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Operator
Greetings, and welcome to the Oxygen, Inc. Report's 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.
Pete Mariani
Thank you, Maria, and good afternoon, everyone. Joining me on today's call is Karen Zadare, Axiom's Chairman, Chief Executive Officer, and President. Karen will begin today's call with an overview of our second quarter performance, 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 investor section of the Oxygen website. Within an hour following the end of the live call, a replay will be available in the investor section of the company website at www.oxygeninc.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, product adoption, market awareness of our products, data validation, our assessment of internal controls over financial reporting. And with that, I'd like to turn the call over to Karen.
Operator
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 continued 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 grafts across applications. With more than 50,000 advanced implants since launch and 145 peer-reviewed clinical publications featuring advanced, adoption of our flagship product continued to grow as surgeons adopted the oxygen 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 return 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 advanced to repair the resulting gap 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 continues to demonstrate growth as awareness of the problem of numb breasts following mastectomy continues to increase among patients and healthcare providers. Using the resensation technique, surgeons can use advanced to reconnect the nerves with the goal of restoring feeling to the reconstructed breast. During the quarter, hospitals continue to open surgical schedules for this elective procedure. And our OMXO facial nerve repair business remains steady during the quarter. The success and benefits of OMXO nerve repair are well documented in clinical studies and textbooks. And we expect improved growth for these elective procedures in the second half of the year. Starting now to commercial execution on our sales team. We ended the quarter with 109 direct sales representatives in the U.S. compared to 106 at the end of the first quarter and 112 one year ago. We expect to end the year with 115 to 120 direct sales representatives as we plan to strategically expand our sales team during the second half of the year to support growth in 2022 and beyond. Our direct sales channel continues to be supplemented by independent sales agencies who represented approximately 12% of our total revenue in the second quarter, compared to approximately 15% one year ago. In the second quarter, our sales rep productivity continued to improve and continues to be the primary driver of our revenue growth as we both drive deeper penetration of our existing accounts and add new accounts. Last quarter, we introduced a new account metric that we believe demonstrates the strength of adoption and potential revenue growth in accounts that have developed a more consistent use of oxygen products in their nerve repair algorithm. We refer to these as core accounts, defined as accounts that have purchased at least $100,000 in the last 12 months. Our core accounts typically have at least one surgeon who's adopted the oxygen nerve repair algorithm for the majority of his or her nerve injury patients and have other surgeons who are at earlier stages of oxygen product adoption. In the second quarter, we had 306 core accounts, an increase of 34% from 228 one year ago. Core accounts represented approximately 60% of our revenue in the quarter. We see significant opportunity to drive increased revenue as more accounts reach this level of adoption and as surgeons within these accounts increase their adoption across our nerve repair applications, including extremities trauma, pain, breast, and LMS. We've also historically reported a number of active accounts among the estimated 5,100 healthcare facilities that treat nerve injuries in the U.S. These accounts have a lower adoption threshold of at least six orders in the past 12 months. In the second quarter, our active accounts increased to 959, representing a 22% increase compared to 789 one year ago. Active accounts have consistently represented approximately 85% of our total revenue with the top 10% of our active accounts representing approximately 35% of our revenue each quarter. Turning now to our continued focus on building market awareness. In the second quarter, we continued to utilize digital marketing to supplement the efforts of our sales team to deliver important and timely nerve repair news and content to targeted surgeons. We were pleased with the continued high level of surgeon engagement with our email campaigns during the quarter, and our surgeon customers continued to participate in our Nerve Matters online surgeon community, discussing their use of peripheral nerve injury solutions. The community has grown to over 3,400 surgeons as we exited the first half of the year. We also continued to increase awareness of nerve repair with patients through our direct patient marketing campaigns, which were successfully... successfully increased visits to our Resensation.com and RethinkPain.com websites during the first half of 2021. As the leader in nerve repair, we continue to invest in surgeon education and advocate development. We kicked off our second annual Masterminds program in April, providing a series of virtual education events for emerging leaders in nerve repair. We remain committed to providing education and training for each class of fellows, and as in prior years, we've trained more than three quarters of the hand and microsurgery fellows in the class of 2021 through a combination of local in-person hands-on labs and virtual programs. We're planning