Greetings and welcome to the AxoGen First Quarter 2020 Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Pete Mariani, Chief Financial Officer. Mr. Mariani?

Thank you, Jerry and good afternoon everyone. Joining me on today's call is Karen Zaderej, AxoGen's Chairman, Chief Executive Officer and President. Karen will begin our call with an overview of our Q1 performance, our response to the COVID-19 pandemic, and provide an outlook on the developing recovery. I'll provide an analysis of our first quarter financial performance and the impact of our cost mitigation initiatives. 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 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 product acquisition 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. I'd like to start the call by expressing our admiration and appreciation for the healthcare professionals who are working tirelessly on the front lines to care for people suffering with COVID-19. We are confident in the global community's ability to overcome the challenges of this pandemic. I would also like to offer a sincere thank you to the entire AxoGen team. The past several weeks have been a significant adjustment for us all, including our employees and their families. Our team is working diligently under challenging circumstances to ensure that patients and surgeons have uninterrupted access to our nerve repair products and support, and for that I'm deeply grateful. In the first quarter of 2020, our total revenue grew 4.2% to $24.3 million. Although revenue exiting February was trending toward our annual guidance, the reallocation of hospital resources and deferment of elective procedures had a material negative impact on our revenue in March. Additionally, we believe that demand for our nerve repair products has been temporarily reduced as nationwide stay-at-home orders have lowered the incidence of traumatic injuries. A steep decline in our daily sales volumes began the first week of March and continued to drop through early April when our weekly sales ran as low as 70% below our Q4 average. Since that time, our daily sales have demonstrated steady improvement, suggesting we're in the early stages of a recovery. We are also encouraged that hospitals and clinics are now beginning to open their elective surgery schedules, which will drive recovery of surgical volumes. In response to the current restrictions in hospital and community activity as well as the anticipated reduction of revenue caused by these factors, on April 23rd we announced a cost mitigation initiative designed to defer and reduce certain…

Thanks, Karen. First quarter revenue grew 4.2% to $24.3 million. As Karen mentioned, although revenue exiting February was trending towards our annual guidance, our first quarter revenue was negatively impacted in the month of March as our customers reallocated resources to prepare for and treat COVID-19 patients. And as shelter-in-place orders reduced the incidence of traumatic injuries, our revenue growth for the quarter was a result of the increases in unit volume as well as the net impact of price increases and changes in product mix. Gross profit for the first quarter was $19.4 million, a slight decrease compared to $19.6 million in Q1 of 2019. Gross margin was 80.1% for Q1 compared to 84% in the prior year first quarter. Gross margin was negatively impacted in Q1 as a result of increased period and variance costs recognized in the quarter resulting from our temporary suspension of tissue processing for most of the month of March and increases in reserves for estimated excess and obsolete inventory to account for expected lower product demand during the period of recovery. Total operating expenses in the first quarter was $28 million compared to $29.8 million in the prior year. Increases to salaries and benefits from increased head count and project expenses in the current quarter were more than offset by a $1.2 million reduction in litigation fees and $1.8 million in lower noncash stock compensation expenses. The decrease in stock compensation in the first quarter is primarily related to forfeitures of performance stock awards. Sales and marketing expenses in the first quarter was $17.8 million compared to $16.4 million in the prior year. This increase includes the impact of our expanded direct sales footprint and increased market development activities. As a percentage of total revenue, sales and marketing expenses increased to 73.5% for…

Thanks, Pete. We are encouraged by the momentum we were seeing in our commercial strategy prior to the downturn. We are highly confident that we have the right strategy in place for the current environment and to support demand once it returns to more normalized levels. At this point, I'd like to open up the line for questions. Jerry?

Thank you. [Operator Instructions]. The first question is from Richard Newitter, SVB Leerink. Please go ahead, sir.

Hi, this is Jaime on for Rich. Hey guys. To start, just on the recovery so, encouraging that you guys are starting to see some of the things improve off of kind of like a low point in the beginning of April. I'm just curious, are you -- from the conversations you're having with customers, are you seeing them rescheduling procedures at this point for a later date, can you talk about some of the challenges that maybe you're potentially hearing from them from a capacity standpoint as we move throughout the rest of this year? And then just thirdly on that, one of the things that we're hearing is that ASCs could potentially be playing a bigger role to help expand capacity, so can you just talk a little bit about how many procedures are done in ASCs or how many active accounts you have that are currently ASCs and maybe your strategy to potentially broaden your reach there going forward?

