Greetings and welcome to the AxoGen Incorporated Second 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, Ms. [indiscernible].

Thank you Tim and good afternoon, everyone. Thank you for joining us today for the AxoGen Inc. conference call to discuss the financial results for the second quarter ended June 30, 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 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 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 or 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, Trisha and good afternoon, everyone. Welcome to our second 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 second quarter highlights, a brief Company overview and an update on our key strategic initiatives. Pete will then provide a review of our second quarter financial results and 2017 financial guidance after which time we will open up the call to Q&A. We are pleased to report another successful quarter. Second quarter revenue grew 46% to a record $15.2 million. Our year-to-date revenue growth is 48% with revenue of $27.4 million. We are also pleased to announce a change in our addressable market opportunity due to expanded use of AxoGen product portfolio and oral maxillofacial procedures include nerve repair during mandible reconstruction due to benign tumor resection. We believe this additional application of our product portfolio moves the current addressable market opportunity to $2 billion in our current markets of trauma, upper extremity and oral maxillofacial surgery. I will talk more about the expanded application as well as additional applications to expansion of the AxoGen platform later in my remarks. As in prior quarters, our revenue growth is continuing from both active and new accounts as we continue to build and strengthen our commercial team. Last month we welcomed Jon Gingrich to our executive leadership team as Chief Commercial Officer. Jon’s extensive medical device experience strengthens our commercial leadership and will help us drive penetration of our existing markets, expand into new applications, introduce new products and build global markets. As a number of the AxoGen executive leadership team he will report directly to me and will oversee the development and execution of the company’s sales and marketing strategies. These efforts along with the…

Thanks, Karen. Second quarter revenue grew 46% to $15.2 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 for the second quarter was $12.9 million, an increase of 46% compared to the prior year’s second quarter. Gross margin for the second quarter was 85% compared to 85.2% in the prior year. Total operating expenses in the second quarter were $14.3 million, up 37% 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 in our business model. Sales and marketing expenses in the second quarter were $9.4 million, up 39% over the prior year. As a percentage of revenue, sales and marketing expenses in the quarter improved to 62% compared to 65% in the prior year. As Karen mentioned, we currently have 52 direct sales reps, up from 44 this time last year. We completed three national education programs in the quarter and eight year-to-date, and anticipate conducting 7 additional events this year for a total of 15. Research and development spending in the second quarter was $1.5 million compared to $937,000 in the prior year’s second quarter. R&D costs include product development and expenditures for clinical efforts focused on our biologic license application for our Avance Nerve…

Wedbush PacGrow Healthcare Conference in New York City on August 15. American Society for Surgery of the Hand Annual Meeting in San Francisco on September 7-9. Lake Street Capital Markets Best Ideas Growth Conference in New York City on September 13. Dougherty & Co Investor Conference in Minneapolis on September 19. Cantor Fitzgerald Healthcare Conference in New York City on September 25. And the American Association of Oral and Maxillofacial Surgeons Scientific Sessions in San Francisco on October 9-14. I also invite you to attend our second annual analysts and investor day in New York City on November 20th. This event provides an additional opportunity to learn more about the company and I will include more detailed review of our current market and expansion opportunities. 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. We are building awareness and expanding usage of our products with innovator and early adopter surgeons and are excited to be moving towards developing 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 platform 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. Tim?

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from line of Richard Newitter of Leerink Partners. Please proceed with your question.

Hi, this is Jamie in for Rich. Thanks for taking my question and congrats on a nice quarter. So I have two questions, I guess I will start with guidance. Obviously you guys reiterated your 40% growth for the full year and above 80% gross margins. So my question there is just as we think about the back half of the year is there anything that we should be thinking about structurally for not raising your guidance just by having a healthy growth profile this quarter?

Yes Jamie thanks for the question. We believe we are just barely scratching the surface of this opportunity and we continue to think the growth in access of 40% is solid and sustainable. As we continue to develop this market we do continue to be conservative as we think about our guidance and we also think about how we would not necessarily make small incremental changes to our guidance and we think that the greater than 40% continues to be appropriate as we look to continue to drive growth in the back half of the year.

