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AxoGen, Inc. (NASDAQ:AXGN)

Q4 2013 Earnings Conference Call

March 6, 2014 16:30 ET

Executives

Karen Zaderej - President and Chief Executive Officer

Greg Freitag - Chief Financial Officer and General Counsel

Analysts

Jeffrey Cohen - Ladenburg Thalmann

Dave Turkaly - JMP Securities

Nathan Cali - Nobel Financial

Doug Selander - DCS Brokerage

Operator

Good day, ladies and gentlemen and welcome to your AxoGen Incorporated Fourth Quarter 2013 Results Conference Call. At this time, all participants will be in a listen-only mode. (Operator Instructions) And as a reminder, today’s conference is being recorded.

And now, I would like to turn it over to your host, (Doug Sherk) [ph].

Unidentified Company Representative

Thank you, John and good afternoon everyone. Thank you for joining us today for the AxoGen conference call to discuss the financial results for the fourth quarter and full year of 2013 recent corporate developments and management’s perspectives on 2014.

This afternoon, after the market closed AxoGen issued its results release, which is posted on the company’s website at www.axogen.com. In addition, the company’s 10-K for 2013 was filed with the SEC this afternoon. Today’s call is being broadcast live via webcast which is available in the AxoGen website. There will be a taped replay of this call, which will be available approximately 1 hour after the call’s conclusion and will remain available for 7 days. The operator will provide the replay instructions at end of today’s call.

Before we can start, I would like to remind during the course of this 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 regarding product development, product potential, regulatory environment, sales and marketing strategies, capital resources or operating performance.

And with that out of the way, I would like to turn the call over to Karen Zaderej, President and Chief Executive Officer of AxoGen.

Karen Zaderej

Thanks, Doug and good afternoon everyone. Welcome to our fourth quarter and our full year 2013 conference call. Joining me today is Greg Freitag, our CFO and General Counsel.

During the year, AxoGen has been focused on pioneering the development of the peripheral nerve repair market. We made significant progress commercializing our Avance Nerve Graft, AxoGuard Nerve Protector, and AxoGuard Nerve Connector product lines and grew total revenue by 42% for the year and 46% in the fourth quarter. As a result, we are emerging as the leading company dedicated to meeting the needs of the $1.6 billion nerve repair market.

In addition to our revenue growth, AxoGen achieved a number of other milestones during 2013. We completed a successful capital raise and moved to trading on NASDAQ. We attracted new long-term oriented institutional holders. We expanded our presence in and sales from international markets. We increased the number of surgeons using our products. We increased our surgeon advocates and expert surgeon panel participants and furthered our preliminary investigation work on potential expansion opportunities beyond our current addressable market of upper extremities. We were also recognized as the 19th fastest growing company in North America by Deloitte’s Technology Fast 500 and received from Frost & Sullivan their 2014 Product Innovation Leadership Award for the Avance Nerve Graft in peripheral nerve repair.

We were able to achieve these milestones, because during the course of the year, surgeons chose our products for thousands of patients to surgically repair their nerves to reduce pain, restore feeling and/or the use of fingers, hands, arms, legs, feet and face. Many, if not most of these patients would have faced reduced quality of life if these nerves were not surgically repaired. Our portfolio of regenerative nerve repair products provides the surgeon the opportunity to repair the nerve with the convenience of off-the-shelf, easy-to-use products that protect the nerves, allow for tension free repair, and provide optimal nerve size matching.

Our mission is to provide patients the best options in peripheral nerve repair by educating surgeons on best practices, driving procedure volume and developing AxoGen products to become the standard of care. Our entire team is dedicated to achieving this target. We have significant challenges to overcome, but we believe we are on the right track and that will lead to substantial gains for our shareholders over the long-term.

As I mentioned earlier, during the fourth quarter, revenue was 46% higher than last year. Sequentially, revenue was up slightly. While Greg will provide more details on our financial performance, I’d like to focus on our growth strategies and sales approach. The team here has made significant progress in 2013. We have been continually examining and modifying our strategies in order to increase our opportunities for success as 2014 unfolds. As a result, we believe the consensus analyst revenue targets of approximately $16 million that have been established for the full year 2014 are achievable.

