Welcome to the AxoGen Third Quarter 2022 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'd now like to turn the conference over to your host, Ed Joyce, AxoGen's Director of Investor Relations. Please begin, Mr. Joyce.

Thank you, Rob, and good morning, everyone. Joining me on today's call is Karen Zaderej, AxoGen's Chairman, Chief Executive Officer, and President; and Pete Mariani, Executive Vice President and Chief Financial Officer. Karen will discuss the quarter and our outlook for the year, and Pete will provide an analysis of our financial performance, followed by 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. 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. Forward-looking statements are based on current beliefs and assumptions and are not guarantees of future performance and are subject to risks and uncertainties, including, without limitation, the risks and uncertainties reflected in the company's annual and periodic reports. Actual results or events could differ materially from those described in any forward-looking statement as a result of various factors, including, without limitation, the impact of COVID-19 on our business, global supply chain issues, record inflation, hospital staffing issues, product development, product potential, expected clinical enrollment timing and outcomes, regulatory processes and approvals, APC renovation timing and expense, financial performance, sales growth, product adoption, market awareness of our products, data validation, our visibility at and sponsorship of conferences and educational events, global business disruptions caused by Russia's invasion of Ukraine and related sanctions and other factors, including legislative, regulatory, political and economic developments, not within our control. The forward-looking statements are representative only as of the date they are made and except as required by applicable law, we assume no responsibility to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or otherwise. And with that, I'd like to turn the call over to Karen. Karen?