Okay and then if I just may one quick follow-up on account penetration and your revenue per account trends. Can you just talk a little bit about the company’s priorities over the next 12 months with regard to accounts penetration specifically around new accounts starts versus deeper penetration into existing accounts and I know you made a little bit of commentary around the middle adopter segments so just any comments that you could provide there around the types of accounts that you are seeing interesting and potentially utilization behaviors that we should be expecting? Thanks.

So when we look at our focus we still see that our growth will be a combination of driving penetration into our existing accounts and that’s looking really at our active account base into same-store field continuing to increase in that base. But we will still be adding new accounts as well and particularly you have to think about as we have territory development and we add new reps and new accounts. And so we are going to see growth coming from both of those dimensions. Frankly, the majority of our growth comes from growth in our current active accounts. And so new accounts well are good to start because our future growth they don't add tremendous amount of dollars in the early periods it's as they mature that they add the growth and the majority of our growth comes from our in fact, our high potential active accounts.

Great, thanks.

Our next question comes from the line of Tao Levy of Wedbush Securities. Please proceed with your question.

Hi this is actually Nah I’m on for Tao. Congratulations on a great quarter. I just have a couple of questions. It's very interesting that you mentioned expanding the addressable opportunity with oral maxillofacial procedures can you give us idea of how much of the quarter's revenue came from oral maxillofacial procedures?

We don't break down each of the segments and so I am trying to kind of give you guidance on that but we do see this as an area where two things are happening. One, we are seeing additional pull through of our products so that we get a multi-unit sale in our traditional iatrogenic injuries and we saw surgeons frankly looking around and recognizing they had other problems to solve and they could solve them with our AxoGen portfolio products. And so they are the ones that actually led us to the opportunity of the benign tumor reconstruction, the mandibular reconstruction and so we have not repaired the nerve in that application of least people permanently numb and they have started to adapt their products and again public fund it so they have got good consistent results with that in that new application and so we do see a nice readiness to adopt and expand among at least our earlier adopters and we see great potential there.

Great. And any new updates on how Avive is used is there any special application for it that you are consistently seeing?

We do see surgeons adapting Avive like we’ve seen happen in past nerve repair and that they are trying it. It certainly has wonderful handling characteristics so I can say introspectively the experience is exactly what we anticipated when we were developing the product but of course, the Avive going to want to use it in their surgical application and see their results. And so that's what we see surgeons doing today so the types of places they are using it, they are concerned about the soft tissue bed being abraded and they are looking for a temporary barrier in that soft tissue bed or places where they are concerned about inflammation. For example in a blood trauma you will have let’s think of it as a bruise to the nerve where the nerve has been hit will be inflamed and swollen and you want to get the best possible chance for that nerve to regenerate and that will be without that significant inflammatory response and the inflammation modulation of Avive is perfect for that application.

Great, thank you.

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

Thank you. I am sorry, I apologize for jumping back and forth. I know you highlighted breast recon and repair of lower limb joints again as the kind of the next logical expansion for you guys. But we had some conversations with some of your surgeons about post surgical pain and you mentioned some other areas. I am just curious how did you pick those to start with and then how soon could you maybe try to go after some of the other opportunities maybe even specific comments on the pain market if you wouldn’t mind?

