Greetings and welcome to the AxoGen Incorporated First Quarter 2017 Financial Results 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, Mr. Brian Korb. Please begin Mr. Korb.

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for the AxoGen Incorporated conference call to discuss the financial results for the first quarter ended March 31, 2017. 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 available on the Company’s website at www.axogeninc.com, under Investors. Before we get started, I would like to remind you that during the course of 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 regarding product acquisition and/or development, product potential, regulatory environment, sales and marketing strategies, capital resources and operating performances. And with that, I would like to turn the call over to Karen Zaderej, President and Chief Executive Officer of AxoGen. Karen?

Thanks, Brian and good afternoon, everyone. Welcome to our first quarter 2017 conference call. Joining me today is AxoGen’s Chief Financial Officer, Pete Mariani. I would like to begin today’s call with a review of our first quarter highlights, a brief Company overview and an update on our key strategic initiatives. Pete will then provide a review of our first quarter financial results and 2017 financial guidance after which time we will open up the call to Q&A. We are pleased to report a successful first quarter and start to 2017. First quarter revenue grew 51% to a record $12.2 million. As with prior quarters, our revenue growth is continuing from both active and new accounts as we continue to build and strengthen our commercial team. These efforts along with the continued development of our certain education events, market awareness activities and further development of clinical data are allowing us to help surgeons develop confidence in the adoption of the AxoGen portfolio of products. Additionally, our new Avive Soft Tissue Membrane was fully launched, and initial surgeon response has been encouraging. We also continued our new market development activities in Breast reconstruction neurotization and the repair of lower limb total joint replacement nerve injuries. We’re pleased with the star of 2017 and believe we are demonstrating our ability to successfully execute our strategy and continue to drive awareness and growth in the emerging peripheral nerve repair market. We are building awareness of peripheral nerve repair and expanding usage of our products with innovator and early adopter surgeons and are excited to be moving toward developing the middle adopters who are the majority segment of the nerve repair market. We conducted three national education courses in the quarter. One of these events was a fellows course where we train the next…

Thanks, Karen. First quarter revenue grew 51% to $12.2 million. The growth in revenue 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, the majority of our revenue growth is driven by growth in active accounts. Additionally, we continue to see growth in our pipeline of new accounts as surgeons become familiar with our products and begin to develop their treatment algorithms. Gross profit in the first quarter was $10.3 million, an increase of 54% compared to the prior year’s first quarter. Gross margin for the first quarter was 84.4% compared to 82.7% in the prior year. The year-over-year increase was driven by growth in unit volume, operational efficiencies and the net impact of price increases and changes in product mix. Total operating expenses in the first quarter were $13.5 million, up 45% over the prior year. The increase includes continued investment in our sales force, market development and awareness activities, clinical, R&D and general corporate expenses. These investments are driving growth in the Company’s operating expenses, but importantly at a lower rate than sales growth, demonstrating the continued operating leverage of our business model. Sales and marketing expenses in the first quarter were $8.6 million, up 39% over the prior year. As a percentage of revenue, sales and marketing expenses in the quarter improved to 70% compared to 77% in the prior year’s first quarter. As Karen mentioned, we currently have 50 direct sales reps, up from 44 at this point last year. We completed three national education events in the quarter and four year-to-date, and anticipate conducting 11 additional courses this year for a total of 15. Research and development spending in the first quarter was $8.4 million compared to…

Thanks, Pete. Before we close, I would like to highlight a few investor events in the coming months that we will be participating in, the Jefferies Global Healthcare Conference on June 6th in New York City and the JMP Securities Conference on June 21st and 22nd, also in New York City. Information about these events will be available on the AxoGen website. In closing, our efforts to execute against our strategic initiatives focused on building market awareness, educating surgeons and developing advocates, growing the body of clinical evidence, executing on our sales plans, and expanding new products and applications in nerve repair. We continue to produce record revenues and position AxoGen to lead and grow the emerging peripheral nerve repair market during the year ahead. We are building awareness and expanding usage of our products with innovator and early adopter surgeons and are excited to be moving towards developing the middle adopter segment of the nerve repair market. We are introducing our product portfolio to fellows, allowing us to train the next generation of nerve repair surgeons. And we will continue to expand our portfolio of products and develop new nerve repair applications where we believe we can bring meaningful solutions to current clinical challenges. Before taking questions, I want to welcome our new investors and thank all of the members of the AxoGen team for their commitment to helping patients with nerve injuries. At this point, I would like to open up the line for questions. Operator?