Thank you, Ed, and thanks to everyone joining us this morning. We're pleased to report revenue of $37 million, representing 18% growth over last year's third quarter, driven by strong commercial execution with increases in each of our products and across our applications. As expected, we saw sequential improvement in surgical procedure volumes this quarter as hospitals address staffing and other challenges, leading to improved consistency in emergency department staffing and greater surgical capacity. While we are encouraged by the sequential improvement, hospitals are still reporting some residual impact from these challenges. Therefore, we are cautious in our outlook regarding the pace of continued improvements in the near term. Our strategy continues to focus on execution within our core and active accounts. Active accounts are those that have ordered at least six times in the last 12 months and may still be in the early adoption stages. Core accounts represent more established accounts, defined as those with over $100,000 in revenue in the trailing 12 months. The number of our core accounts increased to 331 this quarter, showing an 11% sequential growth and a 17% increase from the adjusted prior year level of 283, excluding Avive purchases in 2021. This growth reflects our strategy to deepen our penetration into accounts as they continue to increase surgical capacity in nerve repair applications. Core accounts represent about 60% of our revenue and typically include at least one surgeon who has adopted the AxoGen nerve repair algorithm for many of their nerve injury patients. Leveraging the success of these surgeons with our products, we aim to expand case volume with early adopters and gain traction with additional surgeons, including those in the middle adopter stage within that account. Our best growth opportunities lie with our core accounts through deeper penetration in treating traumatic injuries and broadening into other nerve repair applications such as breast, oral, maxillofacial, and surgical pain management. The number of our active accounts grew to 952 this quarter, showing a 1% sequential increase and a 2% increase over the adjusted prior year figure of 930. Active accounts continue to account for about 85% of our total revenue, with the top 10% contributing around 35%. We concluded the quarter with 111 direct sales representatives, down five from the end of the second quarter but up from 109 a year prior. Our commercial execution this quarter was strong, and we are continuously assessing the productivity of our sales representatives and making necessary adjustments. We believe that revenue growth can mainly be attributed to gains in sales rep productivity and we will continue to add sales reps as their territories reach targeted levels. Our direct sales team is complemented by independent sales agencies, which account for about 10% of our total revenue. In September, we participated in the American Society for Surgery of the Hand Meeting in Boston, a key event for driving innovation and a significant forum for AxoGen's expanding portfolio of clinical data. We were encouraged to see ongoing discussions regarding the importance of our RECON study results at the conference. The RECON study reflects years of collaboration with the FDA and primarily serves as the pivotal study for our Biologic License Application, transitioning Avance from a tissue product to a biological product. We plan to submit this BLA in the second half of 2023. At the ASSH conference, RECON study data featured prominently in a surgeon panel symposium on the integration of this new data into clinical practices. We believe RECON is a significant addition to our clinical evidence supporting surgeon engagement and adoption. The study successfully achieved its primary endpoint and demonstrated that as nerve gap length increases, Avance showed statistical superiority over conduits in restoring sensibility, particularly for gaps over 12 millimeters. Additionally, for gaps greater than 10 millimeters, Avance has shown statistically superior recovery times, with patients regaining normal two-point discrimination up to three months earlier than those in the conduit group. The study also indicated lower rates of persistent and unresolved pain for patients receiving Avance. Another significant presentation at the ASSH Symposium was a systematic review and meta-analysis of nerve gap repair, comparing recovery rates between allograft, autograft, and conduit. This meta-analysis reviewed several hundred peer-reviewed studies, including over 1,500 nerve repairs, and found comparable meaningful recovery rates for allograft and autograft repairs across gap lengths, with no statistical differences in sensory and motor repairs. Furthermore, both allograft and autograft proved to be significantly more effective than conduits for short gaps. The meta-analysis also examined acute procedure-related costs between autograft and allograft, finding these costs to be similar. We are excited about the high level of interest and engagement at the ASSH conference this year, as the strong surgeon participation emphasizes the importance of clinical data for peripheral nerve surgeons. We are actively building market awareness of nerve repair with healthcare providers and through direct-to-patient initiatives, especially for breast and pain applications. Our marketing efforts aim to enhance patient awareness and education regarding the potential benefits of nerve repair procedures for those undergoing mastectomy and reconstruction, as well as those suffering from chronic neuropathic pain. For breast cancer awareness month in October, our breast team has engaged deeply in awareness initiatives, focusing on quality of life for patients undergoing mastectomy and reconstruction year-round. Throughout the quarter, there were eight presentations at clinical conferences discussing the restoration of sensation and neurotization in these reconstructions, highlighting the significance of incorporating nerve reconstruction into these surgeries and the role of the ReSensation technique in restoring sensation after mastectomy. Our surgeon education program remains a priority for AxoGen, generating significant interest in the surgical community. We achieved our goal of training over 75% of the recent class of hand and microsurgery fellows and had excellent interactions during our educational events at the ASSH conference. Looking at updates in our clinical evidence, we are committed to demonstrating the safety, performance, and utility of our nerve repair solutions to support the adoption of the AxoGen algorithm across our nerve repair product portfolio. This quarter, we added 11 new peer-reviewed publications, bringing our total to 207, spanning extremity trauma, breast, oral and maxillofacial, and pain. The RECON study was also highlighted at ASSH, and we believe its Level 1 evidence will provide valuable data to further penetrate the middle adopters in our core accounts. Our extensive portfolio of high-quality clinical evidence is unmatched in the nerve repair field and is essential for gaining surgeon adoption. Enrollment continues in our RANGER and MATCH registries, with over 2,700 Avance Nerve Graft repairs recorded in RANGER. Data from these registries are instrumental in guiding surgeons' clinical decisions. Our REPOSE study, comparing Axoguard Nerve Cap to standard treatment for alleviating symptomatic neuroma pain, has fully enrolled 86 subjects in its comparative phase following strong results from the pilot phase announced earlier this year. We expect to release top-line data from this comparative phase in the fourth quarter of 2023. We are on track for all requirements for the BLA submission for Avance Nerve Graft in the second half of 2023. Our new tissue processing facility in Dayton, Ohio, is also progressing well, with plans to begin production transition in the first quarter of 2023. Regarding our outlook, we have narrowed our full-year guidance and expect 2022 revenue to be between $137.5 million and $140 million, compared to our previous range of $135 million to $142 million. We expect full-year gross margin to remain above 80%.

