AxoGen Inc (AXGN) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AxoGen first-quarter 2012 results call. As a reminder, today's call is being recorded.

At this time, it is my pleasure to turn the conference over to Mr. Rich Cockrell. Please go ahead, sir.

Thank you and good morning. Thank you for joining us today for AxoGen's first-quarter 2012 financial results call. On the call today are Karen Zaderej, AxoGen's Chief Executive Officer, and Greg Freitag, Chief Financial Officer. Also joining us today for the call are Dr. Buncke and Dr. Safa of the Buncke Clinic in San Francisco. They will be discussing some of their recently published clinical results on Avance and will be available to answer your questions regarding nerve repair after today's comments.

Last night AxoGen issued a press release announcing first-quarter 2012 financial results in which the Company reported first-quarter 2012 revenues of $1.7 million, which is a 47% increase over first-quarter 2011, and the results were also ahead of consensus estimates of $1.6 million.

The Company also reported earnings per share for the period, which was a loss of $0.19 per share, but was in line with consensus estimates. If you have not received a version of the press release, you can find it on the AxoGen website at www.axogeninc.com, or you may contact our offices at 404-942-3369 or e-mail at Investor Relations at axogeninc.com.

Today's call is being made available to a broader audience via the Investor Relations section of the Company's website at www.axogeninc.com. Following the remarks by management and today's guests, we will open the call to your questions. We expect the duration of the call to be approximately one hour.

During the course of this call, management may take and make certain forward-looking statements regarding future events and the Company's future performance. These forward-looking statements reflect AxoGen's current perspective on existing trends and information that can be identified by such words as expect, plan, will, may, anticipate, believe, should, intends or other words of similar meaning. Any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, including those noted in our filings with the SEC on Forms 10-K, 10-Q and 8-K. Actual results may differ materially from those projected in these forward-looking statements.

For the benefit of those you who may be listening to the replay, this call was held and recorded on May 15, 2012, at approximately 11 AM Eastern time. Since then, the Company may have made announcements related to the topics discussed. Please reference the Company's most recent press release and current filings with the SEC. AxoGen declines any attempts or obligations to update these forward-looking statements.

With that, I would like to turn the call over to Karen.

Thank you, Rich. Good morning, everyone. Welcome to the AxoGen first-quarter 2012 earnings conference call. I would like to thank again Dr. Buncke and Dr. Safa for joining us on today's call.

Comments from Greg and I will be brief to allow time for Dr. Buncke and Dr. Safa to talk about their work with the RANGER study, the clinical study for the Avance Nerve Graft, and to take your questions about nerve repair and AxoGen's technologies.

We are off to a good start for the year. We expected and saw improved topline performance, resulting from our continued focus on commercialization. During the quarter we also added additional marketing and sales resources and saw positive benefit from the new sales team members who joined us in 2011.

In addition, we saw very positive response to the newly published clinical results, including the treatment algorithm for nerve repair published in the annals of plastic surgery by [Dr. John Dietrich] of Georgetown.

We also saw strong interest in the first set of results from the RANGER study published in the January 2012 edition of Microsurgery. Again, Doctors Buncke and Safa will provide more detail on those RANGER study outcomes.

For the first-quarter 2012, we reported record revenues and gross profit of $1.65 million and $1.2 million respectively. Revenues for the period were 47% higher than first-quarter 2011 of revenues of $1.1 million and 21% above the reported the fourth-quarter 2011 revenues of $1.36 million. Gross profits were higher by 55% over the same period last year, and gross profit margins improved as well, increasing to 73%, up from 70% from the same period in 2011.

While it can be challenging to commercialize the technology that confronts the prevailing paradigm of autograft for transplanting a nerve from the patient's own body, as the gold standard for peripheral nerve repair, we feel that our growing base of clinical data and the increasing tenure of our sales organization for both direct and independent representatives are providing us with solid sales traction. We will continue to leverage our clinical evidence, focus on professional education and awareness, and communicate the value of our technology to fuel our sales growth and expansion.

In addition to the growth in the Avance Nerve Graft, we have seen a very nice ramp-up in the sales of our AxoGuard Protector and AxoGuard Connector products. This has been the result of our ability to leverage the progress we have made with the Avance technology, allowing us to cross-sell our AxoGuard product into new and existing Avance customer accounts. Together with the Avance Nerve Graft, the AxoGuard products allow us to offer a full suite of peripheral nerve repair solutions to our surgeon customers.

The publication of the RANGER data has received international recognition as well and was recently presented at the Vienna Symposium on peripheral nerve.

You may also have seen our recent announcement about our further expansion into Europe with our first shipment of Avance into Austria. While we are at the very early stages of our international expansion, we have been impressed with the level of interest from distributors and surgeons in Europe and their understanding about the value proposition of our Avance Nerve Graft technology.