During the past year our organization has been doing a lot of pioneering work in the field of nerve repair. There has never been a company exclusively focused on selling to the nerve repair market. And there are always challenges in developing a new market. We have and we will continue to challenge the traditional approaches and thinking in nerve repair. Changing the mindset of surgeons to consider the benefits and convenience of off the shelf products and encouraging those that opt to leave certain injuries unrepaired that AxoGen products offer another alternative.

At the same time we are working to ensure that patients seek treatment and demand to be provided choices and treatment options. In short both surgeons and patients should demand more from the repair of peripheral nerve injuries. AxoGen is providing the products, the awareness and education to drive this evolution. Of course, shifting the fundamental beliefs of the market has its challenges. During the past year, we’ve had to modify and retest our strategies. We have made a lot of progress responding our go-to-market strategy and capitalizing on the unique benefits that the AxoGen product portfolio brings for the surgeon and their patients. As a pioneer in this market, our strategy is a combination of four major elements: awareness, clinical data, education and solid sales execution.

First surgeons and patients need to be aware of the new treatment options and the reason to make a change in the treatment pathway. AxoGen has been driving awareness with surgeons through exhibits at 55 clinical conferences, six surgeon discussion panels and 15 podium presentations during the last year. In addition, we want to help patients tell their stories to raise awareness of the impact of peripheral nerve injuries for both surgeons and the patient population. In 2013, we were honored to work with Edward Bonfiglio to tell his story after he was shot in Afghanistan. Edward was able to avoid an amputation of his leg and today he is able to walk and run following the surgical repair of his nerve using the Avance nerve graft. Edward’s story garnered a lot of media attention and reached millions of U.S. households including coverage in the Wall Street Journal, ABC and Fox. His December 31 appearance on Fox and Friends about being selected to represent tissue nerve recipients on the Donate Life Float in the Rose Bowl Parade generated dozens of patient leads, confirmation that patients are actively seeking the opportunity to return to a normal life following an injury.

Patient stories validate the real impact of our technologies. In 2014 we plan to expand the number of patient stories to add to our patient and surgeon reach. Providing surgeons clinical data to make good surgical choices is a critical component of our market development strategy. We have initiated and sponsored the largest multi-center clinical study in peripheral nerve repair called the RANGER study. At the end of 2013, this study included 349 nerve injuries. In addition we have initiated two additional arms of the study reporting on the usage and outcomes of autograft and hallow tubes. These study arms will provide data in addition to the current historical controls. RANGER continues to enroll that has already resulted in two publications and 23 presentations of the data. We are also pleased that individual investigators are starting to study and review the AxoGen products and that this has resulted in four additional publications in the last year. As of the end of 2013, we were – there were a total of 13 peer reviewed publications on the AxoGen products.

The third component of our go-to-market strategy is to create multiple peer led education opportunities for surgeons. In 2013 there were 63 education events in different formats offered through out the year. We have discovered that there is a real need and interest among surgeons to learn about best practices and new products in peripheral nerve repair. To meet this strong need and interest we have now created a national symposium format where we can provide a forum for a leading faculty to present the science and data of best practices as well as case enhance on learning labs to a group of practicing surgeons. In addition to this symposia, we will continue to work with fellowship programs to provide hands on educational events for the next generation of surgeons. In 2013, we provided educational support to 26 fellowship programs.

The fourth component of our pioneering marketing strategy is a solid sales execution. We focused on breadth, depth and quality. By that I mean our sales team of 22 direct associates and our independent distributors are focusing on high and medium potential accounts to establish repeat orders incorporating all three of our product lines into their practices. It takes over a year for a sales executive to become productive within his or her territory and we are constantly working to lower that investment period. Our team is often asking the surgeon to change their standard of surgical practice. Therefore the combination of customer relationships with the persistent value added approach to the surgeon and their team is the foundation for sales success.

When you bring into market a disruptive technology, no matter how superior the solution is successfully based on changing how your target market literally operates. We believe we are gaining traction in the market and have several proof points to illustrate our success. During the last half of 2013 the number of accounts that increased use from one of our product lines to cure more increased 23%. We know that an account that orders all three of our products tends to be a consistent purchaser and generates five to seven times more annualized revenues than account that orders only one of our products. In 2013 we also increased the number of new accounts by 39%. We know that an account that establishes a regular reorder pattern had six times the average revenue as compared to accounts that orders sporadically.

