Greetings and welcome to the AxoGen Third Quarter Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Pete Mariani. Thank you, Pete. You may begin.

Thank you, Omar, 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 third quarter performance and an update on the ongoing recovery in our markets. I will then provide an analysis of our third quarter financial performance, followed by closing remarks from Karen and a question-and-answer session. Today's call is being broadcast live via webcast, which is available on our 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. Before I 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 third quarter was $33.4 million, representing growth of 17% compared to the prior year. I'm very pleased with this performance and believe our return to growth reflects the improved commercial execution of our team, the priority that surgeons and healthcare facilities have placed on the timely repair of nerve injuries and the clinical and economic benefits of AxoGen technologies for patients surgeons and facilities. Our third quarter results were stronger than anticipated, as we believe many of our hospital customers became more adept at operating under COVID restrictions and were able to successfully navigate local resurgences of COVID-19 cases and continue to serve patients, including patients with nerve injuries. Additionally, we received some benefit during the third quarter from a catch-up of previously deferred procedures, which we estimate to be approximately 10% of our third quarter revenue. Similar to our experience in the second quarter, our focus on the core trauma opportunity was the primary driver of the recovery in our business during the third quarter. We believe that the lifting of COVID-19 restrictions led to an increase of daily activities for many people, which in turn resulted in an increase in traumatic injuries. However, we believe that our year-over-year growth continued to be dampened by lower ER volumes in the third quarter as a result of COVID-19. During the quarter, we believe surgeons and hospitals continued to prioritize nerve repair procedures, as elective surgical procedure volumes returned. While nerve repair can result in positive outcomes months after a nerve injury, optimal outcomes are achieved by repairing the nerve in a timely manner. Additionally, in a COVID environment, the desire to shorten procedure time to increase patient and healthcare worker safety and minimize resource utilization, favors the use…

Thanks Karen. Third quarter revenue increased 17% to $33.4 million. Our revenue increase for the quarter was a result of a 12% increase in unit volume and a 5% net benefit from changes in pricing and product mix. Gross profit in the third quarter was $27.7 million, compared to $24 million in Q3 of last year. Gross margin was 83% for Q3 compared to 84.2% in the prior year. Gross margin also improved sequentially from 74.7% in the second quarter as a result of restarting production at our previously idled processing facility during the third quarter and as a result of increased overhead absorption due to higher production levels. Total operating expenses in the third quarter declined 5% to $28.8 million, compared to $30.2 million in the prior year. Total operating expenses in the third quarter included $3 million in non-cash stock compensation compared to $2.4 million in the prior year. Total operating expenses were down primarily as the result of our cost mitigation efforts and the impact of prior-year litigation charges partially offset by higher variable compensation due to higher revenue in the quarter. Sales and marketing expenses in the second quarter declined 3% to $17.7 million, compared to $18.2 million in the prior year. The decrease was driven by a reduction in travel and education programs including in-person surgeon education and conference expenses partially offset by higher variable compensation. As a percentage of total revenue, sales and marketing expenses decreased to 53% for the three months ended September 30, compared to 64% to last year. Research and development spending in the third quarter was $4.2 million, which is consistent with the prior year. Research and development costs include product development, which includes expenses in support of our BLA for Avance Nerve Graft and clinical research. Product development expenses…

Thank you, Pete. Overall, we are pleased with our performance during the third quarter, as our commercial team continued to execute with the renewed focus on our core trauma opportunity. We are encouraged that our recovery progressed faster than expected during the quarter, and we are well positioned entering the fourth quarter and 2021 to continue developing the nerve repair market. I'd like to thank the entire AxoGen team for their dedication and resolve during these challenging times, as we remain committed to delivering innovative nerve repair solutions designed to improve outcomes for patients, surgeons, and hospitals. At this point, I'd like to open the line for questions. Omar?

[Operator Instructions] All right. Thank you. Our first question is coming from Raj Denhoy from the company, Jefferies.

Hi, good evening, guys. Can you hear me okay?

Yes.

Yes, we can.