On the investor relations front, our path to bring better liquidity and value continues to bear fruit. We've made good progress in building awareness of AxoGen, and as a result, I am pleased to welcome our second analyst, Nathan Cali of Noble Financial Capital Markets, who recently initiated coverage of AxoGen. For a company at AxoGen's stage, having analyst coverage by Jeff Cohen of Ladenburg and Nathan as well, supports our view of AxoGen as an interesting investment opportunity.

We will continue to develop on the strong foundation we have established, and I am very proud of our work to date. I would like to thank the surgeons who believe in our regenerative medicine solutions for their peripheral nerve surgery and our employees and independent distributors who have worked diligently to develop the AxoGen story.

I will now turn the call over to Greg who will review our financial results.

Thanks, Karen. It is exciting to be here for the first quarter and to be able to do report our earnings. It was a very good quarter, as Karen alluded to. I will remind our listeners to refer to the first-quarter 2012 earnings press release that was issued last night and also our Form 10-Q for the first quarter, which we will file later today.

As Karen stated, for the first-quarter 2012, we reported record revenues of $1.65 million, which were primarily due to increased sales into key accounts and the addition of new accounts as a result of expansion of the Company's sales force.

Gross profit for the period increased 55% to approximately $1.21 million as compared to approximately $0.78 million for the first-quarter 2011. The higher gross profit reflects lower manufacturing and labor costs and the absence of the one-time manufacturing startup expenses reported during the first quarter of 2011.

More importantly, the gross profit margin also improved to 73% during the period, which after taking into account inventory write-off in 2011 was 7% better than 2011's gross profit margin.

As a result of the Company's investment in additional sales and marketing resources, sales and marketing expenses during the first quarter of 2011 increased to $1.63 million compared to $0.86 million reported during the same period last year. As of the end of the period, the Company reported 16 direct and 21 independent sales representatives.

Research and development expenses increased to approximately $296,000 during the period as compared to approximately $106,000 reported for the first quarter of 2011. Substantially all of this increase was due to expenditures for our clinical research activities.

General and administrative expenses increased to approximately $1.23 million for the first quarter of 2012 as compared to approximately $0.72 million for the same period during 2011. This increase was principally a result of payroll and benefit increases, as well as other expenses associated with being a publicly traded company. As most of you know, first quarter is traditionally higher for public companies as a result of filing of the 10-K and the associated audit reports that come with the 10-K.

As we look forward into the future, first quarter and those general and administrative expenses are in a place where we hope that they will maintain as we increase our sales levels.

The Company reported a net loss of $2.11 million or $0.19 per common share compared to a net loss of $2.3 million or $2.21 per common share reported during the same period in 2011. As of March 31, 2012, the Company had $5.6 million in cash and cash equivalents with $5 million in total debt outstanding.

At this time, I will turn it back to Karen.

Thanks, Greg. I would now like to introduce our guests, Dr. Greg Buncke and Dr. Bauback Safa, both of the Buncke Clinic, the lead center for the RANGER study. Dr. Greg Buncke is a co-Director of the prestigious Buncke Clinic in San Francisco. The Buncke Clinic is an institute for plastic and reconstructive surgery, hand surgery and micro surgery and is a referral center for the most challenging plastic and micro surgery patients.

Over the years through its fellowship and resident training programs, the Buncke Clinic has trained over 200 clinical and research fellows and residents, many of whom now chair departments at leading medical and research facilities around the world. The center is also a prolific research and training center, having published over 400 articles, books and chapters. Dr. Buncke attended the University of California at Davis and Georgetown University Medical College. He completed residencies in general surgery and plastic surgery at Stanford University and a fellowship in hand and microsurgery at the Buncke Clinic. He is board certified by the American Board of Plastic Surgery and holds a certificate of added qualifications in surgery of the hand from the American Board of Plastic Surgery.

I would also like to welcome Dr. Bauback Safa. Dr. Safa graduated from the University of Virginia and Stanford University School of Medicine. He also holds an MBA from the Haas School of Business at the University of California Berkeley. He completed his residency in plastic and reconstructive surgery at Stanford University and a fellowship in hand and microsurgery at the Buncke Clinic. He is board certified by the American Board of Plastic Surgery and holds a certificate of added qualification and surgery of the hand from the American Board of Plastic Surgery. Dr. Safa is an adjunct clinical faculty member in the division of Plastic and Reconstructive Surgery at Stanford University School of Medicine. Thank you.

Doctors Buncke and Safa, again thanks for joining us again today. I would like to have you share your insights on the RANGER study and your changing paradigm in nerve repair. With that, Dr. Safa.

Thanks, Karen. It is really a pleasure to be here and share some of the results of the RANGER study.

As Karen mentioned, the RANGER study is an ongoing multicenter study in nerve gas repair. It is the largest study of its kind to date. There are 12 contributing centers in the study. This is led by the Buncke Clinic. And these centers are a mix of level one trauma centers, military medical centers, to help with specialty hand centers like ours.