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Dave Turkaly with JMP Securities. Please proceed with your question.

I’ve got a quick one or two on Avive. I’m just curious how it fits sort of in the treatment algorithm here. I mean, are there procedures where the AxoGuard lines, Protector and Avive could be used? And then, sort of how does it fit, I know you’re just kind of early on in the launch her but from an ASP or margin profile?

So, there are procedures where Avive might uniquely be used, for example in a situation where there is a blood trauma. The surgeon may recognize that the nerve is knocked out and not functioning, so preoperatively, they know they need to do something to intervene. But when they go in to look at the nerve, the nerve is intact, so it doesn’t make sense at that point to cut it out and repair it with Avance; that would another option that they would have had. I think traditionally, those surgeons would have done nothing. They’d open up the nerve, make sure that it’s not a scar tissue or anything tethering it, and they would than free-up the nerve and close up the patient and then follow them to decide if they want to try and do something in the future, either again go back later and cut out the nerve or go on to other types of treatment. This gives them a chance to do something in that moment to try and address the inflammations causing that nerve to be inflamed and use something to modulate that inflammation. So, that’s an example where in the past we would have had no opportunity for a product to be used and now we have an opportunity. Now, there are other cases where they are concerned about soft tissue attachments and they might have used an AxoGuard Protector in that case, so that’s a trade off that you are talking about. Is there a change in pricing and gross margin, they are all within the range of what we have talked about in terms of projections. From a price point, it depends obviously on the size that they use but in this case the Avive would likely be a slightly higher price point. If they use one of the larger sizes, compared to the larger size of AxoGuard form a gross margin standpoint, they’re all in the range of what we have talked about in terms of giving us a blended average in excess of 80%. So, we don’t see a downside. What we think is actually the best opportunity for the surgeons, it will reflect what is the best material to use, given the surgical situation.

And then, maybe one follow-up for Pete. It looks like second quarter is typically strong one, last year there was a nice sequential increase. And I know you guys aren’t giving sort of quarterly guidance but given the sales reps you now have on board, their productivity, the number of the active accounts, it looks like people are expecting the similar bump up this year. And I guess just curious, starting at 51% growth, 40 for the year, how you feel about those expectations, given some of those factors, the sales force and the productivity to-date?

Yes. Dave, we still feel very good about the market itself and our ability to continue to drive growth. And we’ve talked about before that historical sequential patterns that we have seen over the last three years, we have seen no reason why that wouldn’t continue. So, I think we are feeling very good about where we are to start the year and very good about our guidance for the year.

Our next question comes from Tao Levy with Wedbush. Please proceed with your question.

So, maybe a couple of questions here. The number of sales reps, I know it’s just nitpicky here, but went down sequentially, any reason why people would have left from such a high growth exciting company?

Sure. One thing I guess we haven’t spent a lot of time talking about is that the same time we have been increasing the sales team. We have also been increasing our sales management structure, so that we have a good reporting relationship in terms of the number of reps reporting into our regional sales director. And we’ve had a couple of our direct associates who were promoted into sales management positions, and we are currently recruiting for two open positions. So, again, we have not seen a significant regrettable loss issue. But we do have opportunities for growth within the Company and we’ve been managing that.

The increase that you are expecting this year when you said you are going end the around with 60 reps, it’s certainly a healthy increase. Are the new reps -- you are thinking about this more as you’ll continue to split the territories or you started thinking about bringing in dedicated reps for specific indication, now that you’re starting to broaden the different applications.