Great, great. Maybe, Karen, I can start with you on the revenue side. So I think you noted that about 10% of the revenue in this quarter was probably catch up, right? And so, I think that leaves something around $30 million or so as kind of the base in the quarter. Is that a good starting point for where you think you can settle or a least start in the fourth quarter?

Well, you're right to back out the deferred procedures and thinking sequentially what will happen, because those were really injuries that happened in Q2. But I think we're mindful of the impact on COVID-19. And remember that usually, we're sequentially flat between Q3 and Q4. So, while we think we'll show year-over-year growth, we're not anticipating significant growth year-over-year.

So, you'd maybe suggest something a little light from that, just to account for perhaps COVID having an impact during the quarter?

Yes.

From that $30-ish million? Okay. Fair enough. And then maybe, Pete, I'm just trying to parse out the comments that you made around expenses, right? So the expense load in the quarter was not as low as it's been in times past, but I guess as a percentage of revenue, it was a little bit lower. But it sounds like as you're going forward, maybe that absolute number on expenses will tend to drift upwards, or really, how do you think we should be modeling this? That $28.8 million in operating expenses in the quarter is that sort of a baseline now and it goes up from there, or how should we really be thinking about it?

Yeah. No, that's right. I do think it's going to continue to tick up. Now, it's not going to go very quickly. But we're going to – we've begun to make additional investments on projects that we put on hold, things that are pretty important around clinical trials and continuing to get back into growth mode. Look, we're encouraged about the growth opportunity of the top line. We've remained on offense from a commercial perspective. With that, we kept that team in place and these guys are doing just a very good job of capturing the top line as we – as the economy continues to recover and as these hospitals continue to open. And we are going – we put a hold on some of the other projects around the business – clinical trials, some marketing initiatives, and other things that we'll begin to start spending some money on – but we'll do it, in a way that certainly keeps us on a much more efficient run rate than we were on pre-COVID.

Fair. Fair enough. And then maybe just one last one, Karen. So for you, I guess, you highlighted the MATCH cohort, or the RANGER study, I guess, in the press release as well as the publication that came out. I guess, the question is really, is there any reason why one couldn't reasonably look at the results from that study as a good proxy for what we're going to see in the RECON study when we eventually get that data?

Well, I think every study is its own study, so you can't assume that one study tells you the results from the next study. But having said, this, yes, it's confirmatory to the data that we planned for when we put the RECON study together and we see those same types of results coming out in the MATCH study.

Very good. Thank you.

Thank you. And our next question is from Chris Pasquale with Guggenheim.

Thanks. Congrats on a nice quarter guys. I'm curious on the deferred procedure component, how much visibility do you have into when the injuries occurred? Are you confident that that 10% number is pretty solid, or is some guesswork involved there?

It's an estimation, but what we did see was a very noticeable surge in procedures done as hospitals opened up regionally around the country. And so for a discrete period of time, you'd see a big spike in procedures and that's what we're defining as that surge or deferred case volume. We supplemented that with going out and actually interviewing surgeons to get their thoughts on where they are in catching up on their deferred procedures. And we had -- and we've been doing this on a rolling basis, and surgeons pushed to get their nerve repairs done quickly. They found that the hospitals were supportive of that to provide good patient care. And really the surgeon community has told us that they believed and it looks like they did that they would get the majority of their deferred procedures wrapped up by August. And that's what it seems like they've done.

Okay that's helpful. And then second one for me, slowing the pace of rep hire is driving more efficiency from the sales force makes a lot of sense. I'm curious how you're thinking about the triggers for resuming hiring or resuming expansion of the sales force at this point. Is there a certain level of revenue per rep or certain territory productivity size that you're using as a benchmark now? Just trying to gauge how long you expect to be on hold here while you go through this phase of driving improved efficiency?

Well, we haven't set a fixed number. I think we're looking at individual territories and the growth that they're driving, but we've always said that we thought a territory theoretically could be around $2 million in revenue per territory. We want to continue to see productivity move in that direction. We'll obviously split territories on a rolling basis through the year if we start to see some getting bigger than that or substantially bigger than that. But we're really thinking that we've gotten several quarters in front of us here where we can really see the stability that we get and the productivity we get without the disruption of lots of splitting of territories.