Sure. Well frankly, we have a very long list of expansion opportunities to the platform that we have in peripheral nerve repair and so actually we have a wonderful problem and that we have to choose from many different options. And so the areas that we focused in first were things that we saw were the lowest hanging fruit in terms of readiness to adopt and clarity of the call point associated with our current call point. And that's why we felt these were the two areas we are looking at with breast neurotization, the reconstructive plastic surgeons are often also the people doing the trauma repair. [Indiscernible] partner who specialize in breast reconstruction, so if somebody who is very close to our call point and our first foray in tumor pain has been in this area of lower limb injuries associated with total joint replacement. In that case we are thinking about can you move the patients to the hand surgeon in that practice who is a partner in the practice who deals with nerve repair and can work with orthopedic colleagues to help assist them when they have this patient who has the ongoing pain following total joint replacements. And again, just to be clear what we see in that application is a nerve cut and neuroma is formed the surgeon removes pain by exercising out the neuroma then they have a resulting gap and of course we have products to help surgeon to help deal with gaps. So that's the focus that we had today. Now down the road what do I think about pain, I think pain is a very exciting area. I think it is less structured today in these two segments and so I think we have got some work to do to understand what I recall the physical causes of pain, compression injuries or neuroma formation and how it happens across the body. And then how are those patients diagnosed and who do they get referred to and that's the reason we didn't prioritize that first. I think it's a substantial opportunity but the patient care pathway is less clear and so there is interest in understanding that further and continue to expand what we can do for that that very troubled patient population and provide them some new alternatives.

Thank you for that. And then I think you updated the enrollment completion date to the fourth quarter of 18 for the clinical trials, the recon and I was just curious like what is the timing beyond that. So assuming you completed and the data is what you think it's going to be can you just refresh our memory in terms what would happen next and when you might actually get that BLA?

There is certainly activities that have to happen after that once enrollment is done, you still have a period time for follow-up so there is a year follow-up for and then evaluation of those patients. There is a study report that have to be completed and then the full BLA application submission. We are really looking at the BLA submission in 2020-2021 timeframe and then we are in the FDA tagline. So it could take a year after that. So we are in that timeframe again for us this is considered a more minor milestone because again we are in our enforcement discussion able to continue to commercialize and build the business in parallel with those activities. So it's different than most companies in seeing a BLA approval it's a significant milestone for the company for us it's part of the transition plan overall and not what I would consider a major milestone but still something we are looking diligently towards.

I appreciate that. It's nice to hear that it's moving forward but it's still kind of grants you a long period of time where you are probably the player on the market. So thanks for that.

Thank you.

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

Hi guys thanks for taking the questions.

Hey Chris.

In terms of driving increased penetration within the active account base can you help us understand how long it takes once you are in the account or so is one surgeon to expand to other surgeons within that practice and what strategies you have in place to kind of support that process?

So timing is a little harder to answer because part of it depends on where the surgeons start and the timing period of nerves and healing period of nerves, nerve heal slowly. Nerves in the fingers it will take six months to get results. Nerves in the middle of your arm and injuries there would be 12 to18 months and if you are talking about the bracheoplexis which is a nerve right at the spine that control all of movements of the arm you are really looking at two plus years. And so, I will tell you timing varies depending on where the surgeon chooses to start his or her adoption and then how they will expand out from there. That also affects when the next surgeon is starting to use because what happens is often a surgeon starts to use the product in an account and he starts to use one product in an account. Our rep will start to work with that surgeon to expand his or her treatment algorithm but of course they will meet their partners or perhaps we would want to call on that case on the orthopedic surgeons or hand surgeons, the plastic surgeons or hand surgeons, the plastic reconstructive surgeons and if appropriate the oral and maxillofacial surgeon. So there is a number of call points within the hospital. So the sales rep will want to meet with all of those groups and the first surgeon using will often be a reference or will provide additional information to the second, third and progressive users within that account. So that's typically what our rep will do is just to continue to build out the first surgeon, their full treatment algorithm and move on to the additional surgeons within each of the added departments within their account to expand overall usage.

Okay. Very helpful and then in terms of the sales force, I think you added new reps towards the back half of last year. I guess given we are coming up to that nine to 12 months mark for that group can you talk about how those reps in terms of productivity have progressed relative to your expectations?