There are 25 plastic and orthopedic hand surgeons who are contributing to the study currently. The nerve injuries in the study really represent a large variety of injuries, basically the whole gamut of injuries that we see, and these can range from finger injuries with more straightforward cuts of digital nerves to blast injuries during wartime to nerve defects created by cancer resections.

What I wanted to emphasize here is that the study is really a result of real-life surgeon experience and not an idealized benchtop or an animal study. As such, I really think it sheds light on how the Advance Nerve Graft really works in the surgeon's hand. And, as Karen also mentioned, we recently have a more detailed version of the talk that I am giving right now published in the Microsurgery Journal of January this year. So I just want to highlight some of the high-level results of the RANGER study.

This was a retrospective study. It is basically what we call the registry study, which looks at all the nerves we've implanted and all the patients above the age of 18. And this -- the data was collected over three years. We had a total of 134 patients, which is actually quite large. It is the largest study of its kind up until now, and this included 179 nerves.

We have had 88% follow-up, which actually is remarkably high for a registry study that includes mostly trauma patients. It is exceedingly difficult to follow up with all of these patients because they come from far and wide, and they are trauma patients as opposed to being enrolled in a prospective study.

When we talk about nerve defects, we usually like to break them between sensory nerve -- that is a nerve that supplies sensation to a body part -- and at the other end of the spectrum, a motor nerve, which is a nerve that supplies the motor input to a muscle so the muscle can move, and also nerves that are mixed, that have both sensory and motor. And so you will hear me talk about the results for all three of those.

So probably in the study, we have implanted 115 sensory nerve grafts, 51 mixed nerve graphs and 13 motor grafts. But you can see there is definitely a predominance of use of this product in sensory grafts, in sensory defects simply because there just are many more injuries that involve sensory nerves.

I would like to talk about the safety of this implant so far. We have had no implied complications related to the Avance Nerve Graft. We have had no related adverse events to the use of this Nerve Graft, and today we have had zero incidence of tissue rejection. So that is something that we are very happy about it, being that it is a cadaver product.

Of the patients who are far along enough for us to have included in the study from an outcome standpoint, we have 47 males and 19 females, and that is again a pretty typical range for traumatic head injuries. We have 65 sensory nerves, 18 mixed and nine motor. And breaking it up between those types of nerves, we ended up seeing a meaningful recovery of 89% in the sensory nerve grap and 92% leading to recovery in mixed motor and sensory nerve grafts, nerve gaps and 86% meaningful recovery in motor nerve gap. But our goal is do a comparison of these data with historical controls in other studies.

So what I would like to talk about when we talk about nerve gaps is the length of that gap. And we usually break this down to gaps of less than 15 millimeter, gaps of between 15 millimeter and 29 millimeter, and gaps of above 30 millimeters. And we have 100% meaningful recovery in gaps up to 15, 78% meaningful recovery of gaps up to 30, and between 30 to 50 millimeters, which is really the high-end of the nerve gaps, we have a meaningful recovery of 96%, which is remarkably high.

And what we did is we ended up comparing our data to historical control, basically results from other studies that are in the literature. And some of the studies that have comparable methodologies have meaningful recoveries ranging in the 60s to 70s to low 80s. Our overall meaningful recovery was 89%.

So the data from this study really compares quite favorably to the data that is out there for other studies looking at either direct repair, which is basically fixing a nerve to itself without a gap or fixing a nerve gap with an autograft, which is basically a nerve that is taken from the patient's own leg.

So in conclusion, what we found in this study is that the processed allograft, which is the Avance graft, is a safe and effective alternative for nerve reconstruction, and we have shown a meaningful recovery of 89.2% in these cases. And this -- the need for recovery that we saw was basically regardless -- was the same for all types of nerve gaps be it sensory or motor, and was also across the board regardless of nerve gaps. It also compares quite favorably with historical controls. Also, like I mentioned before, we had no adverse events.

So what we have really seen in our clinical practice is a paradigm shift in the way nerve injuries and gaps are treated. And clinically we simply were not seeing really good nerve regeneration with the use of nerve conduits, which are these basically hollow tubes. And we were not seeing any good regeneration for defects more than 10 millimeters to 15 millimeters.

So when the Avance Nerve Graft came onto the market, we were very excited about using it. And we saw that it compared very favorably to using a nerve graft from the patient's own leg, which has a lot of downside.

In my experience, the graft handled just like an autograft, which is the graft from the patient's own leg, but more importantly it does not require the surgeon to learn any new surgical skills. In fact, it actually eliminates the need to harvest the graft from the patient's own leg, which is added operative time and added morbidity for the patients because they end up with a permanently numbed portion of their foot.

What we have also been able to do is to treat these nerve gaps much earlier. Oftentimes we would have to go back one or two months later and dig out the end of the nerve and then take a graft from the leg and bridge that gap. With this product, we are able to treat that nerve gap at the same time as the trauma, thereby eliminating the need for a re-operation.

