Greetings, and welcome to the AxoGen Incorporated Fourth Quarter 2020 Conference Call. At this time, all participants are in 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, Pete Mariani, AxoGen's Chief Financial Officer. Please begin, Mr. Mariani.

Thank you, Victor, 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 fourth quarter performance and an update on our operational highlights. I will then provide an analysis of our fourth quarter and full-year financial performance, followed by closing remarks from Karen and a question-and-answer session. Today's call is being broadcast live by webcast, which is available on the Investor section of the AxoGen website. Within an hour following the end of the live call, a replay will be available in the Investor's 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 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 fourth quarter was $32.5 million, representing growth of 15% compared to the prior year. I'm pleased with our Q4 results, which reflect our team's continued focus on commercial execution, our customers' ability to successfully navigate the ongoing challenges of COVID-19, and surgeons and hospitals continuing to prioritize nerve repair. At the same time, COVID-19 continued to dampen our revenue in Q4 as trauma remained below normal levels, access for sales representatives to customer facilities remained restricted, and the resurgence of COVID cases further reduced elective procedure volumes, particularly late in the quarter. We're also pleased with the pace of our overall recovery in the second half of 2020, with mid-teens growth each quarter, allowing us to deliver a total revenue of $112.3 million for the year, representing growth of 5% compared to 2019. In addition to achieving year-over-year growth in 2020, we've reached a noteworthy milestone during the year, surpassing 50,000 Avance Nerve Grafts planted since launch. Avance has been featured in more than 125 peer-reviewed clinical publications and has demonstrated clinical outcomes that exceed those reported for conduits and are comparable to those for autograft. The challenges of COVID-19 have further highlighted the benefits of Avance Nerve Graft as an off-the-shelf alternative to the surgical harvesting of an autograft for the repair of transected nerves. Along with avoiding the risk of complications from a second surgical site, the desire to shorten procedure time to increase patient and healthcare worker safety, and to minimize resource utilization favors the use of our Avance Nerve Graft. Reviewing our fourth quarter, we believe revenue that can be attributed to the catch-up of previously deferred procedures decreased considerably compared to the prior quarter and represented approximately $1 million, primarily in our breast, pain, and OMS applications. Our trauma business continued to be the key driver of volume and revenue growth in the fourth quarter. Although we believe our growth continued to be dampened by the below-normal incidence of traumatic injuries, our trauma business has proven resilience during the pandemic, with surgeons and hospitals continuing to prioritize nerve repair procedures. More importantly, we believe that our efforts to refocus on the core trauma opportunity beginning in late 2019 have led to sustainable improvement in our ability to drive growth and have positioned us well as the market continues to recover and the incidence of trauma returns to normal levels. The recovery of our breast neurotization business continued in the fourth quarter, including meaningful contributions from the onboarding of new surgeons at targeted programs during the year. Despite the ongoing recovery in this application during the second half of 2020, we remain cautious in the near term as several programs again suspended breast reconstruction procedures late in the fourth quarter and into Q1 due to local COVID-19 resurgence. Additionally, new cancer screenings were significantly reduced for several months during 2020 due to the pandemic, which may impact breast reconstruction procedure volumes in the short term. Although cancer diagnosis and reconstruction procedure scheduling may continue to be lower than normal, we are confident in the long-term growth potential of our breast neurotization business. Our emerging business in the surgical treatment of pain improved during the fourth quarter and remains an exciting opportunity for the company. Prior to Q4, patients with chronic pain due to neuroma formation were particularly reluctant to undergo a surgical procedure, choosing to live with the pain and often relying on pain medications. The recovery and growth of oral maxillofacial nerve repair continue to lag our other applications as procedures remain below normal levels. OMS repair is a highly-invasive procedure involving the head and neck area, potentially increasing the risk associated with COVID-19. We expect our OMS application to return to growth during 2021 as COVID cases eventually decline and procedure volume recovers. Turning now to commercial execution. While the pandemic presented many challenges throughout the year, the rebalance of our commercial organization around extremity trauma, our largest market opportunity, and driving deeper penetration with our existing surgeon customers was a meaningful catalyst to our growth during the second half of 2020. The time we invested in extensive sales training during the second quarter strengthened our sales team and improved our ability to support surgeons and their patients and to drive continued growth going forward. We ended the fourth quarter with 111 direct sales representatives in the U.S., an increase of one representative during the quarter. Our direct sales channel was supplemented by 23 independent sales agencies that generally cover more remote geographies. Our independent agencies represented 12% of our total revenue in the fourth quarter compared to 13% in the prior quarter. In recent months, we've selectively added new independent agencies to cover largely untapped remote accounts to reduce the travel time of our direct sales team, which allows our direct reps to focus on going deeper in the highest potential accounts. Although we are increasing our number of independent agencies, we expect the portion of our revenue covered by the independent agencies to remain similar to recent levels. Throughout the pandemic, we kept our sales team and the broader commercial organization intact and benefited from the stability of our sales territories, customer relationships, and support, as well as some of the increasing tenure and experience of our sales team. In 2021, we plan to achieve revenue growth primarily by driving sales productivity while strategically adding up to 10 sales representatives in the second half of the year.