Yes. So typically our reps, so we see some changes happening in the territories we are giving the reps so if I go back historically we were putting reps in territories that had frankly almost no business and so a rep that came into a territory with almost no business it was 12 months before that rep even broke even to pay for their expenses in that territory. So it's relatively slow ramp but you have multiple factors going on again surgeons trying products. They would go through the wait period, they get one another people started and new accounts and then they kind of dip down as those surgeons are waiting for results. That got to get through the committee approval process and they really start to rebound out of that just after the 12 months period. But as we have gotten bigger and have now started splitting territories so in some cases we put reps still in brand new territories and in some cases we split territories and when you give them the base of business we see that they do have a base to build from and have a bigger impact quicker. So we see a mixture today. I think it is, we are attracting very high quality people but sometimes in these newer territories they really have to work to get the new business started and that just slows them down and that’s for a few months.

Okay. Then you had a next jump in the active accounts from first quarter to second quarter. Can you just kind of elaborate on what drove that increase and how we should think about the growth and number of active accounts per quarter going forward?

Well, I think we will again continue to add new active accounts but I don't see there is a significant metric that it needs to be at the same rate because the real push for us is just continue drive penetration in these accounts while at the same time we will add new active accounts again specially in new territories. So I think both are important but I am focused on making sure that we continue to build penetration in the active accounts that we have. We have got a great footprint now. We have got about 10% of the accounts out there. And while we have got a lot of room to grow and adding new active accounts I think we also have a great opportunities to drive penetration in that footprint.

And one more from and in terms of the hand surgery annual meeting next month anything we should look forward just in terms of clinical papers or podium presentations into that event? Thanks.

I think it's going to be a continued expansion of the solid data set that we have today. So they will just be, again just strengthening of the position that we have and showing that the portfolio of products that we provide are giving good consistent results for surgeons in various surgical application.

All right. Congrats on the progress.

Thank you.

[Operator Instruction] Our next question comes from the line of Bruce Jackson of Lake Street Capital Markets. Please proceed with your question.

Hi everyone. Nice quarter and thanks for taking my questions.

Hi Bruce, thanks.

So just to declare on the sales rep hiring plans, it’s still more than 60 that you are targeting?

Yes we would look to end the year with at least 60 and it could be higher.

Okay. And then excuse me. Generally, with the gross margin guidance you guys have given historically fairly conservative and you are coming in the 85% range and the guidance is generally over 80%. Is there anything on the horizon that would change your gross margin profile going forward?

No. we are doing quite well in the manufacturing side. We are continuing to build efficiencies, we are following the Avive product into our production capabilities as well versus as we talked about before, we think being conservative along the gross margin guidance is the appropriate thing to do. We know that the mix of products could potentially impact our margin of one point. We know that there may always be some sort of pressure that comes along whether it be some pricing pressure as we get into bigger accounts that could impact sometime in the future. But over the near term we continue to see just a consistent profile on gross margins and we just feel like to be any more specific on our margin guidance it's just not something we want to do.

Okay. And then finally, just around the discussion on Avive and the adoption rate you talked a little bit about how [indiscernible] goes through a trail process. Is there a similar process for Avive and then can you give us a rough idea of the sales levels are right now for Avive and when you might start to see some lift in that product?

We actually see that try and wait approach in everything that we have seen in nerve repair so AxoGuard Connector, AxoGuard Protector, Avance all have that try and wait and we hypothesize, we would see the same thing Avive when we started and we have just kind of a mantra of these early adopters and that they are willing to try things but they are not willing to change their practice until they really what their initial results are like. And so in the first year we - if you think back what we talked about Avive we think that the product is great. We have got early feedback from surgeons again intraoperatively but our revenue projections were pretty modest this year. We don't break it out separately but it was really a modest increase in this first 12 months where we see starting to impact a little bit stronger in the second year and then ramping from there.

All right, got it. Thank you very much.

Thanks Bruce.

There are no further questions over the audio portion of the conference. I will now like to turn the conference back over to management for closing remarks.

Thank you Tim. 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 the upcoming investor events and we look forward to speaking with you during our Q3 conference call in November. Thank you.

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