And so, as a result, our treatment paradigm has really changed. Personally if I have a nerve gap up to 10 millimeters, I use the AxoGuard Nerve Connector, which is basically a hollow conduit, which I believe is superior to the conduits that are manufactured by Integra, [Shrekearth] and others. And if the gap is greater than 10 millimeters and certainly over 15 millimeters, I go directly to the Avance Nerve Graft, which is very similar to the paradigm that was published by Dr. Dietrich of Georgetown in the annals of plastic surgery.

What I want to do now is turn the table over to Dr. Buncke who is going to talk about his views and indications for using the Nerve Graft.

Thanks, Dr. Safa. I think a couple of points are important to bring out. One is that we have been using the Avance Nerve Graft now for about four years. The first case was a case that we were not sure we needed to use the Avance Nerve Graft, but because of the nature of the injury, we did not want to necessarily take a nerve from somebody's foot and transplant it to the hand because we were concerned that we would create problems in the foot. And this patient did very well. And from then on, we started recognizing how important this product is certainly for patients who have irritable nerves. So over the last four years, we have really for any patient that has a defect of anywhere between 7 centimeters or smaller at 70 millimeters, we are really considering using the Avance Nerve Graft primarily. And fortunately the RANGER study, it is very nice to see that it has confirmed our actual -- the way we have used this product and confirms the way that we are going to continue to use this product in the future.

I think the biggest advantage of this is that it saves the patient essentially a second operation on their foot and recovery time from that. And that is hard to get that across to other surgeons who are very prone to using the same thing all the time. That might be a conduit, which we know conduits definitely do not work as well as the Avance Nerve Graft and those who are willing to take Nerve Graft from somebody's foot or leg.

But I think those people are slowly coming around as the data becomes more prevalent and as they see that there is people who are real practitioners using this. They just don't want to necessarily hurt their patients, so they may be a little bit more conservative about using it. But all-in-all we have been very happy about using it, and we use it almost on a daily basis.

The majority of the time it is being used in patients who have had an amputated finger and have, when we replant the finger, putting the finger back on, there may be a gap in the nerve so that you can't actually repair the nerve directly, and prior to Avance, we had really no great opportunity. We are not going to use autograft because this is potentially contaminated wound. So we were using conduit in a lot of those results that were not very good.

Now with the Avance, we can feel confident about putting in a structure that looks exactly like a nerve, behaves like a nerve, and is easy to use and really our fellows and residents that we train are all very excited about using this longer-term, and we have trained the number of people. So I think the word is going to get out pretty quickly.

Well, thank you very much, Dr. Buncke, Dr. Safa. I appreciate your comments, and I really appreciate you taking time from your very busy schedule to provide us this update.

I hope this has given our listeners some insight from the physician community with regard to our technology and the changing paradigm and nerve repair approaches. I believe we have made solid progress not only in demonstrating the benefit of our technology to the physician community and also with our efforts on education and awareness with thought leaders like Dr. Buncke and Dr. Safa. So, again, thank you to both of you for your time today.

At this time I would like to open the call for any questions that our listeners may have.

(Operator Instructions). Nathan Cali, Noble Financial.

Congrats on the progress and thanks for taking the questions today.

A question for Dr. Buncke and Dr. Safa. What would you advise -- just a couple of quick questions -- what would you advise other doctors that you may be talking to that are currently using autograft and hollow tube conduits for the larger gaps on using an allograft product?

This is Bauback Safa. So my advice to those surgeons basically would be to review the RANGER study data and present to them our paradigm as far as when we use conduits. I would really show them the data from the Weber study, which was the sentinel study that really started the use of conduits on a wide scale and point out all the flaws, of which there are many.

And so what I would do is just explain to them the reasons why the conduits don't work for gaps more than 10 millimeters or max 15 millimeters and how our data shows that the Avance Nerve Graft works quite comparably to autografting or even direct repair.

And I think in terms of autograft, I mean it is pretty much obvious that if you can save somebody an operation, not only is their downtime, recovery time less, but even the operative time saves money for the whole system, and that is really how everything has shifted for us. We can do more cases during the day, and patients can -- these can almost be outpatient operations versus when you take a -- harvest a nerve graft from the foot, you often have to keep them overnight in the hospital just to have their foot recover.

And then just one quick follow-up question. As you talk to other docs in the space that are using autograft and then switch over to allograft, AxoGen's allograft product, are you getting feedback, have you heard any feedback back to you on your suggestions as far as using that product?

I am not aware of any surgeon who has started using the Avance Nerve Graft and has gone back to using autograft from the leg. Simply because their experience has been what we have found in the RANGER study.

And what Dr. Buncke mentioned is really important in that from a workflow standpoint, not only does the product work very well, but it also saves the surgeon quite a bit of time, and that is -- talk to any surgeon, if the product saves your time and it is something that you really want to use, especially obviously if it works well. And so I'm not aware of anyone who has had any problems having used this thing personally.

Yes, I have not heard of any problems yet either.

Thanks a lot for taking the questions.

