Good afternoon, ladies and gentlemen, and thank you, for standing by. Welcome to the AxoGen Incorporated First Quarter 2021 Financial Results Conference Call [Operator Instructions]. Please note this conference is being recorded. I will now turn the conference over to your host, Peter Mariani, Executive Vice President and Chief Financial Officer for AxoGen. Thank you. You may begin.

Thank you and good afternoon, everyone. Joining me on today's call is Karen Zaderej, AxoGen's Chairman and Chief Executive Officer and President. Karen will begin today's call with an overview of our first quarter performance, update on our operational highlights and review our reinitiated 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 AxoGen's Web site. 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 these 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, statements regarding product acquisition and/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. Our total revenue for the first quarter was $31 million, representing growth of 28% compared to the prior year. I'm pleased with our Q1 results, which continue to demonstrate our team's ability to execute our strategy despite ongoing COVID-19 challenges. The incidence of trauma and surgical procedures continue to be negatively impacted by new COVID resurgences. They began in late 2020 and continued into the first quarter. Additionally, the severe winter storms across the country in mid-February, further impacted the incidence of procedures. However, procedure volumes quickly recovered through March, resulting in increasing demand for our products. Our revenue volume and growth in the quarter continued to be driven by the repair of traumatic nerve injuries and by the use of Avance Nerve Graft across our nerve repair applications with more than 50,000 Avance implants since launch and 136 peer reviewed clinical publications featuring Avance. Surgeon adoption of our flagship product continues to lead our growth as surgeons adopt the AxoGen algorithm using our portfolio of nerve repair products. In the first quarter, our commercial team remains focused on our strategy of driving deeper penetration of existing accounts and surgeons and hospitals continue to place a high priority on nerve repair procedures with AxoGen products. Throughout the pandemic and despite access restrictions and limited surgical schedules, we've been able to effectively support our customers and remain close to surgeons as they continue their path of adoption. We believe that these efforts have positioned the business for improving growth as the incidence of trauma returns to normal levels, which we expect to occur over the course of the year with the continued roll out of vaccines and a gradual return to more normal activity levels across the country. We're pleased with the continued growth…

Thank you, Karen. First quarter revenue increased 28% to $31 million. Our revenue increase for the quarter was the result from a 22% increase in unit volume and a 6% net benefit from changes in pricing and product mix. The growth in volume was primarily attributable growth in our active in core accounts and also reflects the initial impact of the COVID- 19 pandemic, which began to negatively impact procedure volumes and revenue in March of 2020. Gross profit for the first quarter increased 33% to $25.9 million compared to $19.4 million in Q1 of 2020. Gross margin was 83.3% for the quarter compared to 80.1% for the prior year first quarter. Prior year gross margin was negatively impacted by lower revenue and additional inventory reserves resulting from the impact of COVID- 19. In the current year, we have continued to ramp our tissue processing capacity across the quarter and increased inventory by nearly $1 million compared to the end of the year. Total operating expense in the first quarter increased 15% to $32.1 million compared to $28 million in the prior year. Total operating expenses in the first quarter included $2.6 million in non-cash stock compensation, compared to $600,000 in the prior year. Prior year stock compensation included a credit of $1.7 million, primarily reflecting lower estimates on performance stock awards. Additionally, the increase over prior year includes incremental investment in our R&D programs, increased compensation, costs associated with our new Tampa office and lab and litigation charges, partially offset by decreases in travel, in-person conferences and surgeon education programs due to the COVID -19 related restrictions in the current year. Sales and marketing expense in the first quarter increased 1% to $18 million compared to $17.8 million in the prior year. As a percent of total revenue, sales…

Thanks, Pete. I'm proud of the achievements of the entire AxoGen team as we continue to meet the challenges we faced during this quarter. We remain committed to delivering our innovative nerve repair solutions to pay patients, surgeons and hospitals, and I believe we're well positioned for success throughout the rest of 2021 and beyond. At this point, I'd like to open up the line for questions. David?

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Richard Newitter with SVB Leerink.

I guess the third off just on the guidance, and thank you for reinstating that and kind of giving us a target to look at. How are you guys thinking about the timing of a return to more normalized level across the different market segments? And then just relative to the guidance, how should we be thinking about the different factors across these segments and what's contemplated in that range?