Now, we need to improve the repetitiveness of these new businesses and establish a solid reorder pattern in these new target accounts. The rollout of our sales force focused on breadth, depth and quality was completed in late January at our annual sales meeting and we believe that as the second half of the year progresses this focus will translate into stronger year-over-year revenue growth. I mentioned earlier the importance of multiple peer led education opportunities for a target customer. During 2013 we initiated the professional education program to provide peer-to-peer educational opportunities on the latest science and best practices in surgical nerve repair.

Our first course was conducted in cooperation with the Indiana Hand to Shoulder Clinic and was chaired by Dr. Jeffrey Greenberg and focused on upper extremity repair. Our second course was focused on nerve repair and oral and maxillofacial surgery. This event was held in Chicago at the University of Illinois at Chicago School of Dentistry and was chaired by Dr. Michael Miloro. For each of these events that were conducted in early fourth quarter we worked with the top faculty to create a two day seminar that included the review of the science of nerve repair and the AxoGen products, case presentations and bench top (indiscernible) surgical technique grafts.

We provided a solid learning event for up to 30 surgeons at a time. Aside from teaching best practices in nerve repair, these courses do a good job of showcasing the benefits of AxoGen’s full portfolio of products and supports our breadth, depth and quality sales initiatives. Following these events we observed a 50% increase in utilization of our products across the attendees. The largest increases were actually seen in our Avance Nerve Graft product line with 106% increase in utilization. We learned from these courses and based on their feedback we have improved the course and plan to expand to three courses in 2014 including one that was held just last week in San Francisco. This course had 29 surgeon participants and let me share with you some of the feedback from the exit survey. 52% of the participants expected to increase their AxoGuard connector usage. 87% expected to increase their Avance Nerve Graft usage. And 69% expected to increase their AxoGuard protector usage. While this is obviously very early data, I think it illustrates the importance and power of a well developed educational program to change a traditional paradigm in surgery.

In addition to these AxoGen created events, we have plans to participate at the American Academy of Orthopedic Surgery in New Orleans next week as well as six other major clinical conferences for the remainder of 2014. We expect at many of these conferences clinicians will continue to present additional clinical data illustrating the patient benefits generated from our products. In fact, if the January combined annual meetings of the American Association for Hand Surgery, American Society for Peripheral Nerve and American Society for Regenerative Microsurgery or excuse me Reconstructive Microsurgery results from the CHANGE study were presented by Dr. Jim Higgins of The Curtis National Hand Center in Baltimore. Dr. Higgins reported the results from the CHANGE study. A randomized prospective pilot study at four centers comparing Avance Nerve Graft and hollow tubes. This 18 nerve entry study evaluated digital nerve injuries at one year post repair and demonstrated significant differences between the test groups with Avance showing a higher level of static 2-point discrimination recovery.

This is the primary measure surgeons use to evaluate the outcomes as sensory function. In addition there was a significant difference on the consistency of return to recovery for the Avance repair was 83% versus 50% with hollow tubes. It is data like this study that we will continue to use to assist surgeons as they make choices for the repair of their patients with nerve injuries.

Now I’d like to turn the call over to Greg for a review of our financial highlights.

Greg Freitag

Great. Thanks, Karen. Good afternoon everyone. Given that we have filed our news release and 10-K this afternoon, I’ll focus my comments on financial highlights during our fourth quarter and full year, as well as provide some color on how we’re looking at 2014. Our total sales increased at 46% during the fourth quarter as compared to a year ago result primarily from a 40% increase in domestic sales. Approximately 2% of our fourth quarter sales were derived from grant revenue which is funding some of the development work Karen will review in a few moments.

One point about our revenue growth that I’d like to highlight is that for both the quarter and the full year as a percentage increase of total sales was greater than the percentage increase and total expenses as we began to gain some leverage off of our G&A infrastructure. Our gross margin in the fourth quarter was 80% higher than our target of 75% due to product sales mix, increased efficiencies and manufacturing, and grant revenue which contributed about 2.3% of gross margin.