Just a quick question for Greg -- maybe Greg. As far as the gross margins, congrats on the strong gross margins in the quarter. Any expectations going forward here how we should look at the gross margins?

Yes, so obviously we don't give forward-looking statements like that, but as we look at what we did with the gross margin, one thing that we pointed out before there is a product mix that affects those gross margins. So there is a little bit that occurs there. The product mix that we see in these gross margins are what we think is a pretty comparable product mix.

We have done a lot in the first quarter, and hats off to Mike Donovan and our manufacturing group who has done a marvelous job of continuing to find efficiencies in our manufacturing system, both from all the way from the donor and the work and education that is done with our recovery teams, all the way through our processing in order to make our efficiencies.

But at this point, we believe that these margins are ones that in general are sustainable, and we keep working hard to keep them where we see first quarter and whatever we can do to push those higher. But for now there were not any superheroics in getting there, but there is always a little bit in the mix.

Thanks a lot. And then on the rep side, how many did you end the quarter with? Direct reps?

We ended the quarter with 16 direct reps and 21 distributors.

And then on the account balance, what was the account balance at the end of 2011 and then the account balance at the end of the quarter?

You mean as to the number of direct and independent reps?

No, as far as the number of accounts that you guys are selling into.

That is not the number that we released publicly.

It is not? Okay.

Yes, yes. And then the other thing also, just because we tend not to mention it, although with Austria coming online, just to refresh everyone, we do sell in Switzerland, Austria and have started distribution in Canada of the Avance product in those three countries, which is our start of some of the overseas sales.

Again, congrats on the progress.

Jeffrey Cohen, Ladenburg Thalmann.

I have a couple for the doctor and a couple for management. So I really have one for the doctor.

Dr. Buncke, in doing what you are doing, not necessarily involved in the trial but have you seen out in the marketplace that there may be growth factors or other regenerative products that are being marketed or are being suggested that they have utility for nerves?

There is a lot of discussion about a number of different things, but nothing is real promising as of yet.

There is really nothing in clinical use. There are a number of laboratories around the country that are using different Nerve Grafts, nerve factors, different growth factors including TDGF and even IGF-I to try to kind of augment the seat, if you will, of nerve regeneration. But all this is experimental, and we are not using it clinically, at least we are not. I have not heard of anyone else using it.

And as far as you know, there is no enrollment in any trials related to that?

Not that we know. We only have -- as we have seen a couple of kind of benchtop or animal studies from various groups around the country trying to combine various growth factors with either conduits or other types of autografts, but we have not seen any clinical studies.

Okay. Thank you. Next I guess for Greg or Karen, if you can walk me through a little bit just to get some further clarity on the three expense lines. So generally speaking, sales and marketing was $1.63 million for the quarter, which represented about 98.5% of revenue. So as far as an aggregate number, would you expect that to be somewhat flat throughout the balance of the year with the 16 reps as of the end of the quarter?

Yes, that is a very good way to put it. So if you just stabilize at the 16 reps, which is where we are right now and what we pushed through for sales and marketing expense, there is no reason to believe that that is materially different, other than obviously from a variable cost perspective that goes up as sales go up because there is a commission structure.

But from a fixed cost standpoint, it is going to be stable of what we have established. Part of all of that from just a -- let's take the marketing side, from the marketing side, we continue to do everything we can to get the information out such as RANGER, such as our other studies, the work that physicians are doing, and that is the other piece that should never get lost in the sales and marketing line.

It is our feet on the street of our salespeople, but it is also the marketing. And with having brought on Jill as our Senior VP in Marketing, we are really focused on making sure that our marketing activities are supporting and getting the word out.

Okay. So you also would not expect over the next one or two or three quarters to increase the sales reps from 16 plus 21 of the distributors?

So the answer is that is more forward-looking than where we are at. But what I was telling you is that right now what we are doing is we have stabilized the sales force where we are right now. We including one of the things that we always want to point out is we also have our three regional managers who were brought on at different points through last year. All of that team, which is a young team, is all coming up to speed very well, and so we are very focused on making that core do what they need to do.

We will evaluate how we bring on other independent and other direct salespeople through the rest of this year. Right now though we are pushing with what we have got.

Okay. So stable in the short term? On the R&D front, it looked like Q1 was a little lighter than Q4, as I had expected. Would you expect the balance of this year looking similar to Q1, or will you expect it going more into the high teens or low 20s on a percentage basis of revenue?

So the answer to that is it is going to go up, now understanding that that line has a small line item compared to the reps. But, as we come on with our clinical trials later this year in preparation for those and also the other work that we continue to do. RANGER continues on. Other studies that we are doing continue. The FDA work continues. So you will see growth in that R&D line, and but, again, in proportion to the rest of the budget, it is still going to be proportionally low.

I got it. And on the G&A, would you expect that for the subsequent few quarters to look similar to Q1?