Great. Thank you.

And our next question is from Rich Newitter with SVB Leerink.

Hey, this is Erin on for Rich. Thanks for taking our question. I was just hoping maybe you could flesh out some of what's contemplated in the moderate growth outlook for 4Q, maybe just kind of across the different segments like trauma, BRN, OMF and pain. And what kind of growth do you think you might get in those types of segments?

Sure. If you look that next layer deep at our overall growth, the majority of our growth -- majority of our business is upper-extremity trauma and the majority of our growth has been upper-extremity trauma. That's been really the first segment to rebound and to continue not only to recover from where we were from COVID, but to return to growth. And so we think that we will see what are typical trauma patterns in the trauma segment perhaps dampened by resurgence of COVID regionally, as we saw in Texas and Florida that there can be shorter periods of time. We don't think hospitals will shut down in any way, so this is not a total return to what we saw in the April time frame, but there are cases where they become overwhelmed and especially these level-1 trauma centers, which also often are some of the large centers in a particular region with treat COVID patients. They may have to defer cases or move cases to other hospitals or ambulatory surgery centers and so we're trying to be mindful of that in Q4 that there might be some shifting. In the breast reconstruction segment, we're seeing a recovery in third quarter to start, but what we're hearing from our surgeons is because there weren't mammograms that were done for several months that there is sort of an air pocket in the pipeline of patient flow. And that's going to take a couple of quarters to get all the way through to the reconstructions, because it can be three to six months between diagnosis before they may have their full breast reconstruction. And so we think the next couple of quarters will be dampened. We again saw some recovery in Q3. We may see some continued recovery in Q4, but…

Okay. Great. And then just one more quick one for me. I was just wondering if you could maybe shed some light on what you've seen in the first couple of weeks of October. Given the recent rise in cases have you heard any feedback from customers indicating that there's a slowdown or that some of the elective procedures may need to be start to be deferred again? Thank you so much.

Well, of course, everything that happens in COVID-19 is very regional. We've seen strength into October from -- in the same way that we saw it in Q3, but we have heard of hospitals that are starting to signal that they may need to defer some elective procedures including in this case. And again, typically trauma is not considered elective, but in this case they would look to see if they can defer even traumatic injuries for nerve repair. So while we haven't seen anything to date that I would consider substantial as we look at the charts and as we talk with hospital administrators I think that there's a possibility that procedures will get deferred in some locations.

Okay. Great. Thank you so much.

[Operator Instructions] Our next question is from Kyle Rose with Canaccord.

This is Ian on for Kyle. I wanted to piggyback off the previous salesforce question a bit. Just how do you think about driving utilization in existing accounts versus focusing on getting those new users? I think you mentioned top 10% of accounts for 35% of sales again. Are those surgeons using Avance for 100% of their procedures? Is there an opportunity to grow that at all? It seems like that's been fairly consistent here even with the COVID disruption as well. Any color there would be great? Thank you.

Sure. Yes. No, we're really clear that our best opportunity is to drive penetration with our existing users and existing accounts. We'll continue to see expansion of accounts, but our focus is really on driving adoption among existing users because most of our users are extremely lightly penetrated. And with the data that we've put together to date and the strength of some of the benefits, I think that we provide even in this COVID environment where we shorten procedure times compared to an autograft and allow them to do procedures in a more effective way we think that there are real reasons to help, push that adoption and to do it in -- particularly in this environment where we provide real benefits over what they've done historically.

Perfect. Thank you.

There are no further questions at this time. I would like to take the time to turn the floor back over to Pete Mariani for closing comments.

Well it'll be Karen and thank you everybody and thank you, Omar. 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 are attending including the Jefferies Virtual London Healthcare Conference on November 18th, the Canaccord Genuity Virtual MedTech and Diagnostics Forum on November 19th and the Piper Sandler 32nd Annual Health Care Conference December 1st through the 3rd. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation and have a great evening.