Thank you, Karen. Fourth quarter revenue increased 15% to $32.5 million. Our revenue increase for the quarter was the result of a 12% increase in unit volume and a 3% net benefit from changes in pricing and product mix. The growth in unit volume was primarily attributable to unit growth in our active accounts. Gross profits for the fourth quarter were $27 million, compared to $23.3 million in Q4 of 2019. Gross margin was at 83.2% for the quarter compared to 82.7% in the prior year. After temporarily suspending tissue processing in the second quarter, we restarted in late Q2 and returned to normal levels in January of '21. Our quarterly gross margins continue to improve sequentially as revenue and tissue processing volumes have increased. Our inventory levels have also increased slightly in Q4, and we expect inventory to continue to build across 2021 as we support customer demand. Total operating expense in the fourth quarter increased 6% to $32.4 million, compared to $30.7 million in the prior year. Total operating expense in the fourth quarter included $2.8 million in non-cash stock compensation compared to $2.9 million in the prior year. Total operating expenses increased over the prior year primarily due to higher sales commissions and other compensation-related costs, which were partially offset by decreases in travel, in-person conferences, and surgeon education programs due to pandemic-related restrictions. Sales and marketing expense in the fourth quarter increased 5% to $19.8 million, compared to $18.8 million in the prior year. As a percentage of total revenue, sales and marketing expense decreased to 61% for the three months ended December 31 compared to 67% in the prior year. Research and development spending in the fourth quarter was $4.9 million, which is consistent with the prior year. Research and development costs include product development, including non-clinical expenses in support of our BLA for advanced nerve graft, and expenses for clinical research. Product Development expenses represented approximately 55% of total R&D in the fourth quarter compared to 49% in the prior year, while clinical expenses represented the remaining 45% in Q4 of '20 compared to 51% in the prior year. As a percentage of total revenues, research and development expenses were 15% in Q4 compared to 17% in the prior year. General and administrative expense in the fourth quarter increased 10% to $7.7 million or 24% of revenue, compared to $7 million or 25% of revenue in the prior year. The increase is primarily related to higher compensation-related expenses. Adjusted net loss and net loss per share in Q4 of 2020 was $3.3 million and $0.08 per share compared to adjusted net loss and loss per share in the prior year of $4 million and $0.10 per share. Adjusted EBITDA loss in the quarter was $2.1 million, compared to an adjusted EBITDA loss of $4.2 million in the prior year. The reconciliation of these non-GAAP financial measures to GAAP can be found in today's earnings release and on our website. Turning to our balance sheet, on June 30, we announced a new seven-year interest-only financing agreement with Oberland Capital that provides up to $75 million in total financing commitments, with $35 million drawn as of December 31. Interest is paid at approximately 9.5%, a portion of which is capitalized into the construction costs of our daily biologics process center. The agreement with Oberland Capital also provided Oberland the right to purchase $3.5 million of AxoGen common stock based on a trailing 45-day weighted average trading price. On December 10, 2020, Oberland fully exercised this option and purchased 247,699 shares at $14.13 per share. The balance of cash, cash equivalents, and investments on December 31 was $110.8 million, compared to a balance of $106.7 million on September 30. The net change includes the $3.5 million in equity proceeds from the exercise of Oberland's option, and positive operating cash flow of $3.4 million, partially offset by capital expenditures of $2.8 million related to our new facilities in Tampa and Dayton. As previously discussed, we opened our new Tampa office and lab facility in the fourth quarter. This facility represents a great milestone for the company that will allow us to continue to recruit exceptional talent and execute meaningful scientific discovery and development over many years to come. Definitely, we resumed construction of our Dayton biologics processing center in January of this year. We anticipate completing construction of the facility later this year, followed by a one-year validation process, and expect to convert production to the new center in late 2022. We anticipate capital expenditures of approximately $26 million for this facility in 2021. Our positive operating cash flow in both the third and fourth quarters was the result of a unique influence of events that allowed us to overdeliver from a profitability perspective as revenue growth exceeded expense growth. We are ramping investment into projects previously placed on hold including surgeon clinical trials, product development, and market administrative and initiatives, all of which are key to driving long-term sustainable growth. As a result, we anticipate that operating expenses will increase sequentially, and that we will see a modest increase in operating cash burn in 2021. We are encouraged by the strength of our business in the fourth quarter, as we continue to realize improvements driven by increasing demand across our markets, and by our team's improved commercial execution. As the healthcare community in general and our business specifically moves towards a normalized environment, we're confident that the operating improvements that we have implemented and the investments we are making will position us to grow the business meaningfully and emerge from this pandemic-related downturn as a stronger, leaner organization on a path to profitability.

