Greetings, welcome to AxoGen Reports Third Quarter 2021 Financial Results Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. At this time I would now like to turn the call over to Peter Mariani, Executive Vice President and CFO. Mr. Mariani you may now begin.

Thank you, Rob. 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 our operational highlights and a review of our revised financial guidance. I will then provide an analysis of our 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 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 our growth, our 2021 financial guidance, product development, product potential, regulatory processes and approvals, APC renovation timing and expense, financial performance, sales growth, and product adoption. 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 $31.2 million representing a 7% decline versus the prior year period, excluding the impact of revenue from Avive Soft Tissue Membrane and deferred procedures in the prior year period, revenue growth for the quarter was approximately 9% year-over-year. We’re encouraged by the underlying growth in our business, in light of the difficult operating environment across our industry during the third quarter. Although we believe the incidence of trauma increased during the third quarter compared to both the prior year and prior quarter, surgical schedules and procedure volumes were negatively impacted by the surgeon COVID-19 cases and hospital staffing shortages. These challenges caused some procedures to be deferred most significantly in the month of August. We saw volumes begin to improve in some September and remain consistent in October as hospitals continued to adapt to these challenges. We view the negative impact to our procedure volumes as transitory in nature. Although the timing of recovery is difficult to predict in light of the ongoing staffing shortages being experienced by many of our customers, the continued uncertainty of COVID-19 and ongoing product shipping and transportation challenges. Nevertheless, we remain highly confident in our commercial execution, the underlying demand for our products and the ability of our customers to overcome the present challenges to deliver important healthcare of patients, including the surgical repair of nerve injuries. We expect to see improvement in our procedure volumes as pressure on hospital operating schedules continues to abate. The impact of the Delta variant and staffing shortages on the quarter varied across nerve repair applications. Similar to our experience during previous surgeons in COVID-19 cases and hospitalizations. Our breast, OMF and surgical treatment of pain applications were impacted more significantly due the…

Thank you, Karen. Our third quarter revenue of $31.2 million represents a decrease of 7% versus the prior year, our lower than expected revenue was the result of a 10% decrease in unit volume and a net 3% increase in changes in prices and product mix. Prior year revenue included approximately $3.3 million from procedures deferred from the first half of 2020 as a result of the initial impact of the COVID-19 pandemic, and approximately $1.5 million from Avive Soft Tissue Membrane for which we voluntarily suspended market availability as of June 1, 2021. Excluding the impact of both of these items revenue growth for the third quarter, would’ve been approximately 9%. Gross profit for the third quarter, decreased 6% to $26 million compared to $27.7 million in Q3 of 2020 as a result of lower sales. Gross margin was 83.2% for Q3 compared to 83% in the prior year. Total operating expense in the third quarter, increased 13% to $32.7 million compared to $28.8 million in the prior year. Total operating expenses in third quarter included $2.9 million of non-cash stock compensation consistent with the prior year. The increase in total operating expenses reflects higher facilities costs as well as increased compensation, travel and project costs. As we have returned to more normalized spending levels over the past few quarters, following the steep reduction in spend in Q2 of 2020 as a result of the company’s cost mitigation initiatives and acted at the beginning of the pandemic. These increases were partially offset by lower bonus commission and stock compensation charges in the third quarter, primarily due to lower revenue expectations for 2021. Sales and marketing expense in the third quarter increased 4% to $18.4 million compared to $17.7 million in the prior year as a percent, total revenue sales…

Thank you, Pete. I’m proud of the achievements of the entire AxoGen team in the face of the headwinds during the quarter. We remain committed to delivering our innovative nerve repair solutions to patients, surgeons and hospitals. And I believe we’re well positioned for success as we move through the final months of 2021 and beyond. At this point, I’d like to open up the line for questions. Rob?

Thank you. [Operator Instructions] And our first question comes from the line of Danielle Antalffy with SVB Leerink. Please proceed with your questions.

Hi, this is Erin on for Danielle. Thanks for taking our questions. Just one or just a couple from me. I was just hoping you could maybe talk about the impact of hospital staffing shortages and, if there’s any steps that, you could possibly take to mitigate these impacts and then also just as it relates to the mix of procedures by setting, was there a certain setting maybe like the ASC, but that was less impacted by these shortages versus the hospital. And just, do you expect to see a shift of procedures to the ASC going forward? Thanks.