Turning to the company’s operating expenses during the fourth quarter, we continue to make significant strategic investments in the sales organization and marketing programs. In addition we expanded investments in development activity that we believe could generate significant returns to shareholders over the long-term. As a result of this investing total operating expenses during the fourth quarter increased by 36.5% as lower outside services and materials and supplies expenses were offset by higher sales payroll and commission.

Our R&D spend during the fourth quarter was up 67.8% due largely to expansion of preliminary investigative programs. Similarly, sales and marketing expenses increased about 56% as compared to the fourth quarter of 2012 due to the expanded sales force and increased use of outside services to support sales growth. Our administrative expenses for the fourth quarter were essentially flat at $1.48 million versus $1.45 million during the fourth quarter a year ago as we gained efficiencies through the increase in revenue.

Finally other expenses in the fourth quarter which represent interest expense and interest expense deferred financing costs were down about $0.5 million to $1.34 million due to a write-down of unamortized cost associated with previous debt in the fourth quarter of 2012 which should not reoccur in 2013, offset by an increase in interest expense associated with our PDL agreement.

We used $2.5 million in cash during the fourth quarter and ended the year with $20 million in cash. For the year we grew 42.3% to almost $11 million and our gross margin increased to 77.7% as compared to 74.5% for 2012. Again this increase in gross margin was largely due to product sales mix, marketing efficiencies and a small contribution by grant revenue. Total expenses increased at 33.7% with sales and marketing up 49%, R&D up 48.9% and G&A up 9.4%.

Total interest expense was approximately $4.82 million in 2013 as compared to approximately $1.39 million for the year ended December 31, 2012. This increase was primarily due to accruals related to a PDL royalty contract transaction for the full year 2013. As a result of the accounting treatment for the PDL transaction interest expense for 2013 included $3.8 million of non-cash that is expected to be paid in the future based upon terms of the PDL transaction and increases in action revenues. The $3.8 million of non-cash expense was derived from taking the total amount of imputed interest for 2013 on the PDL agreement plus the actual cash payment made to PDL for the year. Other than this $3.8 million non-cash expense, the remaining $1 million in interest expense for 2013 is related to cash paid to PDL. In the fourth quarter of 2014, we have a minimum repayment obligation to the PDL totaling $1.25 million and our current plan is that we will use some of our existing cash resources, which stood at $20 million as of December 31, 2013 to meet this obligation.

As Karen mentioned, we believe that analyst consensus revenue number for 2014 of approximately $16 million is an achievable goal based on what we know today, but that the revenue ramp will increase as the year progresses. Achieving $16 million in total sales would mean a year-over-year increase of approximately 60% versus the 42% year-over-year growth reported for 2013. Additionally, it is important to note that we expect our gross margins to now be approximately 75%.

From a strategic capital generation perspective, we believe it is important to recall that the Board of Directors chose in 2012 to fund the company’s operating capital needs by entering into the royalty contract transaction with PDL, which also owned 6.7% of AxoGen’s outstanding common shares. As a result, our 19.6 million fully diluted shares is a relatively low number at our stage of development. Our strategy is to meet our obligations to PDL through a combination of resources generated through increased revenue growth and the use of financing strategies that minimize solution to our shareholders while providing the company with a working capital to maximize our opportunities in the $1.6 billion U.S. nerve repair market. At the same time, we like to note that based on our current business outlook, we have the resources on hand to execute our operating plan for at least the next 12 months.

I’d be delighted to answer any specific questions regarding our financials during the Q&A discussion, but we will now turn it back to Karen.

Karen Zaderej

Thanks, Greg. While we remain focused in the execution of the extremity nerve repair market, I’d like to briefly update you on the initiatives we have underway that investigates the potential for extending our technology to other parts of the body. We have already begun to commercialize once such initiative through our use of products by surgeons during oral and maxillofacial surgery. We continue our clinical investigation work on the potential for nerve repair and prostate cancer procedures with a small technique development study at Vanderbilt. Each one of these 12 patients has undergone a prostate cancer procedure calling for a wide resection around the prostate resulting in a loss of a (indiscernible) nerve bundle. These subjects were robotically repaired using the Avance Nerve Graft to restore the nerves. Enrollment in this study is completed and a 2-year follow-up is underway. Data analysis of this preliminary study should be completed by the first quarter of 2015.

