Greetings, and welcome to the AxoGen, Inc. Report Second Quarter 2021 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, Pete Mariani, Executive Vice President and Chief Financial Officer. Go ahead, sir.

Thank you, Maria, and good afternoon everyone. Joining me on today's call is Karen Zaderej, AxoGen's Chairman, Chief Executive Officer and President. Karen will begin today's call with an overview of our second quarter performance and an update on our operational highlights and a review of our 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 the AxoGen website. 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 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 our growth, our 2021 financial guidance, product development, product potential, regulatory processes and approvals, APC renovation timing and expense, financial performance, sales growth, production adoption, market awareness of our products, data validation, our assessment of our internal controls over financial reporting. And with that, I'd like to turn the call over to Karen.

Thank you, Pete, and good afternoon, everyone. Our total revenue for the second quarter was $33.6 million, representing growth of 52% compared to the prior year. I'm pleased with our Q2 results as our team continues to execute well in a dynamic healthcare market. In the second quarter, we achieved growth across our business led by our overall growth in the repair of traumatic nerve injuries and in the use of advanced nerve graft across applications. With more than 50,000 Avance implants has launched and 145 peer-reviewed clinical publications featuring Avance, adoption of our flagship product continue to grow as surgeons adopted the AxoGen algorithm across our full portfolio of nerve repair products. Our commercial team remains focused on our strategy of driving deeper penetration of our customer accounts. We believe that these efforts have positioned the business for improving growth as the incidence of trauma and the volume of elective procedures returned to normal levels. We're pleased with the continued growth in our second quarter of our application for the surgical treatment of pain. The removal of painful neuromas and the use of Avance repetitive result in GAAP is an elective procedure often performed by the same surgeons, who repair nerve injuries in our core extremity trauma business, providing an opportunity for these surgeons to expand their nerve repair practice. Our breast neurotization business continued to demonstrate growth as awareness of the problem of non-breast following mastectomy continues to increase among patients and healthcare providers. Using the ReSensation technique surgeons can use Avance to reconnect the nerves with the goal of restoring ceiling to the reconstructed breast. During the quarter, hospitals continue to open surgical scheduling for this elective procedure. And our oral maxillofacial nerve repair business remain steady during the quarter. The success and benefits of OMF nerve…

Thank you. Karen. First quarter revenue increased 52% to $33.6 million. Our revenue increase for the quarter was the result of a 40% increase in unit volume and 8% benefit from changes in product mix and a 4% increase in price. The growth in unit volume and mix is primarily attributed to growth in our core and active accounts and reflects the initial impact of COVID-19 pandemic, which negatively impacted procedure volumes and revenue in the second quarter of 2020. On May 17, we announced that we would suspend market availability of our Avive soft tissue membrane effective June 1, 2021 pending ongoing discussions with the FDA regarding the regulatory classification of Avive. In the second quarter of Avive revenue was approximately $1.8 million representing 5% of total revenue. Gross profit in the second quarter increased 60% to $26.5 million compared to $16.5 million in Q2 of 2020. Gross margin was 78.9% for Q2 compared to 74.7% in the prior year. Gross margin would have been approximately 83.1%, excluding the impact of a one-time charge of $1.4 million, reflecting the write down of the inventory and production costs related to the previously disclosed suspension of market availability of Avive. Prior year gross margin was negatively impacted by lower revenue and a $1.6 million charge for increased inventory reserves and suspension of production in response to the market impact of COVID-19. Total operating expense in the second quarter increased 36% to $33.6 million compared to $24.8 million in the prior year. Total operating expenses in the second quarter included $3.8 million in non-cash stock compensation compared to $2.2 million in the prior year. The increase in total operating expenses, including stock compensation reflects our return to more normalized spending levels over the past few quarters, following the steep reduction in spend…

Thanks, Pete. I'm proud of the achievements of the entire accident team in the second quarter and first half of the year. We remain committed to delivering our innovative nerve repair solutions to patients, surgeons, and hospitals. And I believe we're well positioned for success in 2021 and beyond. At this point, I'd like to open up the line for questions. Maria?

At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Brandon Folkes with Cantor Fitzgerald. Please proceed with your question.

Hi, thanks for taking my questions and congratulations on a very good quarter. Firstly, maybe on the full year guidance range, just any pushes and pulls in terms of assumptions in that full-year range? And then secondly, on a quarterly cadence in the back half of the year, I think we've seen trauma being a little bit less elective and you haven't relied historically on this heavy 4Q. Is that the same thinking for 2021? Just any color, just given the uniqueness of the times and then is the 3Q summer activity that you saw in July, is that in line with prior years and given that – is it fair to think that 3Q maybe the best quarter just due to the increased activity? Thank you.

Thanks Brandon, thanks for the question. Yes, look, first of all we're just – we're pleased with the overall execution of the business. We're continuing to make very good progress in this market within our accounts. And we're happy with the growth that we had here through the first half. And we believe we'll continue to see growth – nice growth in the second half of the year as well. As far as puts and takes goes, I mean, I think we've – I've highlighted in my prepared remarks that we had $1.8 million of Avive revenue in the second quarter. And we've always expected that, that we would not have Avive revenue in the back half. That's always been part of our assumptions. So as you're thinking about your model there is that put and take to think about. But overall in the market, I think we saw good progress through the second quarter. I think our experience in the second quarter is very much like everyone else has seen. And we do think that that the recovery is continuing. It's not as if and this is consistent with what you're hearing from everybody else. It's not as if there – there was this full recovery in Q2. It's still happening and we'll see that extend into Q3 and likely into Q4 as well.