Sure. That’s a great question. Definitely we saw impacts of actually the combination of the COVID-19, Delta variant rise in certain parts of the country. And then complicated by the fact that the hospitals have staffing shortages. And so the first thing, that we saw impacted were our more elective procedures. So breast reconstruction is a great example in that it’s always an inpatient procedure. It takes a lot of OR time, and it is deferrable without significant complication to the patient. And so that’s usually for us, the very first sign that hospitals are starting to push procedures out. But we also saw that in the surgical treatment of pain and oral maxillofacial surgery all of those being very elective procedures and all of them impacted and delayed as hospitals are trying to manage their flow. In the traumatic injuries, it’s actually not quite as clear, because it really depends on the circumstances of the hospital and what they’re trying to do on these more emergent procedures. And so the first thing that we see and similar to what we saw last year is that these procedures were moved to alternate sites of care. So in the early days in, in some of the areas where we saw Delta variant in particular starting to creep up, we saw in an increase in move to either outpatient surgery centers or ambulatory surgery centers, which were less affected both by the staffing shortages, at that stage and Delta variant, but as Delta variant became pretty strong all of those staffing shortages, it just kind of came to a head and we saw procedures delayed and deferred even more. So this is going on in the, in a ongoing basis. We hear from companies well CEOs of hospital systems that they certainly have today staffing problems, but there could potentially be another wave of staffing issues as Delta variant WANs [ph], but there’s more resignations that may come. And so we’re just trying to be cognizant of that and try and support the hospitals as they go through this. Recognizing that our elective procedures will continue to be more – will continue to be deferred. But the same time, trying to bring back those traumatic nerve injuries as soon as possible so that those patients can get the best possible care.

Great. Thanks. And then just on the, the 2021 outlook, it seems like your, updated guidance implies about $32 million in revenue for 4Q considering that you did about $31 million in 3Q and, it seems like it, things are getting better since the lows of August that they’ve gotten better in September and have continued into October, just kind of want to understand the puts and the takes that are being contemplated. And then also just, if you could, talk about the backlog and, if we should think of the 2020, is that contemplated in the 2020 outlook or should we think of any backlog procedures that are made up in 4Q as upside? Thanks.

Yes, I think our outlook is really reflective of the fact that we’ve got a lot of – we got a lot of confidence in our ability to come in and help hospitals get through these procedures. But they are challenged with how they are going to schedule these procedures. And so where we saw an uptick in September that September run rate sort of ran consistent for us through October. We didn’t see the additional pickup as in the month of October that we would’ve liked to have seen, to have provided a little stronger outlook for the fourth quarter. So, we’re trying to put, the puts and takes, we’re looking at our current run rate, and if we maintain that through the end of the year, that’s pretty much defines the bottom end of our guidance. And if, as we expect, hospitals are able to get these procedures done and work through some of these challenges they – that they have with staffing that we’ll see a moderate improvement, and that kind of moves us through the top end of the range. So, we’re not trying to bake in any exceptional growth in Q4. And if we see more procedures coming in more quickly, then that’s going to move us up in the range. But we wanted to sort of set the bottom end of this at a current state business. And specifically to your deferred procedure, we think those procedures are going to come in. It’s just us trying to figure out what is the pace of getting those scheduled and getting those procedures done. Last year, we saw experiences where those deferred procedures came in very, very quickly, but as Karen pointed out, these staffing shortages are causing us to be a little more measured in the pace at which those procedures might come back.

Great. Thanks so much.

Our next question is from the line of Anthony Petrone with Jeffries. Please proceed with your questions.

Great. Thank you. First question on our end would relates first the RECON study just to an update on next steps into year end and just, whether or not, you’re seeing any notable impacts from COVID just in terms of timelines there. And then in terms of just sort of FDA developments during the quarter, Integra had a panel, meaning on SurgiMend Acellular dermal matrix products for breast reconstruction obviously a mixed vote from the panel, when you look at the breast neurotization opportunity for AxoGen, anything from that panel meeting that potentially maybe a tailwind for the Avance business or otherwise? Thanks.