So if you look at, and I know you guys and for everybody else on the line. Historically, if you look at our biggest segment which is extremity trauma, we see a seasonal impact and a step-up between Q1 and Q2 because of actually just increased activity of people, summer activities leading to an increase in traumatic injuries. We think that as the vaccines expand as people have more confidence to engage in that activity, we'll see that ramp up. It won't be, we believe that the step-up that we've seen in the past, but there still should be a nice ramp through the year really based on overall activity. The other segments are a little different. Obviously there were seasonal, not related to the incidence of trauma and breast reconstruction that is going to really be dependent on again centers opening up surgical schedules. We still have a number of centers that have a reduced surgical schedule for certain procedures including breast reconstruction. We see those as opening up. They are starting to open up now, but it's going to be as gradual process certainly through the summer time period. We also know that there was decreased diagnosis that was done in the last year where patients just sees, I didn't have a mammogram, so they weren't diagnosed with cancer. So there is a sort of air pocket in the flow of patients that we expect by the end of the year will be righted, but at this point we still see some interruptions in patient flow so increasing through the year, but definitely not back to normal yet and surgical treatment of pain, that's actually growing nicely. We're actually pretty pleased that we're seeing our current surgeon customers beginning to expand and bring in these patients so they can help with that neuroma where they cut out the neuroma and then they need to repair the nerve and advance the [indiscernible] tools that they have used in that repair and so we've seen some nice increases in that -- again it's a very small segment because we've just launched actually the beginning of last year, but we're seeing some nice growth there and expect that to continue to expand through the year. All I'm asking is the piece that's actually been the most challenging for us and we think that's going to remain dampens through March of this year, although getting better as we go along.

And then I appreciate that you guys are now introducing this new metric of core account. Can you just talk a little bit about the growth trend that you saw in core account over 2020 and what strategies you're focused on in '21 to not only increase the number of core count but also drive up the revenue mix versus the 60% that you saw in the quarter.

So go back to why we introduced the core accounts, we've always had this measure of active accounts, but active accounts are really just a place we're beginning to sell and the threshold was so low that it wasn't really representative of what we saw -- they inform where we're seeing some real growth and repeat usage and so the core account sets a higher threshold. Our strategy has been and continues to be to drive deeper penetration in existing accounts -- first with the existing surgeons and then expanding to additional surgeons at those same accounts. And so we see nice opportunity to continue to build these core accounts in the sizable accounts, our largest core accounts exceed $1 million today and we want to continue to grow these core accounts as they go from the floor of $100,000 up to something higher. So it is both about with the dollar amount per core account as well as increasing the number of core accounts and that's what really drives all of the work we're doing also in rep productivity, because those two things are really tightly related.

Our next question is from Brandon Folkes with Cantor Fitzgerald.

Congratulations on maybe good quarter and maybe just on gross margin, it's been very good for the last three quarters the granted -- the guidance I saw that. But how do we think about sort of gross margin. Maybe one for the remainder of the year, just any sort of lumpiness or should we expect this to improve. And then maybe just longer term. And then I just going back to this core accounts and following on core accounts we have been following on from the prior question. Any way you can conceptualized in terms of how many of your active accounts you believe you can get into this core account category and then maybe just the focus, is it going to be growing core accounts versus growing revenue within core count. Obviously, you mentioned some of your larger accounts to $18 million. So just, anything to set the expectation from quarter to quarter, should we be focusing a lot on percentage of revenue here versus the actual number of accounts.

Why don't I take the gross margin question first. I mean in first, just as a reminder, everyone. It's been a while since we've given guidance and we have historically given guidance that says that our gross margins will continue to be above 80% even though we've been running sort of normalized in the 83% to 84% range, that's just our way of looking at it. We think having gross margins above 80% is outstanding and we believe that will continue to run above 80% and then specifically to this quarter, I think in the 83% to 84% range has been normal for us and I think as we have gotten our processing center back up to full speed that we're getting back to that utilization level that allows us to run the gross margins at this level. And so I wouldn't suggest that it could be within the range a bit. I wouldn't expect significant increases from this and I certainly wouldn't expect significant decreases from that normalized range now that we're at this level of production. And then the core counts.

So in terms of our strategic intent, what we're looking at with both core and active accounts, Think of these as the priority order that our sales team is working. Is that their first working with our existing users to increase their penetration across their algorithm that their first and highest priority by definition that predominantly means they're going to be focused on existing accounts and increasing the dollars per account, but we do know that surgeons may practice at multiple centers, and in that same work that we're increasing that surgeons usage may cause us to add more active accounts because that surgeon may also practice down the road at another hospital where we hadn't historically been in place. And the second priority is to add in new surgeons or expand surgeons at those same centers. And then the third priority is starting up from scratch and centers that we don't have a current users. So all of those are dimensions of growth, but there is a very clear priority in the sales direction of first and foremost grow our existing users.

