Welcome to the AxoGen third quarter 2022 conference call. At this time, all participants are in listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference today, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Ed Chase, AxoGen's Director of Investor Relations. Please begin, Mr. Chase.
Thank you, Rob. 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. 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 investor section of the AxoGen website. Following the end of the live call, a replay will be available in the investor 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 process 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, 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. With that, I'd like to turn the call over to Karen. Karen?
Thank you, Ed. 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 continued to see sequential improvement in surgical procedure volumes during the quarter as hospitals address staffing and other challenges resulting in improved consistency in emergency department staffing and an increased surgical capacity. We're pleased with the sequential improvement, although we note that hospitals continue to report some residual impact from these challenges. Accordingly, we remain measured in our outlook regarding the pace of continued improvements over the near term. Our strategy remains anchored with continued focus and execution in our core and active accounts.
As a reminder, active accounts are those that have ordered at least six times in the last 12 months and may still be in the early stages of adoption. Core accounts represent more penetrated accounts, defined as those that have had greater than $100,000 in revenue in the trailing 12 months. The number of our core accounts increased to 331 in the quarter, representing growth of 11% sequentially and 17% over our prior year adjusted level of 283, excluding the impact of Avive purchases in 2021. This growth represents the impact of our strategy to drive deeper penetration into accounts as they continue to open surgical capacity across nerve repair applications. Core accounts continue to represent about 60% of our revenue and typically contain at least one surgeon who's adopted the AxoGen nerve repair algorithm for a significant portion of his or her nerve injury patients.
Leveraging this surgeon success with our products, we focus on gaining more cases with that first early adopter surgeon and gaining use by additional surgeons, including middle adopters in that account. We continue to see that our best opportunity for growth resides with our core accounts by driving more deeply penetrating the treatment of traumatic injuries and continuing to expand into other nerve repair applications, including breast, OMF, and the surgical treatment of pain. The number of our active accounts increased to 952 in the quarter, representing growth of 1% sequentially and 2% over an adjusted prior year of 930. Active accounts continue to represent about 85% of our total revenue, with the top 10% contributing about 35% of our revenue. We ended the quarter with 111 direct sales representatives, down five from the end of second quarter and up from 109 a year ago.
Our commercial execution in the quarter was strong. We're continuously evaluating the productivity of our sales representatives and making adjustments as necessary. We believe our revenue growth can be primarily driven by sales rep productivity gains. We will continue to add additional sales reps as their territories approach targeted levels. Our direct sales force continues to be supplemented by independent sales agencies that represent approximately 10% of our total revenue. In September, we participated at the American Society for Surgery of the Hand meeting in Boston. This annual conference is a valuable event for driving innovation and an important forum for AxoGen's expanding portfolio of clinical data. We were pleased to see the continued discussion of the importance of our recently reported RECON study results at the conference.
As a quick reminder, our RECON study is the culmination of years of work with the FDA and serves primarily as the pivotal study for our Biologics License Application, or BLA, towards transitioning Avance from a 361 tissue product to a 351 biological product. We expect to submit this BLA in the second half of 2023. At the ASSH conference, the RECON study data was the focus of a surgeon panel symposium titled "State-of-the-Art Nerve Reconstruction Data: The How and Why of Implementing This New Data into Your Clinical Practice." We believe RECON is a landmark addition to our growing body of clinical evidence used to drive surgeon engagement and adoption. As a reminder, the study achieved its primary endpoint.
The study also observed that as nerve gap lengths increased, Avance demonstrated statistical superiority over conduits in the return of sensibility as measured by static two-point discrimination in gaps greater than 12 millimeters. Also, for gap lengths greater than 10 millimeters, Avance had statistically superior time to recovery, with patients achieving normal two-point discrimination up to three months earlier than in the conduit group. The study also demonstrated lower incidences of persistent and unresolved pain for Avance subjects. The ASSH symposium also included a presentation by the surgeon authors titled, "A Systematic Review and Meta-analysis of Nerve Gap Repair." This comprehensive clinical review and analysis compared the meaningful recovery rates between allografts, autografts, and conduits. For this meta-analysis, several hundred peer-reviewed studies were screened for nerve injury type and similar outcome measurements, with over 1,500 nerve repairs included in this analysis.
