Thank you.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.