Greetings. Welcome to the AxoGen, Incorporated Fourth Quarter 2021 Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal of presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ed Joyce, AxoGen's Director of Investor Relations. Please begin, Mr. Joyce.

Thank you, Hillary, and good afternoon, everyone. Joining me on today's call is Karen Zaderej, AxoGen's Chairman, Chief Executive Officer and President; and Peter Mariani, Executive Vice President and Chief Financial Officer. Karen will begin today's call with an overview of our fourth quarter and update on our operational highlights and our guidance for the year. Pete 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 AxoGen website. Within an hour of the end of this call, a replay will be available on 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 be making 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 which may cause actual results or events to differ materially from those described in the forward-looking statements. These factors may include, without limitation, statements related to the expected impact of COVID-19 and hospital staffing on our business, statements regarding our growth, our financial guidance, product development, product potential, expected clinical enrollment timing and outcomes regulatory process and approvals, APC renovation timing and expense, financial performance, sales growth, product adoption, market awareness and our products, data validation, our assessment of our internal controls over financial reporting, our visibility and sponsorship of conferences and educational events and other matters not within our control. And with that, I'd like to turn the call over to Karen. Karen?

Thank you, Ed, and good afternoon, everyone. Our total revenue for the fourth quarter was $31.5 million, representing a 3% decline versus the prior year period. Excluding the impact of revenues from Avive Soft Tissue Membrane in both years, revenue for the quarter was approximately flat year-over-year. Although we saw a sequential improvement in revenue in November, the Omicron variant negatively impacted procedure volumes and hospital staffing in December, which negatively impacted our revenues for the quarter. For the year, we achieved revenue of $127.4 million, an increase of 13% over the last year. Excluding the impact of Avive, revenue increased 15% year-over-year. I'm proud of the growth we were able to achieve despite the ongoing challenges of COVID and hospital staffing shortages, and we believe more surgeons and accounts recognize the value AxoGen provides. We had an excellent year engaging and educating surgeons using a combination of in-person and virtual programs, and we again met our annual goal of training more than 75% of hand and microsurgery fellows. We are confident that we've built the right organization and a solid foundation of clinical evidence that will allow us to deliver sustainable long-term growth as the impact of COVID wanes and hospital operating environments improve. The Omicron-related challenges we faced late in the fourth quarter continued through the early part of Q1. Like all of you, we're encouraged by reports of declining COVID rates in the recent weeks. However, we believe it will take longer for hospital staffing challenges to improve and for surgical schedules to normalize. As a result, we are measured in our outlook of the pace of procedure volume improvement in the first half of the year compared to 2021 and anticipate a return to more normalized growth rates in the second half. Commercially, we remain focused…

Thank you, Karen. Fourth-quarter revenue was $31.5 million, a 3% decrease compared to Q4 of 2021. Fourth-quarter revenue was negatively impacted by COVID and related hospital staffing challenges, particularly in the final weeks of the quarter. Fourth-quarter revenue includes $500,000 from the reversal of a sales return reserve recorded in the second quarter of 2021 for Avive soft tissue membrane for which we voluntarily suspended from market availability on June 1, 2021. Avive revenue in the fourth quarter of 2020 was $1.6 million. Gross profit for the fourth quarter was $26.1 million compared to $27 million in Q4 of 2020. Gross margin was 82.8% for Q4 compared to 83.2% in the prior year fourth quarter. Total operating expense in the fourth quarter decreased 3% to $31.5 million compared to $32.4 million in the prior year. The decrease is primarily due to a reduction in employee compensation where decreases in incentive and stock compensation, bonus and commissions were partially offset by increases in salaries. The net decrease in operating expense was partially offset by increases in professional and consulting fees, marketing programs and travel, and research and development projects. Sales and marketing expense in the fourth quarter decreased 11% to $17.7 million compared to $19.8 million in the prior year. The decrease is primarily related to lower employee compensation, partially offset by an increase in marketing programs and travel. As a percent of total revenue, sales and marketing expenses decreased to 56% for the 3 months ended December 31 compared to 61% in the prior year. Research and development expenses increased 28% to $6.3 million compared to $4.9 million in the prior year. Product development expenses represented approximately 73% of total research and development expenses for the current quarter as compared to 55% in the prior year. The increase in product…

Thank you, Pete. I'm proud of our achievements this year and of the entire AxoGen team in the face of pandemic headwinds. We remain committed to delivering our innovative nerve repair solutions to patients, surgeons and hospitals, and I believe we're well positioned for long-term success. At this point, I'd like to open up the line for questions. Hillary?

[Operator Instructions]. Our first question is from Dave Turkaly of JMP Securities. Please proceed with your question.