Yes, in general terms. Again, off of our base, we bounce a little bit here and there. But overall if we look at our fixed expense cost base, you will get just a little bit that rises as the revenue rises. You have got your variable costs that come into that, but generally for the Company is very well established for us pushing heavy the revenues out through the rest of this year.

So, again, you always have just in general things increase as you drive revenue some. But we do not see anything that has material increases, and as revenues as we expect them to continue to increase through the year, the burn will continue to come down.

Okay, which leads me to my next question. So $5.6 million in cash and, right, somewhat similar, slightly larger amount in debt, could you talk about the line? I think your line was $5 million, so it is fully used, and how the cash might look over the next couple of quarters, do you expect your burn to maintain or decrease by a certain base over the next few quarters?

No, we expect the burn to continue to decrease. It did decrease from fourth quarter to first quarter. Yes, we had an aggregate uptick in the expenses, but the burn was down as a result of the revenue. Because of what you said earlier, as we now have stabilized our situation with our salespeople, there was this bolus that has come through over fourth quarter and first quarter as you bring on people that are not productive to cover their own expense line.

So now as our people are becoming more productive, our sales increase, we stabilize our expenses, the burn comes down, and we should continue to see that burn come down as we progress through the rest of this year.

Okay. And then I guess lastly for Karen or for Greg, are you seeing other complementary products to what you are selling currently that could be available as acquisitions or as distribution that are out there, US or international?

Yes, both Karen and I are going to answer. I am going to start by saying that one of the reasons back in September for doing the merger and having a public vehicle is to have the currency in order to be opportunistic as we go forward.

And so from my side, from the financing structuring side, I think we are positioned with our focus on nerve, with our capability from a corporate structure to be able to take opportunities as they would come to us.

And I was going to say something similar. We are always interested in adding things that complement the call pattern we have today in peripheral nerve for our sales teams. We are not looking to start research programs from the ground up. That is just not to the profile that we are looking for at this point, but yes, we are actively talking with parties to see if there are products that meet that profile.

[Dominique Simone], [Merlin Excess].

So a quick question for Dr. Safa and Dr. Buncke. Thanks for being on the call. Could you please maybe explain a little bit on the use of conduit as opposed to grafts. What drives your decision here? Is it just really just simply a question of length of gap, or are there other factors that come into play?

And then the second part of the question is, which proportion of patients that you see requiring repair do get a graft as opposed to a conduit?

And finally, have you used the AxoGuard Nerve Connector?

Thank you for those questions. With regard to the first question when we use conduits, you are correct, it is primarily a question of gap length.

In our clinical experience, gap length of more than 10 millimeters or maximum 15 millimeters simply do not regenerate as well -- if it is above that as well as a Nerve Graft be it from the patients himself or herself or a (inaudible) graft. And that is mainly because of the micro architecture of thousands of tubules that are present within a nerve graft.

So for us, basically it is a matter of length. And if it is more than a centimeter, at least in our practice, we have been jumping directly to using the Avance Nerve Graft.

With regards to the types of nerve conduits that are out there, there are multiple materials that are available based on the manufacturer. These tubes come in the form of collagen tubes, PGA tubes, which is an absorbable kind of synthetic material. And you mentioned the AxoGuard Connector, which is made of intestinal submucosa. SIS, it has become outdated, but we have used it and we do use it pretty frequently. And it is multi-factorial?

One of the reasons is that it handles much more easily, and it is much easier to sew than a very thickened, stiff collagen tube or a PGA tube. And along the same lines, it flexes very nicely around joints. So when you are thinking about a finger and you want the patient to move, when you use a collagen tube, it tends to kink around these joints.

So for that reason alone, it is the superior product. But there are other reasons as well. It does accept the micro needle much more easily, so technically it is easier to sew with. It is also translucent, so you actually get to see the nerve sitting inside the tube, which is reassuring to make sure it is oriented properly.

And finally, what we have seen is that based on the bench top and animal data and we have seen it clinically as well, is that the body does form a kind of nice sheath-like layer between the scar and the nerve when you use the AxoGuard Connector or even the AxoGuard Protector. And because of that, we are seeing less scar infiltration into the nerve repair site. For all of those reasons, we really do prefer the AxoGuard Connector and the Protector to the other products that are out there.

Since I'm on the topic, I also wanted to mention that we have been preemptively wrapping or protecting a lot of our nerve repair sites with the AxoGuard Nerve Protector, which is basically -- it is just a big wrap made of the intestinal submucosa. So what that has done -- in a lot of cases, we will take an Avance Nerve Graft, we will bridge a gap, and then we will take the Protector and wrap it around so that the scar does not infiltrate into the nerve and does not compress it too much.

I hope that answers your question.

If I could just have one follow-up on that. Have you done that before with any other products, or is this an extension that the product itself has provided you an opportunity to do something you otherwise were not doing?

I presently had done it a few times, but it had not become a regular part of my practice as much. And it was mainly because managing or handling the collagen nerve wrap, it is just a little more difficult to quite fit. It does not lay on the nerve as easily, and I find myself using it a lot more with the AxoGuard material than with the existing stuff.