This question and at this point, we’ve been talking about continuing to focus territories whether they are from making territories smaller or splitting territories or replacing some of our direct -- or independent distributors with direct reps. That’s what we think about with the 60 versus having a specialty sales team, for example with either breast or the total joint nerve injury repair. Now that’s not to say, down the road, we wouldn’t think about those, but this is really built on our existing market and our plans in those. And down the road, if we think specialists are the right way to approach one of those markets, then that would be in our 2018 thinking for our sales team.

And then just lastly for Pete on the G&A side of things, obviously the first quarter -- again, maybe this is seasonal thing, was little bit higher. Is that something we expect as stays at these level start the year or was Q1 just a little bit higher than the rest of year will be...

Some of it is just additional comp expense and additional headcount that we’ve had. But remember, we did make a stock option grants or stock awards were granted at the end of December. So, you’re seeing the full impact of that. And much of this is the impact of non-cash stock comp coming through. But then, we also had in the first quarter the normal seasonality of increase from audit expenses, professional fees associated with that and other things that you would typically see in the first quarter of a company. So, Q1 is probably a little high but it is going to stay in the higher than what it’s been as we came out of 2016, simply because of the increased compensation expense.

Our next question comes from Chris Lewis with ROTH Capital Partners. Please proceed with your question.

Can you just talk about where you are in terms of penetration within each of your active accounts? And may be just elaborate on the strategies you’re implementing to drive people penetration within those active accounts, I guess both, in terms surgeries and additional surgeons within those practices.

So, that is -- our strategy is really we see that we’re just scratching the surface of this large market and we have the opportunity to grow and increasing the number of active accounts. The 465; there is 5,100 potential active accounts. We’re also seeing the opportunity to continue to drive penetration in the accounts where we’re already active. We’re really at the beginning stages with really single digit penetration, high single digit penetration on average in our active accounts. Our threshold for active account, if you remember how I described it is a pretty low bar, where it is at least one surgeon using, and that’s may be using one of our products, so they have to be using something and ordering at least six times a year. That’s a very low bar. And so, we think the lowest hanging fruit is driving penetration in our active accounts where we don’t have the administrative barriers and it really is expanding that first surgeon algorithm where they are using hopefully now all four of our surgical implants as well as expanding to the other surgeons who do surgery at that account, if it’s a large teaching institution could have plastic surgeons to do nerve repair, hand surgeons who are both in the plastic department and the orthopedics department who do nerve repair and oral maxillofacial surgeons who do nerve repair. And so, obviously, we’ve got room to expand and continue to grow.

Okay, thanks. That’s very helpful. And then, in terms of expletory markets, specifically for breast, can you elaborate the key findings you kind of took away from the advisory panel meeting you held? And kind of talk about what’s driving those discussions, what did you learn, and what work still needs to be done on your end before you commit to that or potentially another new market by the end of this year?

Well, thanks. So, let me talk in general about what we are looking for in any market and then specifically answer your questions in breast. So, in any new market that we’re moving into, we are trying to balance the opportunities that we have in front of us with the opportunity in new markets. And we have opportunities; we have the options to grow in multiple dimensions. We are really looking at any market that we want to -- or many new applications that we move into to see where we think we can get the fastest revenue attainment, while solving a significant clinical challenge for surgeons and patients. And we think both of the opportunities in front of us meet that criterion. We think that they are areas that we can provide a clinically meaningful change in the way that the practice is done today and taking care of these nerve injuries. Specifically in breast neurotization, I think this is a movement that is happening and that we are just contributing to that movement. I think that surgeons and patients are looking for that next threshold of better outcomes in breast reconstruction. And for many years, they haven’t talked about sensation. Sensation was just one of those things that it was just considered an accepted complication of this procedure that you as woman would have numb breast. But what they are finding is that that contributes to the overall -- impact quality of life of these women. These women are trying to get back to being normal and normal includes feeling normal. To feel like that tissue that they’ve had a reconstruction of feels like their own tissue. And so, one of the things I think I’ve really been struck by is a significant impact this has on the…

And maybe, Pete, one for you. Can you quantify the amount of the price increase that was taken and I guess when it was implemented and any impact it had on the quarter?

We implement the price increase in March 1st every year. And historically, we’ve been able to get mid-single-digit price increases and we think that the impact of this will be about the same. But it’s part of March 1st. So, it’s a little bit of an impact on the quarter but not significant.