In addition to this study, we are looking at the potential of expanding our products into other surgical areas, including surgical intervention for pain generated from nerve entrapment and then the reconstructed breast market allowing the patients following mastectomy the opportunity for sensory recovery. We are also pursuing low cost strategies to expand our product pipeline, including grants supporting AxoGen products with Brigham and Women’s, Vanderbilt and Wake Forest. We will keep you informed as we learned more about these new opportunities.

Before we open the call up for questions, let me summarize where we are. 2013 was the year of great progress for AxoGen. And we have positioned ourselves for continued strong growth in 2014. We are a pioneering company with a truly disruptive technology and we are seeking to change surgical practices. Our product lines bring an enormous amount of benefit to patients as well as to surgeons. Our team is driven to capitalize on the opportunities that we have in front of us and in doing so are confident that we will continue to build value for our shareholders.

So with that, operator, we are ready for questions.

Question-and-Answer Session

Operator

Okay. (Operator Instructions) So we will take our first question from Jeffrey Cohen from Ladenburg Thalmann. So Jeffrey, please go ahead.

Jeffrey Cohen - Ladenburg Thalmann

Hi, thanks for taking my questions. Good afternoon.

Karen Zaderej

Hello, Jeff. How are you?

Jeffrey Cohen - Ladenburg Thalmann

Good. So is the ‘16 number guidance or goals?

Greg Freitag

It is guidance and it’s at this point is what we are providing based on the consensus that’s out there.

Jeffrey Cohen - Ladenburg Thalmann

Okay, that’s helpful. Could you talk about spending levels going forward for 2014 versus 2013, I know that spend across the board was up 33% compared to 42% for growth on the top-line. Would you expect similar metrics I mean the number 16 gets you up 45%, 48%. So should we expect to see 32% to 35% on the spending levels for SG&A, R&D and G&A?

Greg Freitag

Yes. So I am not going to be that specific. What we are looking at is during the first part of the year we are going to probably be up slightly in our cash spend, and then leveling off as the year is completed.

Jeffrey Cohen - Ladenburg Thalmann

Okay. So what was the number of sales folks all told for the end of the year at your current levels?

Karen Zaderej

We ended the year with 24 direct associates and 21 independent distributors.

Jeffrey Cohen - Ladenburg Thalmann

24 direct total and 21 distributors and that was as of the first of the year?

Karen Zaderej

Right.

Jeffrey Cohen - Ladenburg Thalmann

Has that changed in the past six weeks?

Karen Zaderej

Actually it has. We’ve been going through some strategic replacements in a few territories and so we’re actually at 22 today, 22 direct and the same number of independents, we’ve moved a few of the independents as well as the same number.

Jeffrey Cohen - Ladenburg Thalmann

Okay. So and would you expect the sales force to increase as the year goes on for a total in 14, are you expecting to be approximately the same size as 13?

Karen Zaderej

I do expect to continue to add some sales associates not obviously at the same percentage growth. We started 2013 with 16 reps ended at 24. We’ll probably add again a few a quarter. So it’s obviously not at the percentage growth that we’ve had, but we’ll end up with 8 to 10 additional folks through the year.

Jeffrey Cohen - Ladenburg Thalmann

So we may end up 32 to 34 total?

Karen Zaderej

Right.

Jeffrey Cohen - Ladenburg Thalmann

Okay. And can you talk about the or could you talk about the composition of revenue in particular for Avance, I know that historically over the past year or so it sounds like you spent about a third to a 40% on average. Is that still the case?

Greg Freitag

Yes. So we – in overall revenue about 60% to Avance, 40% to the AxoGuard products, we don’t break out the AxoGuard products but quite frankly there can be a 10% change in that depending on the period you’re looking at. So there is some fluctuation as much as that 10% in there, but that’s still pretty consistent to what we continue to see.

Jeffrey Cohen - Ladenburg Thalmann

Okay. So Avance was approximately 60% of total revenue for 2013?

Greg Freitag

Yes.

Jeffrey Cohen - Ladenburg Thalmann

And could you talk about percent of international revenue, I didn’t get a chance to look through the whole K for 2013. What percent was international as far as sales goes?