a safe return to in-person programs with five fellows education events currently scheduled for the second half of 2021. Beyond a surgeon's fellowship, we provide support for the transition to practice and are pleased the majority of the new hand surgery attendings from the 2020 class have performed cases using our nerve repair products following completion of their fellowship training. As we carefully return to live programs, we'll be offering a surgeon educational event at the upcoming 76th Annual Meeting of the American Society for Surgery of the Hand Conference in September in San Francisco. Our lab will explore practical solutions for upper extremity trauma through lecture and hands-on cadaveric experiences, along with case review and discussion. We continue to expand our body of clinical evidence in support of our product portfolio and increasing surgeon adoption. Our ranger and match registries continue to enroll, with over 2,400 nerve repairers now enrolled in ranger. In 2020, analysis of the match registry which is a comparative population of conduit and autograft subjects for ranger, demonstrated that advanced neurograft outcomes were statistically better than conduit and were similar to those for autograft. Data from these two clinical programs continues to play an important role in informing surgeons' clinical decision making. Our RECON study remains on schedule after completing enrollment of 220 subjects in July of 2020. As a reminder, Recon is our Phase III pivotal study supporting our biologics license application, or BLA, which will transition our advanced nerve graft from a Section 361 tissue product to a Section 351 biological product. The study is progressing well, and we now anticipate the final follow-up visit to occur in the coming weeks. A top-line study data readout is expected in the second quarter of 2022 and will be followed by filing of our BLA in 2023. Enrollment in the comparative phase of REPOSE, our study of maxigard nerve cap compared to standard treatment for symptomatic neuroma, is well underway, and we expect enrollment to be completed in Q1 2022, and then study data readout in Q2 of 2023. Two recent publications resulting from a collaboration between Washington Nerve Institute and Washington University bring to life the significant negative impact of chronic nerve pain on patient quality of life and the economic burden associated with managing these injuries. Both of these manuscripts address the role of peripheral nerve surgery in the treatment of chronic nerve pain. Finding that surgical intervention can significantly improve patient quality of life and that timely surgical referrals are associated with the reduction in the overall economic burden especially compared to conventional, non-surgical management of the pain. This data helps to inform surgeons and referring clinicians on the growing role of the surgical treatment for chronic nerve pain. As we advance the science of nerve repair, we remain committed to investing the time and resources necessary to provide meaningful and impactful clinical evidence on the utility of our nerve repair portfolio. Nerves regenerate slowly, which often necessitates long follow-up times to assess treatment effects and gather the meaningful clinical data that surgeons, payers, and regulators have come to expect when making clinical care decisions. Our RECON and RANGER studies highlight the significant amount of time, effort, and expertise required to conduct clinical research in peripheral nerves. The RECON study began enrollment approximately six years ago, and the RANGER registry began enrollment more than 10 years ago. In Ranger, many of the nerve injuries have follow-up assessment periods of up to 36 months to fully appreciate the impact of the repair. We're fortunate to have an established body of clinical evidence supporting advanced nerve grafts, and we remain committed to obtaining the clinical evidence to demonstrate the safety, performance, and utility of our nerve repair solutions. I'd like to take a moment to comment on the proposed changes in CMS reimbursement rates for nerve repair in the outpatient setting for 2022. While the proposed increases for 2022 are modest at approximately 3% across most nerve repair procedures, we continue to be pleased with the significant increase over the last three years for repairs utilizing an implant. While Medicare patients represent a relatively small percentage of trauma cases, commercial payers often follow the lead of CMS. These reimbursement changes make simple nerve repairs economically feasible in the ambulatory surgery center setting. And we believe we are well positioned with our full portfolio of products to support nerve repair in all surgical sites of care. Before I turn the call over to Pete, I'd like to spend a moment discussing our outlook for 2021, including our updated financial guidance. We're confident that our commercial execution combined with our substantial investments in clinical data over the past decade, will continue to support search and adoption and our long-term growth as we continue our mission to revolutionize the science of nerve repair. On the strength of our first half results, we're increasing our financial guidance for the year. We now expect that full-year 2021 revenue will be in the range of $134.5 million to $137.5 million, versus the prior range of 133 to 136 million. And we continue to expect full-year gross margin to remain above 80%. This guidance reflects our optimism in the business as we continue to monitor the impact of COVID variants on procedure volumes and surgical capacity. As we look forward to 2022 and beyond, we continue to view Axigen as a long-term growth company, delivering sustainable annual revenue growth in the high teens below 20%. I'll now turn the call over to Pete for a review of the financial highlights. Pete?