Pete, maybe just following up on the commentary on the spend you expect in 2022 if your adjusted EBITDA loss was close to $7 million this year, it sounds like you still have some initiatives that you're anticipating spending on. Directionally, I mean, you're almost breakeven and you have plenty of cash, but that EBITDA losses if you were just commenting up or down. Is it up a little bit this year and then when the new facility is on in '23, would you expect it to be -- would you expect to breakeven?

Look, we're headed in the right direction. I mean, I think your point is right. As we get the building up and running and as we continue to drive revenue growth, I think we're certainly on the path towards breakeven across the line, but I'm not going to call that in in 2022. We're not going to give that type of outlook. But certainly, we're in a good position from a spend perspective. We can -- we've got some initiatives that we're continuing to invest in around the BLA product development and other items. And we think we're in a good position to manage spend well through next year and into '23.

Yes. And I don't think anyone would be super surprised about the measured sales outlook as a lot of companies are kind of forecasting that at least in the first half of the year. Could you just remind us the RECON readout, like what are we anticipating there? I know you said in the second quarter, is it just -- will it just be a PR are you going to do a call or like what are the plans right now?

Yes, we'll do -- we're going to do a press release and we'll schedule a call. As soon as we have the information available, we'll be excited to talk about that.

Our next question is from Danielle Antalffy of SVB Leerink. Please proceed with your question.

This is Erin on for Danielle. I was just hoping you guys could talk about some of the trends that you saw in the fourth quarter related to Omicron and hospital staffing shortages and maybe how that's trended starting heading into the first quarter?

Sure. I think we're on a pretty good trend of what we measure as daily sales in November and then certainly in December, started to see some substantial drop off of that, especially towards the back end. As Omicron started to ramp up, hospitals had the double whammy of both capacity constraints because of patients in the hospital because of COVID patients testing positive when they were showing they're asymptomatic and showing up for procedures, but not able to have procedures because they were positive with COVID and being sent home and then constraints in terms of staffing. And that continued into January. Now as COVID has -- the incidence rate has come down and to some extent, has come down of hospital beds as well. We start to see things loosening up and getting -- trending much better, and we hope to see that continue to trend.

Okay. Great. And then if you could just -- regarding the 2022 guidance, just if you could walk us through kind of some of the assumptions baked in regarding COVID and hospital staffing shortages and kind of what we would expect to see maybe at the upper and the lower end of the range.

Yes. I think our observation is that even though COVID is certainly coming down -- COVID is coming down, hospitals are still dealing with a census that includes a lot of COVID patients, and we expect that to improve. But what we also are recognizing is that the hospitals still have challenges with staffing. And we think that will take some additional time for them to work through. Look, we see hospitals as being very resilient. They will figure this out. We think that in time, this will move back towards what we all hope to be a more normalized situation where surgical schedules are keeping up with the current pace. But I think in our outlook, we wanted to just be fairly measured in assuming when that's going to happen and not get out in front of it. We'll see how things go over the rest of this quarter. And we certainly think that back half of the year, this is back to more normalized growth rates for us.

Our next question is from Frank Pennal [ph] of Jefferies. Please proceed with your question.

Hope everyone is doing well. A bit of a follow-up to the last question. I was hoping you can maybe provide some color on rep access sort of exiting last year and so far, what you're seeing this year? And I have a follow-up to that.

Well, through the year, we've seen rep access actually get better. Obviously, when things were shut down completely, it went down completely as we've seen hospitals become more comfortable with operating in a COVID environment, they've allowed rep access to occur. It does go up and down depending on what's happening with the hospital in terms of their COVID constraints at a moment if they move into crisis management, then where their extreme capacity, they don't want reps in there. But they're also limited in the number of procedures that they can do. Having said that, I think that some of the tools that we learned in remote case coverage during the COVID pandemic will continue to be important to us, it both helps our productivity as these are unscheduled cases. And many hospitals have put in place restrictions that I think are going to be durable post all of this and that they don't want -- they will ask reps in for a specific case, but not allow reps to just visit the OR on a daily basis and check out the Board. And I think those changes are going to be more durable for the long term. So we've been very successful with the resources that we provide to surgeons to be able to have the access that we need in most cases. And where we can't do that, we can do the remote case coverage.

Great. I guess, a follow-up to a prior question as well on RECON. What sort of the significance in your view, how are you thinking about the significance of a positive top line readout? I'm sure you're expecting that at this point, but I guess, really on growth penetration. And will the BLA -- will BLA approval in 2023 allow you to charge a premium for Avance? I guess, in addition to what seems like already favorable CMS reimbursement trends at least on the JPM presentation.