Karen Zaderej

International is a very small percentage. We haven’t broken it out because it’s not material. What our goal is in international both and the work that we did last year to start and the work we’re going to do through 2014 is to really get a good footprint to build what I think are some of the key things to develop that market, so that in 2015 and beyond we’ve got a good platform for growth. So while we’re selling there our primary goal is building the key opinion leader base and surgeon advocates in those markets. And so the selling is really to be able to provide them products that then we have advocates to clinical conferences going forward. So again it’s a small amount.

Jeffrey Cohen - Ladenburg Thalmann

Okay. And just two more, sorry about that. Could you talk about the two arms that you added on to RANGER? How many are in those arms now? And could you talk about what’s being measured as far as autograft and hollow tubes?

Karen Zaderej

Sure. It is still small. So it’s – we’re in actually the very beginning initiation phases of that study. So at this point we have 35 repairs, so we have 349 Avance, but only 35 total of the autograft and hollow tubes. I think that will grow fairly quickly because again it’s a retrospective review. So when we get a center initiated we can go in and randomize their previous repairs and pull those results fairly quickly. The outcomes are just like in the RANGER. This is a retrospective review so we measure the outcomes of – from the standard of care looking at the nerve and classifying them under the MRCC scale of meaningful recovery. And that’s a standardized scale determining meaningful recovery. What that really adds for us is traditionally or historically we have looked at historical controls to look at autograft and conduit outcomes as compared to Avance. This in addition to that will give us some contemporary controls in the study to be able to directly compare.

Jeffrey Cohen - Ladenburg Thalmann

Okay, got it, and lastly any commentary how Q1 is looking thus far?

Greg Freitag

[Inaudible] at this point.

Jeffrey Cohen - Ladenburg Thalmann

Okay, thanks for the questions.

Greg Freitag

Thank you, Jeff.

Operator

Okay. Thank you, sir. And our next question is coming from Dave Turkaly from JMP Securities. Dave, please go ahead.

Dave Turkaly - JMP Securities

Thanks. I was wondering would you be willing to help us a little bit between your mix from direct sales or distributors?

Karen Zaderej

Sure. Hi, Dave.

Dave Turkaly - JMP Securities

Hi.

Karen Zaderej

We– as I said before most of our growth comes from our direct reps, although I have been fortunately surprised over the last year with a few of our longer term independent distributors showing some nice growth in their territories. Having said that, if we look today we are still about two-thirds of our sales at this snapshot, are coming from direct reps and most of the growth is coming from the direct reps.

Dave Turkaly - JMP Securities

And then I know you have talked in the past about taking down something like 12 months to get up to speed or so. How many of the 22 that are on right now are at that point?

Karen Zaderej

Good question. And I am looking quickly at my notes, average tenure today is about 19 months and the majority of our reps are past that 12 months period.

Dave Turkaly - JMP Securities

And then as we look at, you did give us a lot of detail on this call, lot of data which is helpful, you mentioned new accounts I think were up something like 40% in the year, can you just ballpark how many that is versus how many you think are out there, I am just trying to get a feel for where we stand from a penetration standpoint I imagine it’s pretty early still, but if you could help us with that I would appreciate it?

Karen Zaderej

Yes, for competitive reasons I don’t really want to put out the numbers of accounts and at this point it’s something that’s a great idea. If I look at the universe of accounts they are actually if you look at the universe of surgery centers and hospitals there is a little over 5000, but we don’t target that and that’s what I meant when I talked to about breadth, depth and quality is that what we are really targeting are the level one and level two trauma centers. And the larger centers in terms of discharges and emergency room visits that create the highest volume of trauma. And so we are going to be targeting in the end less than a thousand of those 5,000 hospitals or surgery centers. But in terms of actual penetration into them, I think at this point that are not put out there.

Dave Turkaly - JMP Securities

Okay, thanks a lot.

Operator

Thank you, sir. And we will take our next question from Nathan Cali from Nobel Financial. Nathan, please go ahead.

Nathan Cali - Nobel Financial

Hey guys. Thanks for taking the questions.

Karen Zaderej

Hi Nathan.

Nathan Cali - Nobel Financial

Just a couple of follow-ups most of the questions have been answered, but two more questions as far as the BLA study, any updates there and then prostate nerve repair, how do you guys see that market and based upon the study you are currently doing when can you guys start selling into that market? Can you do that before or you need the data to go in and sort of be able to penetrate that market and how do you expect to see that evolve?