Yes, now thanks, Jaime. Certainly, the recovery that we're seeing is highly variable geographically. There's very big differences between what you see in New York City and Baltimore and other cities that have had a significant COVID-19 impact as compared to other areas that have had a lower run of the disease. And so we've seen that geographical difference. We started seeing things pick up off of our low in April but certainly in the last week, as elective procedures have opened up again we're starting to see an increase in volume in all types of procedures, not just the urgent trauma procedures. We are starting to see what we believe are some patients coming back. But most of what we're seeing, I think, are really the patients or procedures that would be our regular base. We do believe that the majority of the patients who were deferred will come back for care. It's a complex -- and I'm sure you and all of the other people on the line have spent a lot of time thinking about this as well, but it's a complex equation of how things are going to get scheduled because it is both surgical OR time availability and patient willingness to come back into the OR. And actually, that was our first sign that there was a serious problem in volume drop. In early March, we saw significant numbers of patients being no shows even for trauma repair. That they had a trauma the night before, they're scheduled the next day to get their nerve repair done, and they just didn't come back particularly in areas that had a higher pickup of -- at that point was the earlier stages of the disease progression. We're not seeing that now. We're seeing patients are coming back…

Helpful, Karen. And then just, Pete, I guess, from a modeling standpoint on the gross margins. Obviously, it was down year-over-year and below Street expectations. So just help calibrate us a little bit, if you could, how should we be thinking about that cadence for the remainder of the year, given that revenues are obviously going to see some pressure due to the COVID-19 situation.

Yes, now I think we had unique items here in the first quarter that impacted margins, and we'll see that again, I believe, in Q2, more so from the inefficiency of not producing and then the lower revenue numbers that we would all expect in Q2. But once we see more volume coming into the recovery in the back half of the year, I think we'll see a normalization of margins.

Thank you.

The next question is from Raj Denhoy, Jefferies. Please go ahead, sir.

Yeah, hi, good afternoon. I wonder if maybe I could start with the sales force. I know you guys have talked about a hiring freeze, I'm assuming we should assume that the sales force stays about 109 people for the balance of the year. One, I'm curious if that's correct? And second, I'm curious how you're thinking about the sales organization at this point, given the lack of access into hospitals now, given the high restrictions around COVID and things, how do you think about how that might impact the business going forward?

So in terms of the sales side, we will continue to look at improving and maximizing the productivity of our sales team. I'm not telling you that we wouldn't find a selected territory here and there that we thought we needed to go ahead and make a change, but our focus is going to really be on maximizing that productivity. In terms of access, again, another highly variable -- in fact, a very local difference. So as our reps have started to go back into hospitals and work more directly in healthcare facilities over the last week, the access in the hospitals ranges from near no change to you have to be shown that you have a negative COVID-19 test within a certain period of time and be fitted with your N95 mask before you can even come into the facility. So there's a high range of variability of direct face-to-face access. I think, for us, that was why we did our spring training with all of the sales team, spent a lot of time working with the reps thinking about reimagining our selling model that says if you are not face-to-face with the surgeon and their support staff, how can you still be a resource and help. And frankly, we got some live training on that as we did it to be able to support cases that were done, and continue to interact with and work with surgeons on expanding their treatment patterns. So I think we've had training by real-life as we did that, and we'll continue to implement that.

Okay. I think he is gone.

Thanks Raj.

We have a question from Danny Turkaly, JMP Securities. Please go ahead, sir.

It's actually Dave Turkaly. Danny may have queued in as well, but how are you?

I was wondering about that if you changed your name.

Not yet. So you mentioned the slowdown in trauma from shelter-in-place. I just wondered, do you have any way to quantify that or any data to look at that kind of points to that or how much of an impact that could have been?

Yes, I don't have data that I can point you to that you could go look up. We've spent time talking with surgeons saying, what are they seeing, what do they think is happening in the marketplace. If I take a step back and think about what is the incidence of trauma, what are the majority of things that we see, and they end up being things like power tool injuries, lacerations from knives, and sharp things and glass. Those are our top three categories of the types of things that impact us and cause nerve injuries. And all of those can be impacted by the shelter-at-home. There is less people in jobs using power tools. So there may be -- they may have less job-related injuries. On the other hand, we've definitely seen an increase of the guy who decided to fire up the chainsaw while he was at home a little bit and unfortunately may have had an accident with that. So we've had a little bit of balance of those types of injuries. Definitely, with restaurants being closed and slowed down, fewer lacerations. So we believe that it was down some, maybe a few, maybe something in the greater than 10% to 20% range. But we're not at the half range. And we think the majority of those patients who were still injured will likely come back for treatment.

Got it, and then maybe one for Pete, $89 million in cash and $7.5 million EBITDA loss, just looking at all the announcements that you made prior to even the quarter in terms of the cuts and the savings, the 10% workforce reduction and everything. I just -- it seems like you're in a good spot that maybe something -- maybe you're being ultracautious. I guess I'd like to get your thoughts on that because it sure seems like you have plenty of capital?

Well, you're right, we do. And we've got a strong balance sheet, and I think that what we -- the approach we've taken here, I think, is a balanced approach that allows us to preserve broad capability on the sales execution side and set ourselves on a much more efficient run rate. I do think that as we come through this, we're going to be heading -- the question is how quickly do you get back to that $28 million revenue level that we were running at in the second half of last year. And we're confident that we have a team and a structure in place that can -- that we can maintain as we move back towards that level. And I think we'll do it on a more efficient run rate than we were before. And once we confirm that timing, then we'll talk about what's the additional investment profile look like after we get back to that level.