Thank you, Karen. Revenue this quarter was $37 million, an 18% increase over the third quarter of 2021. Growth was driven with increases in unit volume of 12% as well as 3% increases in both price and changes in product mix. As a reminder, there was no Avive revenue in either the third quarter of 2022 or 2021. Gross profit for the quarter was $30.8 million compared to $26 million in the third quarter of 2021. Gross margin was 83.3% for the third quarter compared to 83.2% in last year's third quarter. Total operating expense in the third quarter increased 9% to $35.6 million compared to $32.7 million in the prior year. The increase in total operating expenses is primarily the result of compensation costs of $2.6 million and occupancy-related expenses of $500,000. Sales and marketing expense in the third quarter increased 8% to $19.8 million, compared to $18.4 million in the prior year. The increase was primarily due to compensation costs offset by a decrease in marketing program expense. As a percent of total revenue, sales and marketing expense was 54% compared to 59% in the third quarter of 2021. Research and development expenses increased 10% to $7.1 million compared to $6.4 million in the prior year. Product development expenses represented approximately 50% of total R&D in both the current and prior year and included spending on several specific programs including the BLA for Avance Nerve Graft and a next-generation Avance product. Clinical expenses represented approximately 50% of total R&D in both the current and prior year and included spending in support of our various clinical programs. As a percent of total revenues, research and development expenses were 19% in Q3 compared to 21% in the prior year. General and administrative expenses increased 12% to $8.8 million in the third quarter compared to $7.9 million in the prior year. The increase was primarily due to higher net compensation expenses, partially offset by decreases in professional service fees. G&A as a percent of revenue was 24% in the quarter compared to 25% in the prior year. Net loss for the quarter was $4.3 million or $0.10 per share compared to a net loss of $7.1 million or $0.17 per share in the third quarter of 2021. Adjusted net loss was $368,000 or approximately $0.01 per share in the third quarter, compared to a loss of $3.6 million or $0.08 per share in the prior year. Adjusted EBITDA in the quarter was $368,000 compared to an adjusted EBITDA loss of $2.5 million in the prior year. A reconciliation of these non-GAAP financial measures to GAAP can be found in today's earnings release and on our website. The balance of all cash, cash equivalents and investments on September 30, 2022, was $59.4 million compared to a balance of $64.3 million at the end of Q2. The net change includes capital expenditures of $3.9 million related to the construction of our new processing facility in Dayton, Ohio, and $1 million of net operating cash burn in the quarter. The construction and validation of the new APC facility is on schedule, and we expect to begin transitioning nerve tissue processing to this new facility in the first quarter of next year. And as a reminder, we expect to have dual facility and other startup expenses during the transition and expect our gross margins to be temporarily below 80% during the transition. We will provide additional guidance for 2023 gross margins at our Q4 and full-year call in March of next year. We expect our operating cash to continue trending towards cash flow breakeven driven by revenue leverage on our fixed cost infrastructure, along with our continued focus on thoughtful operating expense management. We believe this trend combined with the return to more normalized capital expenditures will allow us to maintain our strong balance sheet position, providing ample support as we continue our path to profitability. Lastly, today we narrowed our full-year revenue guidance and now expect 2022 revenue to be in the range of $137.5 million to $140 million, compared to our prior revenue range of $135 million to $142 million. We're pleased with our strong commercial execution, particularly as staffing issues continued to stabilize in the second half of the year, and the new guidance implies a mid-point Q4 revenue growth of approximately 17%, excluding the impact of Avive revenue in 2021. Additionally, our full-year 2022 gross margin is expected to be above 80%. We're pleased with the strength of our execution and performance in the quarter, including strong top-line growth and solid gross margins, while also providing a line of sight towards cash flow breakeven over time and longer-term profitability. We have achieved several important clinical and operating milestones and look forward to transitioning our new APC processing facility and filing our BLA in 2023. We believe we have built a solid foundation to support our next phase of company growth anchored in clinical science and approved outcomes for patients, and we continue to be confident in our ability to deliver sustainable long-term growth. And at this point, we'd like to open up the line for questions.

Thank you. We'll now be conducting a question-and-answer session. Thank you. Our first question is coming from the line of Mike Sarcone with Jefferies. Please proceed with your questions.

So the first question just on the revised 2022 guide. It seems to imply for Q4, if I'm doing my math correctly, about a mid-teen year-over-year growth rate for Q4 and that's kind of down off the 18% you posted in Q3 and I know Karen mentioned, you're being somewhat conservative, but you have seen some improvements in the hospital setting with kind of staffing shortages and constraints around there. I was wondering if you could just talk about what you've got baked into the Q4 guide and are there any other factors outside of being measured in your outlook that would explain the deceleration in growth at the mid-point?

Yes, I'm happy to answer. We are very pleased with our performance in the third quarter and our expectations for the future. The mid-point would suggest about a 17% growth for Q4. Typically, we see Q4 being flat to down compared to the previous quarter, and we are considering that aspect. However, we also acknowledge that the upper end of our range could signal ongoing improvements in staffing and overall performance in the fourth quarter. We want to maintain a cautious approach to the pace of improvements in staffing issues within the hospitals, as Karen mentioned.