This is the largest peripheral nerve repair meta-analysis to date. The study concluded that meaningful recovery rates for allograft and autograft repairs were comparable across all gap lengths and up to 70 millimeters. There were no statistical differences between allograft and autograft outcomes in both sensory and motor repairs. Additionally, allograft and autograft repairs delivered significantly better rates of meaningful recovery in short gaps as compared to conduit repairs. Lastly, an additional part of this meta-analysis was an examination of the acute procedure-related costs comparing autograft procedures to allografts, and the study found the costs were comparable. Overall, we were excited with the high level of interest and engagement at the ASSH conference this year. The strong surgeon participation highlights the importance of clinical data to peripheral nerve surgeons.
We continue to build market awareness of nerve repair with both healthcare providers and through our direct-to-patient initiatives, particularly for breast and pain applications. We utilize our marketing initiatives to drive patient engagement to our ReSensation and Rethink Pain websites. These sites are aimed at increasing patient awareness and education for the potential of nerve repair procedures to improve outcomes for those undergoing mastectomy and reconstruction and those suffering from chronic neuropathic pain. October was Breast Cancer Awareness Month. This annual campaign raises awareness about the impact of breast cancer. Our breast team has been highly involved in the monthly awareness events. For us, quality of life for patients undergoing mastectomy and reconstruction is a year-round focus, and we're pleased to see that throughout the quarter, there were eight presentations at clinical conferences on restoring sensation and incorporating neurotization into these patients' reconstructions.
We believe the increased awareness and enthusiasm from the thought leaders in the space will continue to elevate both the importance of incorporating nerve reconstruction into these surgeries and the role the ReSensation technique plays in providing the opportunity for a return of sensation following mastectomy. Our surgeon education programs remain a top priority for AxoGen and continue to generate interest in the surgical community. We have achieved our annual goal of training more than 75% of the most recent class of hand and microsurgery fellows. As I mentioned, we had great interactions and engagement during all of our educational events at the ASSH conference. Moving on to updates in our growing body of clinical evidence.
We remain committed to developing the clinical evidence to demonstrate the safety, performance, and utility of our nerve repair solutions to support the continued adoption of the AxoGen algorithm across our full portfolio of nerve repair products. We added 11 new peer-reviewed publications this quarter, now with a total of 207 across extremity, trauma, breast, OMF, and pain. As I mentioned, our RECON study was discussed during ASSH. We believe that the addition of the RECON study's level 1 evidence will provide compelling incremental data to support further expansion into the middle adopters in our core accounts. We believe that our growing portfolio of high-quality clinical evidence is the most comprehensive in the area of nerve repair and a key data-driven part of gaining surgeon adoption. Our RANGER and MATCH registries continue to enroll, now with over 2,700 Avance Nerve Graft repairs enrolled in RANGER.
Data from these two clinical registries continue to play an important role in informing surgeons in their clinical decision-making. REPOSE is our study of AxoGuard Nerve Cap compared to standard treatment for reducing symptomatic neuroma pain. Earlier this year, we announced strong top-line data results from the pilot phase of this study. We've achieved full enrollment with 86 subjects in our comparative phase of this study. We expect top-line data readout from the comparative phase in Q4 of 2023. We remain on track working towards all the requirements necessary for a BLA submission for Avance Nerve Graft in the second half of 2023. Our new tissue processing facility in Dayton, Ohio, also remains on track. We anticipate beginning transitioning production in the first quarter of 2023. Turning now to our outlook.