Sure. Thank you. So on the RECON study, again we completed enrollment and follow-up of all those subjects. And so at this point, it, there’s not an impact in hospital staffing associated with the study as we have this with the CRO to complete the data table. So, no, we don’t see any impact on RECON despite the staffing challenges at hospitals. And we still look forward to having the top-line data readout in second quarter of next year. In terms of the – looking at this recent panel that happened. I think we’ve read through it and looked at what was going on there. I think it is important to make sure that in communicating with these panels, that it is not just statistically significant difference, but also a clinically relevant and clinically meaningful endpoint is an important measure to put in place. And I think in this particular case at least, as I read the panel, I think there was varying under thought processes among the panel members around the presentation on clinically meaningful endpoints. And so I think it’s a very good reminder to all of us that when we’re doing these trials, we want to make sure that we’re showing both of those points. Fortunately for us, as we’ve designed RECON, those are both baked into RECON. It’s also information that we have, and we are – would pull data from RANGER and sensation now to support our broader label claim. And all of that was kept in mind when we set those studies up. So, I’m anticipating that we have those, that information in a form that the panel, if there is a panel that the panel would be able to understand it.

And, and if I can, if I could sneak one follow-up in there, which would be on the core business and kind of shifting to the core accounts that new category announced last quarter. When you think about some of the headwinds you saw on 3Q, Delta and staffing shortages, how did that play in those core accounts? And are they – is there a portion of those accounts that are more insulated or was it evenly disbursed across the entirety of the accounts in the quarter? Again the pressures on Delta and staffing. Thanks again.

Well, Delta definitely had regional differences across the country. So Florida, the Southeast, Tennessee that, Tennessee valley area, all of those had a greater impact overall on volume and on those core accounts in those regions. But the staffing is much more broadly impacted. If you look at it, we still did show an 18% overall growth year-over-year in this core account. So, we see that as still a continuing funnel and fuel for our overall growth, both increasing the number, but also increasing the penetration or volume within accounts. Remember the $100,000 is a floor. It’s not a ceiling that’s just getting into of that category. And our largest accounts are over a $1 million. And so while we saw staffing affecting accounts across the board, we still see that distribution of driving penetration and that’s as their staffing resolves, we see that we come – we believe will come back up to continuing to drive them those two dimensions, both continuing to increase the number of core accounts taking from our active accounts and moving them to core and increasing the revenue per account.

Thank you. Our next question from the line of Kyle Rose with Canaccord. Please proceed with your question.

Great. Thank you for taking the question. I wonder if we could just get a little more commentary on what you’re seeing just with respect to staffing shortages? I mean, some of the diligence we’ve done is that is suggesting that yes, there are staffing shortages, but that’s more related to the inability to flex for like overtime or additional operating hours, but that just the queue is full. So it’s hard to flex higher as we do see in some Q4. Yes. Is that what you’re seeing or are you seeing, actual decreases in procedure volumes in the markets you serve?

Yes. I have to give a different answer for different segments. So for those elective procedures that require a hospital stay. We are seeing that the staffing shortages are causing those to be pushed out and either not scheduled at all or scheduled way out into the future. Because I would say more acutely, the staffing shortages are in the hospital floors, not necessarily ORs hospitals are trying to keep the ORs moving at as much capacity as they can. Now, I’ve talked to some hospital CEOs that have in their system, hundreds or thousands of backlog procedures that they need to get through. So there are some sizable amounts of backlog and what the shortages are causing in the OR is, as you said, the inability to flex and create more capacity so that they can both deal with the current procedure volume and the backlog at the same time. Doesn’t mean they won’t get to it. It’s just going to be working it off we’ll take a little bit more time.

Okay. That that’s helpful. And then with respect to guidance I just want to make sure I understand it appropriately. If you see kind of status quo, the exit rate of October for the rest of the quarter, that brings you to the low end. And if you see maybe some gradual improvements that takes you to the high end, but maybe just talk to us about how October trended on a month-over-month basis relative to September?

Yes, we saw – so the – we saw things get better in September, but then going into October, it remained relatively consistent, slightly better, but still I would say relatively consistent. So, we think that and that’s why we set the low end of the guidance. There is to say, let’s just assume that because of these headwinds, we remain flat through the quarter. And then of course, if we can start to get the volume back up to what I would consider a normal through flow, and, or start to tackle some of the deferred procedures, we would see some increasing through the quarter, which would be the higher end.

Okay. Very helpful. That’s all for us. Thank you.

Thank you. We’ve reached end of the question-and-answer session. I’ll now turn the call over to Karen Zaderej for closing remarks.

Thank you, Rob. I want thank everyone for joining us on today’s call. We look forward to speaking with many of you at the Jeffries London Healthcare Conference and at the Canaccord MedTech & Diagnostics Forum later this month. Thank you.

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