Understood. That's really helpful. And then just one more question, I think, Karen also mentioned that the best opportunity for growth resides within the core accounts and increasing utilization. I was wondering with that in mind, can you speak to what the environment looks like for new account additions and are staffing constraints impacting your ability to get into new accounts, but we'd just love to hear your thoughts there.

We are seeing growth in our active accounts, which are transitioning to core accounts. This quarter, we experienced increases in both the number of core accounts and the average size of those accounts. We believe that a key area for growth is to deepen our engagement with these core accounts. However, we will also focus on growing our active accounts into core accounts and developing new accounts. Our strategy emphasizes where we allocate our efforts. Staffing is not a barrier to acquiring new active accounts, as we haven’t encountered significant challenges in that area since the early days of the pandemic. Our focus is more on our strategic approach and commercial execution.

Our next question comes from the line of Chris Pasquale with Nephron. Please proceed with your question.

Thanks and congrats on a nice quarter. I wanted to ask a couple questions about the sales force. Karen, you made some operating changes back in the summer more of the direct reporting coming to you. Can you talk about the impetus for that and what you're hoping to achieve?

Yes. So we ended up splitting so that we have a marketing team and a sales team and just splitting those functions so that they both report to me as well. This is really just recognizing that those are distinct functions, and we want to make sure that we have focus on both commercial execution, as well as from the marketing standpoint, real emphasis on building awareness of this great body of clinical evidence that we have, that we think ultimately will be a real driver for middle adopters. And that's a stage that we're at. We're starting to move into middle adopters, and we want to ensure that we have the right emphasis on that. I think it's paying off as I look at our commercial execution as well as what the marketing team is working on. I think we are on a good track.

It seems you will finish the year with fewer sales representatives than you initially planned, but with improved productivity. What is your outlook on adding new representatives as we move into 2023?

Yes. We will bring in a few more reps yet here in the fourth quarter and then next year while we haven't given a guidance number yet, I think you can think about the pace being similar to this year that as territories reach a certain threshold level, we will still add capacity in. But it will be really focused on growth through productivity.

Our next question is from the line of Ryan Zimmerman with BTIG. Please proceed with your questions.

Thanks for taking our question. I know you're not going to guide to 2023 at this point, but we look at the Street looking for about mid-teens growth and maybe you guys can just kind of help tee up in terms of some of the puts and takes you're thinking about as we move into 2023 just qualitatively and you've had so many kind of macro dynamics that have impacted your ability to grow. Does it feel like we're starting to come out the other end of that and this may allow you to be a little more unconstrained in terms of your ability to grow at that mid-teens rate?

Yes. I think we're really pleased with where things are right now and the execution that we've seen and that we're executing to the plan that we laid out and that it's yielding the results we expect. So if you use where we are today to think about the future, I think we are fairly optimistic about the future, but we want to remain measured in our guidance just because there are still macro effects out there that we can't control. And so you kind of hear that in the guidance that we provided. While we're optimistic about the growth that we see and excited to return to sort of high teens growth, we don't want to get out over our skis in getting too aggressive in guidance. And you'll see that as we round out our guidance for 2023.

Okay. Appreciate that. And if I can just squeeze two more housekeeping questions. And number one, REPOSE I think shifted back maybe a quarter from third quarter 2023 to fourth quarter 2023. Can you just elaborate on that? And then, Pete, as we think about the gross margin impact, again, I know you're going to give more commentary on the next call, but how long does the transition of this magnitude take just as we contemplate margins for next year? Thanks for taking the questions, guys.

Sure. On REPOSE, you're right. The last few subjects ended up taking a little longer to get into this study than we had originally forecasted. So it's pushed it; we were at the end of the third quarter, we're now in the beginning of the fourth quarter, and we'll have the results but now fully enrolled and looking forward to getting that top-line readout from the comparative phase, especially with the encouraging pilot data that we had.

Yes. On the margin side, our production team is doing an excellent job with yields and managing operations at our current facility. Another team is efficiently working on getting the new facility operational, and we’re excited about the significant capacity it will provide us in the future. I anticipate a negative impact during the first couple of quarters next year, with a gradual improvement expected in the third and fourth quarters. We will provide more specific guidance on the numbers later. As mentioned earlier, we expect pressure below 80% in the initial quarters due to dual facility costs and other startups, but we aim to return to normalized margins over time.

Our next question is from the line of Kyle Rose with Canaccord Genuity. Please proceed with your questions.