Our next question is from Bruce Jackson with Lake Street Capital Markets. Please proceed with your question.

So, just a follow-up question on the adoption rate. You talked about with the early adopters in particularly you are making some progress and you have also in the past talked about characterizing the market. So, can you just remind us when you look at the market, what percentage of early adopters, what percentage of middle adopters and then late adopters? And how do you feel your penetration rates are in the early adopter and middle adopter parts of the market? And when do you think you might be moving more heavily into the middle adoption piece of the market?

SO, this is -- go back to a little bit about market change theory. And if you just think about people’s readiness to change, whether the surgeons or people adopting some new technology, there is bell shaped curve of adopters. And the early adopters and innovators are sort of in the tail to the left and then the big middle -- of course the middle adopters and the laggers, the late adopters are on the far right of people who may change or may never change. And you can look at some different numbers as to what the statistics would be. I can’t give you specific numbers in nerve repair because it’s somewhat of a qualitative assessment as to whether people are in early or middle adopter. But typically you are going to look in the range and say okay there is about 12% to 15% of the population that’s going to be in that early adopter and innovator segment. The middle adopter is where the gold is in terms of there is a lot of volume in that middle adopters. And the Holy Grail question is how do you get into the middle adopters and when will that happen. I think the how is easier to answer. The timing of when is much harder. And so, I’ll just tell you, I don’t think that you can time that in our med-tech market, maybe others that figure that away. But in my experience, the timing of when is challenging. So, I don’t want to tell you a time because I know I don’t believe you can time. But what you can do is you start to look at signals that say, what are signs that middle adopters showing interest? And that’s of the things that I think we are seeing at the conferences when we have our symposium, at conferences we are obviously -- conferences are attended not just by early adaptors but by whole range of types of adaptors. And we continue to get very high attendance and interest from surgeons that are not using our products that they are very likely middle adaptors that we see feedback from them at our booths where they come up and they say things like I saw your presentation, I can no longer ignore the data. I need to start to learn more about your product. Those are signs that middle adaptors are showing interest in our product portfolio. I think at the same time, we’re doing thing in the market that will continue to make it easy for middle adaptors to adopt. We use a changed model that says that in order for it to be something that they want to do, it needs to be easy, normal and rewarding. And those are things that we’re changing in the marketplace to make the adoption of the AxoGen products easy, normal and rewarding. And all those will contribute to allow the change to continue to occur.

Are there any other signals that you’re looking for in terms of that adoption?

In terms of readiness for change, we continue to assess surgeons’ attitudes towards those. So, that is something that we do internally to understand that. I also look at some of things that we’re doing, again easy, normal and rewarding is I want to make sure that we have inventory stocked in accounts. Early adaptors are completely happy to order products for each case but our middle adaptors want to make sure that we do things -- so the product is available already, so that they don’t have to plan for each case. I think one of the other things that we see as a signal, we have an online forum called Nerve Matters. Nerve Matters is a HIPAA compliant discussion forum so that surgeons can talk about nerve injuries and cases and ask -- they can post information, they can ask questions of experts. And we sponsor this. And we’ve seen significant increases in registration of the number of surgeons who are active in Nerve Matters; in fact, well above 1,000 at this point in terms of surgeons who are now actively engaged in that forum. And that’s interesting to me because that’s more than what I would think is the early adaptor surgeons in our total universe. So, we’re clearly getting people who are interested and watching and engage there and learning. And so I think that helps reinforce what we’re doing.

Ladies and gentlemen, we’ve reached the end of the question-and answer-session. I would now like to turn the call back over to Karen Zaderej for closing comments.

Thank you. And I want to thank everyone for joining us on today’s call. I look forward to seeing many of you in person at one of our upcoming investor events. Also a quick reminder that our annual shareholders meeting is scheduled for May 24th at 4:00 pm in Orlando. We look forward to speaking with you all during our Q2 conference call in August. Thank you very much.

This concludes today’s conference. You may disconnect your lines at this time. We thank you for your participation. And have a great day.