Today, we narrowed the range of our full-year guidance and expect 2022 revenue to be in the range of $137.5 million-$140 million, compared to our prior guidance range of $135 million-$142 million. Full-year gross margin is expected to be above 80%. Now I'll turn the call over to Pete for a review of financial highlights. Pete?
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, as 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 in a number of specific programs, including the BLA for Avance Nerve Graft and a next-generation advanced 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.
Research and development expense was 19% in Q3, compared to 21% in the prior year. General and administrative expenses increased 12% to $8.8 million in the third quarter, as 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% the prior year. Net loss for the quarter was $4.3 million, or $0.10 per share, compared to 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. The reconciliation of these non-GAAP financial measures to GAAP can be found in today's earnings release and in our website. The balance of all cash equivalents, and investments on September 30th, 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.
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'll 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-$140 million, compared to our prior revenue range of $135 million-$142 million.
We're pleased with our strong commercial execution, particularly as staffing issues continue to stabilize in the second half of the year. The new guidance implies a midpoint 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've built a solid foundation to support our next phase of company growth, anchored in clinical science and improved outcomes for patients.
We continue to be confident in our ability to deliver sustainable long-term growth. At this point, we'd like to open up the line for questions. Rob?
Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question today, please press star 1 on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants that are 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. Thank you. Our first question is coming from the line of Mike Sarcone with Jefferies. Please proceed with your questions.
Hey, good morning, and thanks for taking the questions.
Hey, good morning.
The first question, just on the revised 2022 guide. It seems to imply for 4Q, if I'm doing my math correctly, about a mid-teens year-over-year growth rate, for 4Q, and that's down off the 18% you posted in Q3. I know Karen mentioned you're being somewhat conservative, but you have seen some improvements in the hospital setting with staffing shortages and constraints around there. I was wondering if you can just talk about what you've got baked into the 4Q guide and are there any other factors outside of being measured in your outlook that would explain the deceleration in growth at the midpoint?
Yeah, no, happy to answer. Like you said, we're very pleased with our performance in the third quarter and expectations going forward. You're right, the midpoint would imply about a 17% Q4 number. We typically see Q4 being sequentially flat to down. We're thinking through that piece, but we also recognize that the top end of the range would allow us to see continued improvement in staffing and in our continued performance through the fourth quarter. We just also want to continue, like Karen said, be measured in the pace of continued improvements of staffing issues in the hospitals.
Understood. That's really helpful. 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? Would just love to hear your thoughts there.
Sure. We continue to see some growth in our active accounts, active accounts become core accounts. This quarter, we had growth in both the number of core accounts, but also the size or the average size of our core accounts. We think the lowest hanging fruit is to continue to move deeper in those core accounts. It's not exclusively that we're only going to do that. We'll continue to grow active accounts to be core accounts and develop some new accounts. It's just an emphasis of where we're spending our time. I don't see staffing as an impediment to getting into new active accounts. We haven't seen that be a particular barrier since very early on in the pandemic. That's not driving this. It's really a decision about strategy and how we approach commercial execution.
Okay, great. Thank you.
Our next question comes from the line of Chris Pasquale with Nephron. Please proceed with your questions.
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?
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. The chief marketing role reports to me, as well as the sales team reports to me. This is really just recognizing that those are really different functions, and we want to make sure that we have a 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. That's a stage that we're at. We're starting to move into middle adopters, and we want to make sure 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're on a good track.
I'm sorry. I was just saying, it looks like you're now going to end the year with fewer reps than you originally planned, but better productivity. How are you thinking about the pace of rep adds from here and heading into 2023?
Yeah. We will bring in a few more reps yet here in the fourth quarter. Next year, while we haven't given a guidance number yet, I think you can think about the pace as being similar to this year, that as territories reach a certain threshold level, we will still add capacity in. It'll be really focused on growth through productivity.
Great. Thank you.
Our next question is from the line of Ryan Zimmerman with BTIG. Please proceed with your questions.
Good morning, Karen, Pete, Ed.
Good morning.