Our next question is from David Turkaly with JMP Securities.

Pete, maybe one for you. You mentioned rep productivity and great to see guidance out there again and I'm just curious, given that the length of time, you guys have been added in some of the trends you've probably seen, do you feel like your visibility is greater today than it was say in prior years? It seems like the performance has been remarkably consistent and better side. Still going to color you'd like to provide around sort of how that visibility is today, maybe it's better than it was in the past? Any thoughts on that front?

Yes, I think -- I appreciate the question. And yes, I think we do have better visibility or improving visibility in the sales rep productivity ramp. Remember last year was a point in time when we weren't expanding -- obviously we weren't expanding reps very much. Our reps were focused in their territories for long periods of time, and we were able to connect with the surgeons and remain with them as they continue on their journey of adoption. And I think that's proven beneficial to us on a lot of levels, and it helps us think through what is the appropriate pace at which we might expand reps and when we do think about splitting territories and expanded reps that we do so in a very deliberate fashion that allows us to maintain the connectivity between rep and surgeon and continue to not only grow the top line revenue but do so with increasing overall productivity.

I mean like looking at the level, it's certainly above where the Street's at so that that's great, maybe as a follow-up to 6% mix and price. Just love to get any color there price evenly spread out maybe across Avance and AxoGuard and I was wondering the mix guard.

The 4% of that 6% is price and we are -- we've been successful this year, last year, over the last several years of taking moderate price increases across the product line and we continue to do that, this year's price increase was effective April 1, but we've got, this is the annualized impact of last year's increase coming through, but the additional 2% of mix is actually a reflection of increasing mix of Avance and the overall revenue results. We traditionally said that Avance has been slightly more than 50% of revenue, which is true, but this quarter we have moved that up a few more percentage points in that came through in the mix calculation.

And then thank you for that. One last one, I think you mentioned an AxoGen advanced product. You may now going to talk about it, but I'd certainly love to know when we might hear more about that or any details you could share.

Yes, we don't have any details at this point, Dave that we can share other than we're excited to continue to look to the future and see opportunities to continue to improve our flagship product.

[Operators instruction] Our next question is from Anthony Petrone with Jefferies.

Just hopping between calls here. The first would be on breast neurotization, apologies we're hopping amongst calls. So if any of these are asked, I apologize. On breast neurotization question there, just on backlog, how substantial can that be in terms of a turnaround, once we sort of evolve into the vaccine cycle. So the first question again will be breast neurotization backlog and then on the new key account focus and we think about a champion on the event side, sort of using most of the -- using events across the majority of their procedures and there being at least one surgeon in that site. When you think of an existing [Indiscernible] in that site, already, how easily scalable is that two additional surgeons within those sites.

Yes, so on breast neurotization, we don't see that there is a sizable backlog net-net, with the air pockets that I talked about that you're going to see a big bubble here, so I wouldn't model and that there is a nice reserving that we're heading into. We think that most of the centers have been able to recover again, about a third of our centers do still continue to have delays, but most have recovered and are back on a reasonable flow and with the air pockets of patient flow that's intermittently picking these centers and impacting them. We think that a little bit of reserve that you have from the third that are shut down or may offset -- are going to offset that backlog. In terms of how easy is it to get surgeons at these centers to continue to adapt, we've not seen a change in the adoption process in nerve repair. The adoption process in nerve repair remain slow and a lot of it is gated by getting surgeon seeing clinical results in each type of nerve repair they do from their own hands. So they want to see the data that we have and then they want to replicate it with their own hands, in their own patients and so what we have seen is historically a surgeon will do a handful of cases and then pause and wait to see results from those first subjects they start with the digital nerve injury. Digital nerve injuries typically take six months before they're going to get results back, so they do three to six cases, they will wait, they'll see those patients back in that 6-month time period and say, hey, this worked and then they will continue to adopt and add maybe the next types of injuries. So that pattern remains the same. And so, while I think we have a good understanding of the pattern and a good method to be able to continue to add those surgeons adoption. It's not quick.

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

Thank you, David. I want to thank everyone for joining us on today's call. We look forward to speaking with many of you virtually at the Canaccord Genuity Musculoskeletal Conference on May 20, the Jefferies Virtual Healthcare Conference on June 2 and the JMP Securities Life Sciences Conference on June 16. Thank you.

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