And last one if I could just sneak it in, you talked about the suspended recovery and processing of tissue. And I think your inventory, I have always kind of thought you guys have sufficient amounts. But I imagine that means you must have over a year or something to that magnitude that you can access without having to process anything new, would that be fair?

Yes. No, you're right about that. We have -- our normal contingency planning has us have sufficient inventory in place that when we run into a situation like this, that we can stop processing for a while and not impact supply to customers. And like we said, we're going to start ramping up tissue processing again here in the second quarter. We'll ease into it. We're not going to step on the gas and run real fast real soon. We don't need to do that. But we'll ramp it up over time and get back to normal production levels as the recovery rates return to normal levels.

Great, thanks a lot.

Mr. Denhoy from Jefferies has re-registered. Please go ahead, sir.

Sorry, Raj. Did we lose you?

Yes. Sorry about that. I was actually on mute as it happens, but it's the joys of working from home, right. So actually, my questions are really, really kind of focused more on the sales force activity. Again, I was asking about the 825 rep -- excuse me, accounts you guys had in the quarter, which was up something like 13%. And I was curious to know, as you moved into April and now you are here into March [ph], have you seen any resumption in new accounts or any new activity in terms of physicians wanting to get trained, anything that would kind of support the growth kind of picking up as you move into the back half of the year?

Well, I think it's too soon to think about active accounts as we're -- as accounts are really trying to just open and get started again. If I -- again, we do think that working with our active surgeons, they're going to want to move into additional sites of care just so they can get the OR time. And we're working with them to support that so they can continue to drive deeper in their penetration. That's been and has been -- that was our strategy as we started the year, was to continue to build -- we have a good base of surgeon users today. And we think we have a tremendous opportunity to go deeper with that surgeon base. And so that's the strategy we're still continuing.

Understood, and then just the last one on the sales force. When you think about turnover, right, how are you mitigating that and are you sort of making your sales reps relatively cold during this period in terms of commissions and other things that you can limit that turnover?

Yeah, we did some mitigation plans on compensation. Salespeople have predominantly a variable compensation. And especially when we ask salespeople to shelter at home and not go into account, we protected them on their income so that they were not suffering from something that was entirely not their issue.

Okay. So we should use that number of about 109 then for the balance of the year, do you think?

Yes.

Great, okay, thank you.

[Operator Instructions]. We now have a question from Kyle Rose, Canaccord. Please go ahead.

Hi, this is Ian on for Kyle. Just to piggyback off of Raj's comments a little bit. Right on the numbers here, I think the active accounts went from 791 in Q3 to 798 in Q4 and then 825 this quarter. So it seems like a little bit of a step-up in Q-over-Q growth. Was there kind of anything interesting you saw in January, February because it seems like a step-up, and you were also kind of missing that month of March as well, right?

Right. Yes. No. There definitely was a step-up. And the thing that we were excited about is that it was really, again, predominantly existing surgeon users who wanted to make sure that they expanded their usage across all the places that they did surgery. And so we're continuing to drive deeper and gain more depth with our existing surgeon users that allow us to continue to drive that growth. And of course, that gives us access then to continue to work with additional people that work at those same sites of care. So we thought it was a substantial step-up, and it was based on our focused strategy of driving penetration.

Makes sense, and then kind of in terms of rep access, is there any difference in terms of like what an existing heavy user customer needs versus kind of new customer in terms of training and education?

Yes, on any conversion of a surgical technique, we believe that a new user is going to need more support than an existing user does, or at least an established existing user, somebody who's used the product a number of times in that type of setting. So remember, nerve repair is really many different types of repair. A carpal tunnel repair is very different than a chainsaw injury. So those would be considered separate types of repair, and the surgeon will want assistance when they're really trying the first few cases of every different type of repair. What we're finding in the new environment, working with surgeons virtually, is that you can really use a lot of the digital tools that we have in place, FaceTime people during the case, talk to them about the clinical setting that they have and what the issues are, working with the coordinators, both before and during the surgery, doing what typically would have been a scrub sink discussion with the surgeon before the case. All of those are tools that we've implemented, and we found actually quite welcomed by the surgical staff and the surgeons. So we've continued to implement that as well as now supplementing it with the direct face-to-face contact, where appropriate, in centers that are allowing that.

Perfect, thank you.

Ladies and gentlemen, we reached the end of the question-and-answer session. And I would like to turn the call back over to Karen Zaderej for closing remarks. Ms. Zaderej?

Thank you, Jerry. I want to thank everyone for joining us on today's call. We look forward to speaking with many of you at the upcoming Jefferies Virtual Healthcare Conference in June. Thank you very much.

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