Thanks for taking our questions. I know you're not going to guide to 2023 at this point, we look at the street, looking for about mid-teens growth. Maybe you guys can just help tee up in terms of some of the puts and takes you're thinking about as we move into 2023, just qualitatively. You've had so many 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 maybe will allow you to be a little more unconstrained in terms of your ability to grow in that mid-teens rate?
Yeah, 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. If you use where we are today to think about the future, I think we are fairly optimistic about the future. We want to remain measured in our guidance, just because there are still macro effects out there that we can't control. You hear that in the guidance that we provided, is while we're optimistic about the growth that we see and excited to return to high teens growth, we don't want to get out over our skis in getting too aggressive in guidance. You'll see that as we round out our guidance for 2023.
Okay. Appreciate that. If I could just squeeze two more housekeeping questions in. Number one, REPOSE, I think, shifted back maybe a quarter from third quarter 2023 to fourth quarter 2023. Can you just elaborate on that? Pete Mariani, 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 a 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 the study than we had originally forecasted. It's pushed it. We were at the end of third quarter. We're now in the beginning of fourth quarter, and fourth quarter that we'll have the results. Now fully enrolled and looking forward to getting that top-line readout from the comparative phase, especially with the encouraging pilot data that we have.
Yeah. On the margin side, first of all, two things. Our team on the production side is doing a fantastic job on yields and managing the production in our current facility. The other team is working great on getting the facility up and running, and we're excited to be able to start transitioning that. That facility's going to give us significant capacity well into the future. On the transition, I think about a negative impact in the first couple of quarters next year, then think of it as sort of ramping to some improvement across Q3 and Q4. What that means specifically for numbers, we'll give more guidance later. Like I said in my remarks, we would expect pressure below 80% in the first couple of quarters as we have dual facilities charges and other startups. Moving back towards normalized margins over time.
Thank you, guys. Nice quarter.
Thanks.
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. A lot's been asked, 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.
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 count, 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. 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. 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 question.
Hi, congrats on the quarter. I guess, just one from me. It sounds like the operating environment did improve sequentially. I would be curious to hear how the more elective procedures, such as breast recon, performed during the quarter and your outlook for the rest of the year and maybe 2023, if possible.
Yeah, as we've talked about before, breast reconstruction and oral maxillofacial procedures do tend to be our earliest warning signs that hospitals are having challenges for staffing because they're both very resource intensive, long in the OR, in-patient stay. We saw those rebound in Q3, back to being up and running. 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 that, 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. We're up to steady operating those procedures, which is a good sign.
Got it. Thank you.
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. 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 of Avance, we have mentioned that we also have a third generation of Avance that's in our pipeline. We think it's important to continue to be the innovator and leader in nerve repair, that's what those products represent. As a biologic, the cycle time can be a little bit longer, we just recognize we need to make sure we continuously have improvements in our pipeline. As far as what the features are, we're not quite ready to talk about those just yet.
Yeah. On the building, we'll have about $8 million left to go between now and the end of the first quarter. I think we've spent right around $57 million, we'll be all in about $65 million by the time we're done.
Thank you.
Thank you. Our next question is from the line of Ryan Zimmerman with BTIG. Please proceed with your question.
Apologies, I have a follow-up and just can't get enough here. The operating expense profile was a little bit better than I think we expected this quarter, and you're running kind of flattish relative to second quarter. So Pete, I just would appreciate your commentary as we think about OpEx in the next year, and given the slower pace of adds on headcount in the sales force, do you guys feel like you might be able to see a little 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. 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 cost, 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.
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.
Thanks, Pete.
Thank you. At this time, we've reached the end of our question and 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. We remain focused on ensuring our long-term success. I want to thank everyone for joining us this morning. We look forward to meeting with you at several upcoming investor conferences, including Jefferies in London, Canaccord Genuity and Piper Sandler in New York, the Cantor Fitzgerald conference in Miami. Thank you. 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.