Dr. Buncke, do you have anything to add?

Also, just historically when you -- there are many patients -- we happen to see a lot of patients that have these secondary nerve reconstruction, meaning that they have bad pain and we dissect out the nerve, and then unfortunately if you don't re-wrap or do something to that nerve, wrap something around it, then the scar reforms.

And so prior to any conduits or anything like that, we take a staff in a vein and split it down the middle and actually wrap it around like a barber pole to keep it sort of a slimy surface on the nerve side. And now with -- then we started using the newer -- the older nerve conduit than AxoGuard actually is the best one because it is thinner. It conforms much more nicely to the nerve, it is much easier to handle, and they come in relatively long lengths.

So if I'm doing a 10 centimeter, 12 centimeter nerve, neurolysis we call it, and we are moving scar around the nerve, we can use this AxoGuard, and it actually helps considerably keeping. And we have actually gone back on patients where we have had to redo part of that, and a year later find that there is this nice slimy surface between the AxoGen product and the nerve so that the nerve can glide more smoothly.

Great. Thank you very much. And let me just ask one more time quickly, the proportion of lesions you see in your practice, does that require a graft? Is it more the exception than the rule?

Sorry, I forgot that part of the question. So in our practice, we tend to see nerve gaps that are more than 10 millimeters or 15 millimeters more frequently than we see the very short nerve gaps. It could be a selection bias based on the patient population that we see because they tend to be slightly more dramatic type fingers or hands.

But generally speaking, once you get a severe crush injury to a nerve, if you actually trim that nerve back significantly hopefully out of the zone of injury, in my experience you are left with a minimum of a 1 centimeter gap. I think the conduits, which are less than a centimeter in my experience, the numbers that are usually in my experience less than the ones between 1 to 2 centimeters and 1 to 3 centimeters.

I think most of the time when we are reconstructing a nerve gap, we are using the Avance. Because we can now know that we can resect more nerve, and prior to using Avance, we were very reluctant to resect a lot of nerve because we knew that if we had greater than a centimeter or so nerve gap, then that conduit would not really work all that well.

Now we can resect more, get it back into healthier nerve and put the Avance in. So I would say it is probably 80% of what we do?

Yes, I would say in my experience, in my practice, the proportion of Avance to AxoGuard Connector is probably 8 to 10 to 1 with a heavy -- much heavier use of the Avance product compared to the Connector.

Great. Okay. Thank you. And finally, one more question before Dr. Buncke or Dr. Safa may want to answer that as well, but Dr. Buncke, as a Director of the clinic, I suspect you must look at it, of course, from a purely clinical and medical perspective, but also from a business perspective. And the notion of you mentioned earlier in the call that the fact that now with the Avance you do not have to harvest the sore nerve and it says fine, it cuts costs down and so on, but it must also reduce revenues to the clinic. Can you may be briefly speak about the economic impact of this technology on your clinic?

Sure. So the clinic is a group of doctors. We work at a hospital. The hospital purchases the Nerve Graft and the conduit. We really -- it has nothing to do with us personally. So there is no impact on our finances whatsoever.

We are paid for professional fees. The hospital is paid by the insurance company or the expenses, the labor expenses of all the other things basically.

So there is no impact on impact (multiple speakers) -- sorry, no impact on you surgeons, but perhaps a positive impact on the hospital?

Correct.

So I would like to expand on that. I think that is an excellent question because there are two components here. One is the M.D. and so for herself and more as a hospital. For the physician, there definitely is an opportunity cost of your time. So if it is going to take 45 minutes to harvest a nerve graft and close up, and that is usually time where I am under a tourniquet pressure on the hand, that opportunity cost is quite significant.

So the tendency is to really want to be able to use something that is going to make the operative time less.

The other thing that is specific to CPT coding, at least here in the US, is that the reimbursement code, if you will, the CPT code for using the Avance Nerve Graft is the exact same as using the gap from the leg.

So if I can get the same amount of money and do it in 45 minutes or half an hour or less, I'm clearly going to do that. So we have not seen any decrease in our reimbursements because of that because we use the same code, even though we don't have to harvest it from the patient.

On the hospital side, there certainly is a lot of times, Steve, which they always like, and that is the reason why we have not seen any difficulty in hospitals adopting these, even at county hospitals that you would imagine would be much more cost sensitive than a specialty hospital that focuses on these types of injuries.

And I think one thing that the Company did that was pretty smart is that if you look at the shorter Avance graft, the 15 millimeter ones, which are 1 to 2 millimeters in diameter, they are actually priced pretty comparably, not too differently than the existing conduits that Integra and Synovis market. So it is not a huge step up to go from a 3 centimeter or 15 millimeter nerve to Integra to one of the short Avance grafts. If you combine that with the operative time saved, I think that a lot of the hospitals would be willing to use this.

(Operator Instructions). Doug Wilson, private investor.