Pete Mariani
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, an 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 17th, we announced that we would suspend market availability of our VIVE soft tissue membrane effective June 1st, 2021, pending ongoing discussions with the FDA regarding the regulatory classification of Avive. In the second quarter, 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%, 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 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 a return to more normalized spending levels over the past few quarters following the steep reduction in spend in Q2 of 2020 as a result of the company's cost mitigation initiatives enacted at the beginning of the pandemic. Sales and marketing expense in the second quarter increased 35% to $19.3 million, compared to $14.3 million in the prior year. As a percent of total revenue, sales and marketing expenses decreased to 57% for the three months into June 30, 2021, compared to 65% in the prior year. Research and development spending in the second quarter increased 41% to $5.7 million, compared to $4.1 million in the prior year. Research and development costs include product development, including the non-clinical expenses in support of our BLA for advanced nerve graft, and expenses for all clinical research. Product development expenses represented approximately 64% of total R&D in the first quarter, compared to 50% in the prior year, while clinical expenses represented the remaining 36% in Q2 of 21, compared to 50% in the prior year. The increase in product development expenses reflect increased spending in specific programs, including the BLA for advanced nerve graft and a next-generation advanced product. Additionally, pandemic-related restrictions lowered spending on certain clinical study programs beginning in March of 2020. As a percentage of total revenue, research and development expenses were 17% in Q2 compared to 18% in the prior year. General administrative expenses in the first quarter increased 35% to $8.7 million, or 26% of revenue, compared to $6.4 million, or 29% of revenue in the prior year. Adjusted net loss and net loss per share in Q2 of 2021 was $3.7 million and 9 cents per share compared to adjusted net loss and loss per share in the prior year of 5.9 million and 15 cents per share. Adjusted EBITDA loss in the quarter was $2.4 million compared to an adjusted EBITDA loss of 5.7 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. The balance of cash, cash equivalents, and investments on June 30th of 2021 was $106.2 million, compared to a balance of $97.2 million at the end of Q1. The $9.7 million increase includes $15 million of additional debt proceeds drawn from the company's debt facility with Oberlin Capital on June 30th, and net operating cash flow in the quarter of $1.2 million, partially offset by facility's capital expenditures of $7.2 million, primarily for our new biologics processing center in Dayton, Ohio. And we continue to expect completion of the Dayton facility later this year, followed by a one-year validation process and expect to begin production in the new center in late 2022. Year to date, we've spent approximately $9.1 million on this facility and continue to anticipate total capital expenditures of approximately $26 million for this facility in 2021. Additionally, we expect to continue ramping investment in clinical trials, product development programs, marketing and administrative initiatives, all of which are key to driving our long-term growth. As a result, we anticipate that operating expenses will increase sequentially and that we will continue to see moderate operating cash burn in 2021. Turning to guidance, as Karen noted earlier, we are increasing our revenue guidance and now expect full-year 2021 revenue to be in the range of $134.5 million to $137.5 million. an increase from our previous range of $133 million to $136 million. Additionally, we continue to expect full-year gross margin to remain above 80%. This guidance reflects our optimism in the business as we continue to monitor the impact of COVID-19 variants on procedure volumes and surgical capacity. This guidance also assumes that Avive is not commercially available for the remainder of the year. As we look toward 2022 and beyond, we believe the strength of our strategic plans, the execution in this underserved healthcare market will allow us to continue to be a long-term growth company, delivering sustainable annualized revenue growth in the high teens to low 20%. And with that, I'd like Pam to call back over to Karen.
Operator
Thanks, Pete. I'm proud of the achievements of the entire Oxygen 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'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question is from Brandon Foulkes with Cantor Fitzgerald. Please proceed with your question.
Pete
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 the quarterly cadence in the back half of the year, I think we've seen trauma being a little bit less elective and then 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 may be the best quarter just due to that increased activity? Thank you.
Pete Mariani
Thanks, Brandon. Thanks for the question. Yeah, look, first of all, 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, you know, 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 highlighted in my prepared remarks that we had $1.8 million of Avive revenue in the second quarter. And we've always expected that we would not have a viable revenue in the back half. That's always been part of our assumption. So as you're thinking about your model, there is that put and take to think about. But overall in the market, you know, 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 the recovery is continuing. You know, it's not as if And this is consistent with what you're hearing from everybody else. It's not as if 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.
Pete
Great. Thank you very much. Okay.
Operator
Our next question is from Anthony Petroni with Jefferies. Please proceed with your question.
Anthony Petroni
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 in 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 $100,000 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 is into place? Thanks.
Operator
Great. Well, actually, trauma is not back to pre-pandemic levels. People's activity, while improving and increasing, and then there's resultant level of trauma associated with that. It has been getting better in terms of activity, 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 while some elective procedures in hot spots 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 a reminder, a core account is a minimum of $100,000 in the trailing 12 months. But if you just do some math and 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 million dollars 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.
spk00
Thank you. All right.
Operator
Our next question is with Janie Morgan with SVB Lerink. Please proceed with your question.
Janie Morgan
Hey, guys. Thanks for taking the time. Hey, Janie. 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 treatment of pain, breast, and OMF in the back half of the year and future. You know, if those markets aren't back to normal either yet, which, you know, I'm assuming they're not, you know, when can we expect to see more normal levels in those markets?
Operator
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, they 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 an elective procedure that takes quite a bit of OR time, so in areas 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 surgical capacity in the hospitals. 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, all of the elective 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. As I think we've mentioned before, it's been our slowest market to recover with a significant patient reluctance 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 off a really small base in that we really launched Axigard NerveCap 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 in expanding into the surgical treatment of pain.
Janie Morgan
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, you know, is bringing on the new incremental surgeon or new account versus just getting an existing active user to do more cases helpful? more needle moving in terms of, you know, driving the growth and kind of delivering, as you're talking about, the sustainable, you know, high teens to low 20s annualized growth? Thanks.
Operator
Yeah, the best opportunity for us is to continue direct penetration with an existing user and an existing account. Just from 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 this strategy that says 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 is 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 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 in existing accounts.
Janie Morgan
Thank you.
Operator
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. One moment please as we poll again for questions. Ladies and gentlemen, we have reached the end of our question and answer session. I'd like to call turn the call back over to Karen Zatteray 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 Disruptor Summit on August 9th, the Canaccord Genuity Annual Growth Conference on August 11th, the Morgan Stanley Global Healthcare Conference on September 9th, the Cantor Fitzgerald Global Healthcare Conference on September 27th, 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.
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