Karen Zaderej

Great. And so the two questions were the BLA clinical study and then the prostate surgery markets, so let me start with BLA study. I had anticipated that we will be starting that study now the FDA has approved. The FDA did come back to us and asked us to do some additional characterization work. If you remember we are doing this a little bit out of order and that we are doing the IND in the same time actually after we did our FDA and clinical trial approval. We are wrapping up that work, but at this point I would expect us to be starting that BLA study in third or fourth quarter of this year. So it will not be in the early part of the year. The study design has been changing and all of the parameters that we have talked about before are still the same and that is to randomized prospective clinical study comparing against hollow tubes and digital nerve injury. So all that’s the same. In the prostate cancer market in that work from a regulatory claim standpoint we’re still repairing peripheral nerve discontinuity so there is not a regulatory claim that we would need to do the clinical study work on prior to selling into that market in effect, Vanderbilt is using it with this clinical study and there are two other centers that have started to adopt it, but having said that, I do believe from talking with the surgeons that we are going to need to get some clinical data for them to feel like they are making the best choices for their patients. So we will need to have data from at least this preliminary study and perhaps an expanded study in order to get good adoption into that market. Those are the things that we’re really considering as we weigh that relative to some of the other opportunities that we have as to where we prioritize our initial marketing efforts.

Nathan Cali - Nobel Financial

Okay. When did you guys start that study the one that you’re doing now with the two year follow-up?

Karen Zaderej

Gosh, Nathan you’re testing my memory.

Nathan Cali - Nobel Financial

That’s okay. How many patients are in that?

Karen Zaderej

It’s small.

Nathan Cali - Nobel Financial

Okay.

Karen Zaderej

It’s only 12 patients.

Nathan Cali - Nobel Financial

Okay.

Karen Zaderej

We’re already a year plus into the follow-up period. But from an enrollment standpoint we started the enrollment – I just don’t remember when we started it. It took a while to enroll this study partly because we got busy working on RANGER and didn’t give it a lot of priority ourselves. But again the last patient and was about a year in a quarter ago or so.

Nathan Cali - Nobel Financial

Okay. So you would be essentially using the same product that you used across the board right now?

Karen Zaderej

Yes.

Nathan Cali - Nobel Financial

See this in surgeries?

Karen Zaderej

Yes absolutely. One of the big things for us and this wasn’t so much testing the product. It was testing that you could place the product using the da Vinci robot and so that was an important part of this for us is to be able to make sure that you could do this robotically as most of these procedures have moved robotically. And I’m happy to say that we feel very comfortable that we’ve got a good placement procedure and technique.

Nathan Cali - Nobel Financial

Okay, great. Thanks a lot for taking the questions.

Greg Freitag

Thanks, Nathan.

Operator

Okay. Thank you. (Operator Instructions) And I am showing our next question from Doug Selander from DCS Brokerage. Doug, please go ahead.

Doug Selander - DCS Brokerage

Good afternoon.

Greg Freitag

Hi Doug.

Doug Selander - DCS Brokerage

Karen and Greg. Question being is this, actually when did Shawn McCarrey come on as Head of sales?

Karen Zaderej

Just about a year ago. It’s in February of this past year.

Doug Selander - DCS Brokerage

Okay. And at that juncture how many sales people did he have there?

Karen Zaderej

So I don’t remember exactly the date that he started. But in January we had 16 and so we’ve upped the number now as I said we’re at 22 today. But in addition one of the other changes that Shawn made was in – working and expanding our sales management. So at the time Shawn came we had two Regional Sales Directors, we’ve increased that so that we have one Regional Sales Director in-charge of the independents. And now four directors managing regions across the – that directs across the country. And the reason that’s important is we realized with a young sales team and with the developing market that we needed to give more direct attention to make sure that their time as spend in accounts and again going back to the breadth, depth and quality but following the sales direction. And so we did hire those folks that Shawn came in and have gotten them up to speed at some point as well.

Doug Selander - DCS Brokerage

But (indiscernible) when he came on, what I’m hearing is for a sales person to be seasoned, they made at least 12 months under their belt, right?

Karen Zaderej

Yes.

Doug Selander - DCS Brokerage

Okay. So as he move forward if I heard it correctly there was about 16 sales people that and that 12 months under their belt?