Sure. Well, I'll start with the pricing piece. Being a BLA, actually, we don't believe we'll adjust the reimbursement of Avance. So we don't see that as impacting our pricing strategy. We think that we've done a good job of looking at this and pricing this to be comparable to autograft so that from an economic standpoint to hospitals, it is a good choice for their patients to switch from autografting to Avance. In terms of the data readout, we're getting very excited about that. I think that there's an opportunity -- there's an opportunity for us to, in fact, showcase this with a lot of surgeons. Our PIs are pretty enthusiastic about getting a chance to announce this information. We will be looking to present it later in some conferences. Obviously, we'll do the short-term presentation here when we -- when we have the data in second quarter, but we're looking for more extended review with surgeons and some presentations at scientific conferences later this year and think that it's going to create some buzz among our surgeon friends as they continue to think about changing their treatment algorithms. This is important -- really for middle adopters, our early adopters and innovators they were willing to try Avance and actually help us build this data. But middle adopters are looking for this type of level 1 evidence to be confident in changing their treatment algorithms. And we think it will be helpful as we continue to drive penetration in some of our core accounts to help convert those middle adopters. I do want to go back real quick. One thing I thought I heard you say with BLA approval in 2023, we actually plan to do the submission in 2023. And while we have an expedited review with the FDA, I think we should assume right now that it will be a year approval, just they're running a little slower given some of the other things going on. So we're assuming a 2024 approval.

[Operator Instructions]. Our next question is from Jubran Amed [ph] of Canaccord. Please proceed with your question.

This is Jubran on for Kyle. I guess one question from us. In terms of backlog, sort of a follow-up from the Omicron dynamics seen at the end of the Q4. Did the backlog grow this quarter? Maybe has there been any sort of shift in terms of how the 2022 guide is assuming working through that backlog? Obviously, less of a factor on the trauma side of the business, but curious if any sort of dynamics have shifted on that front.

Yes. Thank you for the question. We do believe that there are some deferred cases in certainly all of our segments. But in trauma, we no longer have visibility to what those are. It really has to do with the staffing issues that they have. In the first round, if you go back to 2020, when hospitals were turned back on, they were able to run with significant overtime and pulled back these nerve repair patients very quickly. And we could see a very clear spike in their business as they worked off all of their deferred patients in about a 2- to 4-week period, they no longer have that flexibility. They can't work them off that quickly. We do think that they'll be bringing patients back in. And as a reminder, you can do nerve repair. It's always better when it's done sooner in terms of the outcomes expected, but you can still get good meaningful recovery up to a year post the injury. So it isn't something that has to be done in days or weeks. It's better if it's sooner, but we think it's going to be a little bit longer tail for any deferred patients. In our more elective procedures like in particular, breast neurotization we do have a fair number of patients who are -- have been deferred on their breast reconstructions. These deep flat procedures are pretty resource-intensive in the hospital. They're a long surgical procedure, and they're an inpatient stay. And so from a resource standpoint in a hospital, they are actually some of the first ones we see deferred every time that there's been a hospital constraint. And so at this point, we are having surgeons tell us that they have substantial deferred waiting lists and deferred patients, but they don't have enough block time in the OR to work them off quickly. So they are telling us that it may take them as much as a year or more to work through their deferred patients. So while we thought about that in our guidance, it's also something that's going to trickle in. It's not going to be a big spike.

That's helpful. Appreciate the color there, Karen. And then maybe if I could just squeeze a second one in. The active account, core account numbers have held relatively sort of steady now for a couple of quarters in terms of percentages of revenue. I guess what do you need to see to start maybe getting more pull-through from those active accounts into core accounts? Does that direct-to-patient marketing efforts that you alluded to? Does that help sort of drive that? Or maybe what are some other factors to consider there?

Yes. So first of all, we expect the percent of our revenue to remain approximately the same. Now we expect our revenue to grow up, but to go up -- but for example, approximately 60% of our revenue coming from these core accounts as our revenue goes up, it's going to be primarily driven by increased penetration in core accounts. And so we think that 60% number will hold approximately the same. The drivers of that are really increasing the usage of surgeons within the accounts. So it is really that first surgeon. I've described this as almost a stair step of adoption. That first surgeon who's kind of our anchor surgeon in the core account has some significant adoption, but it's not fully adopted. We want to continue to drive full adoption with that surgeon so that they become a champion across the full algorithm that we teach and start to move to the second and third surgeon at those accounts. In addition, at our biggest accounts, we can be bringing in the breast business and the surgical treatment of pain. Those are the segments that are driven more on the patient education segment to help patients start to show up and ask the right questions to say, I think sensation is important to me in my breast reconstruction and I want to understand where I can get that done. And we're more and more seeing patients showing up understanding that, that is a problem and looking to have the repair done in a site that will do the re-sensation technique.

We have reached the end of the question-and-answer session. I will now turn the call back over to Karen Zaderej for closing remarks.

Thank you, Hillary. I just want to thank everyone for joining us on today's call, and we look forward to speaking with you in the near future.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.