Great. Thank you very much for squeezing me in. So a lot's been asked, so I'll just ask one. I appreciate the previous commentary on the sales force, but maybe just help us understand, you're down five reps quarter over quarter, obviously, up still a little bit year-over-year, but just help us understand those transitions out, and just your confidence that we won't see any disruption when we think about moving forward. Thank you.

Yes. I think one of the really great things as we've moved into kind of a new stage in our accounts is that as we have a core account, we find that they remain pretty sticky as we have transitions. We don't see as much turbulence when you performance manage a territory and make transitions of reps. It doesn't mean we want to do too much of that; we want to make sure that we continue to train people up as much as we can. But we're not anticipating a lot of disruption in the short term from these transitions.

Thank you. Our next question is from the line of Ross Osborn with Cantor Fitzgerald. Please proceed with your questions.

Hi, congrats on the quarter. I guess just one for me. It sounds like the operating environment did improve sequentially but I would be curious to hear how the more elective procedures such as breast reconstruction performed during the quarter and your outlook for the rest of the year, maybe 2023 if possible.

Yes. As we've talked about before, breast reconstruction and oral and maxillofacial procedures tend to be our earliest warning signs that hospitals are having challenges with staffing because they're both very resource-intensive and lead to longer OR inpatient stays. We saw those rebound in Q3 back to being up and running. Now, the one thing that I would say is that hospitals are still constrained on overtime. So while there is a backlog of procedures, we're not making headway on the backlog. They're really trying to meter those in, but it's just again they're resource-intensive and they're just not getting enough capacity to do much on the backlog. So they're scheduling pretty far out. But we're up to steady operating in those procedures, which is a good sign.

Thank you. The next question is from the line of Dave Turkaly with JMP. Please proceed with your questions.

Hey, good morning. Maybe one for Karen and one for Pete. Karen, you mentioned again that next-gen Avance product, and I was just wondering how we should think about that, whether it's going to be processed differently or function differently or I guess any sort of details that you could share would be much appreciated. And I'll just ask the one for Pete here as well. Pete, just remind us what's been spent on the Ohio facility and what's left in terms of the CapEx as we look ahead. Thank you.

Well, mine will be short because I don't have a whole lot. I can tell you we haven't really provided any details on the second-generation Avance. We have mentioned that we also have a third-generation Avance that's in our pipeline. We think it's important to continue being the innovator and leader in nerve repair, and that's what those products represent as a biologic. The cycle time can be a little bit longer, so we just recognize we need to make sure we continuously have improvements in our pipeline. But as far as what the features are, we're not quite ready to talk about those just yet.

Yes. Regarding the building, we have about $8 million remaining to spend between now and the end of the first quarter. We have already spent around $57 million, so we expect to total approximately $65 million by the time the project is completed.

Thank you. Our next question is from the line of Ryan Zimmerman with BTIG. Please proceed with your questions.

I apologize for the follow-up, but I have to ask about the operating expense profile, which turned out to be slightly better than we anticipated this quarter, and it's relatively flat compared to the second quarter. Pete, I would appreciate your insight as we consider operating expenses for next year, especially given the slower growth in sales force headcount. Do you think there might be an opportunity for more leverage in 2023?

No, absolutely. I think what you saw in the third quarter was some evidence of our ability to drive leverage off this model. We've been talking about the opportunity to drive increased rep productivity and drive leverage off of our fixed cost base which has been fairly flattish over the last few quarters. We think there's more leverage that we can gain certainly through the next quarter. And as we think about 2023, without specifically giving guidance, we would expect to see continued leverage as we see rep productivity continue to improve. We will have some additional spend and additional costs, especially early in the year as we continue to get ready to file the BLA. You'll see some moderate increase in spend in the first part of next year. But again, similar to the messages we've been saying for a while, we really do not feel we need to spend significantly more sequentially in order to drive the revenue growth that we've been targeting.

Thank you. At this time, we've reached the end of our question-answer session. I'll turn the call over to Karen Zaderej for closing remarks.

Thank you. I'd like to thank the AxoGen team who remain committed to our mission of improving nerve function and quality of life for patients with peripheral nerve injuries. We're happy with the progress we've made towards our goals this year, and we remain focused on ensuring our long-term success. I want to thank everyone for joining us this morning, and we look forward to meeting with you at several upcoming investor conferences including Jefferies in London, Canaccord Genuity, and Piper Sandler in New York, and the Cantor Fitzgerald Conference in Miami. Thank you and have a great day.

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.