Great. Thank you very much.

Okay.

Our next question is from Anthony Petrone with Jefferies. Please proceed with your question.

Thank you, and congratulations. Maybe just, Pete on the follow-up to the initial question, just when you look at trauma cases and obviously that's being tracked and it looks like it was sort of mixed in the quarter from competitive calls we've been on in the past week or so. Where do you think U.S. trauma cases are versus pre-pandemic levels? Are we even yet, overall trauma cases or do you think we're still at some discount, when do you think we'll get to even, so just to clean that up a bit, and then on the core account sort of update, when we think about those accounts now doing a hundred thousand and trailing 12 month revenue, just curious as to where do you think, the average overall core account contribution can go as this new strategy of going deeper as into place. Thanks.

Great. Well, actually trauma, is not back to pre pandemic levels people's activity, well, improving and increasing and then there's resultant level of trauma associated with that. It has been getting better in terms of activities. So therefore the trauma cases have increased some they're not back to what we would consider normal for this time period. One difference that we see compared to obviously early last year is that, well, some elective procedures in hotspots are being delayed. What we aren't seeing is trauma cases being delayed. Hospitals are looking to continue to prioritize those as long as they have really any kind of surgical capacity. So we have – been less effective than elective procedures in our trauma business. In terms of the question about core accounts just to reminder, a core count is a minimum of a $100,000 in the trailing 12 months. But if you just do some math, we'll think of it as 60% of our business, you can see that the average is obviously higher than that. Our highest accounts are over a $1 million in that category. And we see that, we have room even to grow those highest accounts. So we look to continue to drive penetration. That's where we think, we get the biggest dollar impact. And then continue to add more core accounts as we take, if you think about a progression of taking active accounts to core accounts. So they move up into that higher region and we continue to develop new accounts to move them into active. We see this as a total expansion as we drive penetration.

Okay.

Our next question is with Jaime Morgan with SVB Leerink. Please proceed with your question.

Hey guys, thanks for taking my question.

Hey, Jaime.

So you guys just touched on the trauma market. I'm curious just how the progression of the other markets is going in the second quarter and kind of how to think about the outlook between the surgical treatments of pain, breast and OMF in the back half of the year. And if those markets aren't back to normal either yet, which I'm assuming they're not, when can we expect to see a, more normal levels in those markets?

Sure. If you look at each of the segments breast reconstruction, neurotization. We have had what I would call an air pocket of patient flow that occurred because women didn't have mammograms, didn't have preventive care. So they didn't have diagnoses of a tumor and they didn't have a mastectomy and those things were delayed. So there was this air pocket of patient flow. We believe we're through that and see breast reconstruction ramping back up that is of course tempered as is an elective procedure. That takes quite a bit of our time. So in an area that are a hotspot and that’s a very regional determination, but areas that are a hotspot for COVID, we see the cases in those areas going down for a period of time, they're delayed, they're not lost but those cases are delayed until they have more capacity and the surgical capacity in the hospital. So what do we think will happen for the rest of the year? Overall, we think we're going to be going through these rolling pockets of impact from COVID that it will be manageable in the same way that we've managed over the last 12 months, that the overall surgical impact will be less than what we saw over the last year. And in general, these will – all of the elected procedures will be increasing through the year. So we think that breast neurotization will be continuing to ramp through the back half of the year. Oral maxillofacial we've seen has been very flat, I think we've mentioned before, it's been our slowest market to recover with significant patient's reluctant to come in and have surgery in this sort of invasive surgery in the mouth. That we do expect to start to ramp back up in the back half of the year, but it has been relatively flat through the first half of the year. And the surgical treatment of pain, it's a little hard to say what's normal, because that was a new introduction for us really focusing on it last year, it has continued to grow, but of course also really small base in that we really launched Axoguard Nerve Cap and a focus on neuroma management only at the beginning of last year. So while it's a small segment, we continue to be pleased with the adoption and interest from surgeons and expanding into the surgical treatment of pain.

Got it. That’s helpful. And then I think you were starting to allude to it before with your commentary just on the core accounts, Karen. But is bringing on the new incremental surgeon or new account versus just getting an existing active user to do more cases, more needle moving in terms of driving the growth and kind of delivering as you're talking about the sustainable high teens to low-20s annualized growth? Thanks.

Yes. The best opportunity for us is to continue to drive penetration with an existing user and an existing account just from an – continuing to move the needle, that's the thing that is the biggest impact. But obviously we're not only doing that, we continue to focus on the strategy, that said, we need to continue to expand out our footprint, so that our users can use our product in all sites of care. Nerve repair is done predominantly in hospital-based centers, but it's moving to ambulatory surgery centers and we need to be positioned to be able to support that. And we believe with the product portfolio that we have, we are well positioned to be their choice, their partner of choice in all of their nerve repair, regardless of the site of care. So we continue to work in all of those areas, expanding and adding new accounts, at the same time that we're driving penetration with existing users and existing accounts.

Thank you.

[Operator Instructions] Ladies and gentlemen, we have reached the end of our question-and-answer session. I'd like to turn the call back over to Karen Zaderej for closing remarks.

Thank you, Maria. I want to thank everyone for joining us on today's call. We look forward to speaking with many of you virtually at the Guggenheim MedTech Disruptors Summit on August 9. The Canaccord Genuity Annual Growth Conference on August 11, the Morgan Stanley Global Healthcare Conference on September 9, the Cantor Fitzgerald Global Healthcare Conference on September 27, and the Jefferies London Healthcare Conference in November. Thank you.

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