Karen Zaderej

Well we’ve had some turnover in that group. So some of the group that was there in January are no longer with us.

Doug Selander - DCS Brokerage

Okay.

Karen Zaderej

Again through some strategic decisions to decide to make some changes, but I would say that roughly half of our sales team has that.

Doug Selander - DCS Brokerage

Okay. So my question being kind of looking at a dynamic company in a huge space with somebody having sales and see sequential growth from the end of June 30, 2013 being at $2.8 million, September 30, 2013 being at $2.9 million, then all of a sudden for the next year just reported $3 million. I mean, what kind of growth is that? I mean, I would just (completely) to see sequential growth that, that’s ecstatic, nothing is happening, anything it’s more a repeat orders than getting new things?

Karen Zaderej

So as we talked about Doug, we are really in the pioneering space of trying to build both the number of accounts, but even importantly as you said repeat business, because at the end of the day, the solid foundation that we are striving for is both a breadth across the number of the target accounts that we are looking for and we have made good progress in getting into new accounts. And now we need to convert those accounts to get the sequential growth that you are striving for and we are striving for is to get those accounts ordering on a regular repeat basis that establishes a strong platform of predictable sales. So what we have done in each of the quarters is looking at where we are going to set ourselves up for growth. The first step of that is getting into the right accounts. The second step is to getting them fully converted and giving the penetration within the accounts that we are in.

Doug Selander - DCS Brokerage

So with that said, we have looked at SG&A on a monthly basis escalate to, correct me if I am wrong, but 1.2 to 1.3 a month?

Karen Zaderej

Right. As we are adding headcount, of course the sales go up, the commissions go up and the headcount goes up, so all of those things contribute to increase SG&A.

Doug Selander - DCS Brokerage

Well, which is great, but the offset of that would be greater sales and we are not seeing that.

Karen Zaderej

Right. And our investment in the sales team is to do that so that we can drive that greater sales.

Doug Selander - DCS Brokerage

Well, hopefully we see this soon, because I think there needs to be a lot of accountability, I mean at the sequential growth for the next quarter is $3 million, $3.1 million, $3.2 million, we are not going to make it’s going to be hard to obtain guidance as we move forward?

Karen Zaderej

Well, we certainly are driving as building growth. And I would say I think we are going to see accelerating growth through the end of the year, so that we see that in this pioneering work that we are doing that you are going to have some investments that you are making now to help drive those types of revenue growth for the full year.

Doug Selander - DCS Brokerage

Well, I guess time will tell, but I do think there needs to be some accountability in this regard, so what assessments – excuse me, at the end of this quarter?

Greg Freitag

I am sorry, Doug, repeat that last part?

Doug Selander - DCS Brokerage

Well, no, what I am saying is moving for accountability and what I am saying we are in the first quarter of the 2014. Hopefully, we can see much greater sequential growth when this is reported sometime ago on April and now?

Greg Freitag

Yes. So part of this also and I realized that we are looking at sequentially as compared to looking at the year-over-year and quarter-after-quarter growth. But you also had similar patterns that you see in your comparison to 2012 and 2013, okay. So one of the things that you are really looking at is breaking what has been a pattern of growth historically into driving the third and fourth quarters of the years beyond the second quarter growth that you have historically seen. And that’s really what this year and when you look at what we are saying with regards to accomplishing $16 million and then some is to look at breaking that flatter sequential pattern that you have seen at the end of the years.

Karen Zaderej

So again, I think Q1 will be obviously if we are looking at growth will be the low quarter of the year, but we do see and expect based on patterns that we have had that will continue to seek growth and we have traditionally seen a nice bump in the second quarter.

Greg Freitag

This year is breaking the pattern that we have had in 2012 and 2013, which is we have continued to show very good growth year-year and quarter-quarter, but where the extra growth is going to come that we anticipate this year is going to come from finally breaking that sequentially flat cycle that we have seen in third and fourth quarters.

Operator

Okay, thank you. So that does conclude our Q&A session for today. I would like to turn it back to management for any concluding remarks.

Karen Zaderej

Thank you everybody for joining us for this call.

Operator

Okay. Ladies and gentlemen, that does conclude your conference. You may now disconnect and have a great day.

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