Thank you, Pete. I am proud of the achievements of the entire AxoGen team in 2020 in the face of unprecedented challenges. 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. Victor?

Our first question comes from Brandon Folkes with Cantor Fitzgerald. Please go ahead with your question.

Thank you for taking my question and congratulations on another strong quarter. I'd like to start by discussing the fourth quarter results. I know you provided a pre-release, but there was quite a bit of information there; as anticipated, you had some positive updates from your third-quarter call. We've heard from several companies that the impact of COVID was felt in November or December, depending on the business. So, what shifted positively since your last earnings quarter in November? What did you observe in the quarter that exceeded expectations? Additionally, are you noticing improvements at this point, or is it more of a continuation of the trends we saw towards the end of 2020? Thank you.

Thanks, Brandon. So if I just look at the cadence, it's been a little bit of a roller coaster over time. We had a very strong entry into Q4 seeing continued growth in our extremity trauma business, but also starting to see some recovery in our again smaller segments, but more elective procedures in breast reconstruction, and surgical treatment of pain, and the beginning to see some recovery in OMS. Towards the December timeframe, as COVID levels increased, we saw certainly more elective procedures shutting down, but we also saw some parts of the United States where the COVID levels became so high that they even again started to defer things that are not quite as elective like our surgical trauma cases. That continued that decrease continued into Q1, where we saw again, where COVID became quite high in some regions of the country, decreased levels of nerve repair. Now, what we saw in the past was that those procedures are brought back pretty quickly, and we've done a strong job, I think, of educating both the surgeons and the hospitals that nerve repair outcomes are always better when they're done sooner. You can get a meaningful recovery up to a year of a delay, but sooner is always better. And so we anticipate that we'll be able to see a lot of these deferred procedures occur still here in this quarter. We're beginning to see that now up until the snowstorms disrupted things over the last week. But we were starting to see that recovery in terms of COVID. And so we think it'll continue to follow that pattern that we will get those deferred cases in pretty quickly.

Right, and one follow up if I may. Maybe just jumping ahead a little bit. So on Avance with the filing of the BLA, I'd imagine that allows you a lot more flexibility in terms of perhaps sort of innovation around the product. Pete, you mentioned about investing in some programs in 2021. You know, I guess maybe call it events 2.0 is innovation around this post BLA? Is this something we may share about prior to the BLA approval or should we expect not to hear anything about that before competitive reasons or just from a regulatory perspective and not trying to push the FDA in terms of what you may have in store for Avance once it's improved under BLA? Thank you.

Yeah, great question. And one that we're not prepared to answer just yet. So in terms of innovation of advance, we continue to see opportunities to continue to have, as you said, Avance 2.0 and maybe a 3.0 down the road. But for both reasons, both for competitive reasons, as well as not wanting to get out ahead of ourselves in front of the FDA, we've not released any information about what those will look like. But we do continue to invest in innovation, both in thinking about advance but also in new products like you've seen with our AxoGuard Nerve Cap, which is a new product that we released actually in February of last year, and continue to be pleased with its clinical utility and the opportunities for growth in the future with that product.

Great. Thank you very much.

Thank you. Our next question comes from Richard Newitter with SVB Leerink. Please proceed with your question.

Hi, thank you for taking the questions. A couple here. So first, congrats on the positive data readout that you had on nerve cap there, can you just remind us how you size the nerve cap market opportunity and when you might start to see that become a meaningful revenue contributor?

So, first of all, AxoGuard Nerve Cap is used in those locations where you want to terminate or end the nerve and manage or prevent a symptomatic neuroma, which is one of the what we believe substantially underdiagnosed causes of chronic pain. And where these patients historically have been referred to a pain center to be managed predominantly pharmacologically but you know maybe other pain types of treatments. We think that there's an opportunity to go in and remove the physical source of the pain and reduce the painful stimulus and therefore make people have a much better quality of life. And we see that at least in the early results, we see from the pilot phase of our RIPOSE study, we see the application here is what it's actually all across the body. But we're initially focusing on both trauma procedures and injuries due to orthopedic procedures. And that has a lot more to do with referral patterns than it is necessarily about market size. And so we just think that that's a simpler way to manage the referral of these patients because they're still within the orthopedic practice. In a long way, that's a long-winded answer to say we decided it's big enough that we think it's important for us to focus on it. And it is not distracting to the business interests that we have today and that we're taking our existing customers and expanding the amount of nerve repair that they can do. Sizing this opportunity is very difficult because again, it has been underdiagnosed, we believe it's been underdiagnosed as a cause of the pain. So therefore, it's very hard to find references that actually identify how often people who have pain have pain that's due to a symptomatic neuroma. So when we talk about the total addressable market of $2.7 billion, we ask ourselves and say this doesn't include what we think are the pain applications, because they're on top of this, but because it has been so hard to size it again, with our focused approach that we're doing, I don't have an addressable market that I'm comfortable giving you at this time.