First of all, congratulations on your revenue growth in the quarter. Very good.

I have questions in two areas. The first in the sales are, can you express an opinion as to the time it takes for a sales rep to essentially be paying their way? And then related to that, of the 16 sales reps we have right now, how many do you think have reached that threshold?

The time that it takes for a sales rep to pay their way is built upon two things. One is their learning curve, and it does take time, because while we hire experienced reps who have a good track record in selling in the operating room, we prefer to hire reps who do not have nerve repair experience because we want to teach them a lot of the anatomy and really the clinical data that is out there about nerve repair. So it is a bit of a learning curve for our reps. That is the first component.

The second component is that in order to sell today in hospitals, you have to get approved through the committees at the hospitals, and so that takes time as well. That time is highly variable, and so sometimes it is a week and sometimes it is months. But it does affect the total amount of sales that a representative can have because there may not be all of their accounts that they can actually purchase the product at.

So having said that, we look at the learning curve and the committee time period for a rep to be in the six- to nine-month time period. That is an average, so there is going to be variability both in rep skill level and that committee process from an individual territory standpoint.

From specifics about the territories, we are not releasing that at this point. So I'm sorry, I cannot give you that information. But I can say that we are pleased to see that the folks that we had in 2011 are getting traction and are now contributing as they have gone through that process.

Okay. Well, thank you very much. That is helpful.

My other question would be in the area of cash. We have the information that is in your release. You have made some comments with respect to G&A and sales and marketing expenses. I'm going to assume that the funds used for inventory is related to sales growth.

But taking that altogether, in rough terms, at a decreasing burn rate, it does appear that the cash would be exhausted somewhere in the range of year end, which has a certainly a possibility of being prior to the Company being cash flow neutral. So any comments that you could make with respect to the possible need for additional capital.

What you will see when the 10-Q comes out is that we believe that we have cash capability that goes beyond this year.

We also, though, are providing in the Q that additional capital needs to be evaluated, and we are evaluating those. And we look at what we need for cash needs, not only just to continue to maintain what we are doing -- and, again, if you look at those numbers, obviously we believe the burn is coming down with what we have to make the statements beyond this year -- but we are also looking at not only the continuation of the US and where we may be with any greater expansion overseas, but also keeping a keen eye on our balance sheet to make sure that we have the strength in the balance sheet as we continue to move forward from a public market perspective.

One of the things that Karen mentioned and we continue to see as very important to the Company and that is moving away from the LTCBD, moving into another market, getting institutional, as well as individual interest in the stock. And as the investors on the call know, if we all do good work but we don't provide a platform of liquidity and a solid company going forward, that does not get us all where we want to go.

So our focus on our capital needs are also focused on making sure we keep a strong company and can pull in the groups and the capabilities in order to move forward on the capital markets side.

(multiple speakers).

Is there one more question?

We did have several follow-up questions in the queue.

We can take one.

Jeffrey Cohen, Ladenburg Thalmann.

Just a couple of follow-up questions. So for the physicians on the phone, generally speaking what percent of the cases that you are doing are you wrapping as far as installing Avance? What percent are you wrapping subsequent to the product being used?

So the indications of wrapping alone are quite different than wrapping a nerve repair site. So wrapping alone is usually done for recurrent nerve compression syndrome such as carpal tunnel or cubicle cubital tunnel or carpal tunnel in diabetics and so on.

I would say of the nerve repairs that I do, I have been wrapping almost all of my mixed motor sensory nerve repairs, so more proximal injuries above the wrist that I fix, I wrap. I have been wrapping regardless of if it is primarily done or if it is with the Avance Nerve Graft. And I would say those are probably about 30% or 40% of the nerve repairs that I do.

And in the things I see, I would say closer to 50% to 60% of the cases that I do, I have to use -- I would like to use the AxoGuard Nerve Graft. (multiple speakers) wrap, I'm sorry.

Okay. And where you are wrapping with using the Avance Nerve Graft, are you using the AxoGuard 100% of the time, or is there other products that you are using for some of the cases?

I have been using the AxoGuard 100% of the time.

So have I.

Okay. Can you talk about AxoGuard or if you are doing a lot of carpal tunnel re-dos? Can you talk a little bit about that? I know it is a little off the topic.

Every re-do cubital tunnel, carpal tunnel, any (inaudible), all the nerves that get entrapped that need to be done a second time, they all get wrapped.

Yes, I would agree with that.

And the thought process behind that is the same thing that led to the nerve being compressed again will invariably happen again if we do the same thing. So you need to cushion that nerve with something, and that is where the Nerve Protector comes in.

Rich, I think we are at the top of the hour. So I think that we will sum up this call.

All right. Well, operator, we do appreciate your help, and again, we thank you all for joining the call. If you have any additional questions, feel free to call Greg or myself, and we will be happy to take your call. Thanks, again.

And with that, ladies and gentlemen, that does conclude today's call. Thank you for your participation, and have a great day.