Aziyo Biologics, Inc.

Welcome to the ISEO Biolics Q1 2020 earnings call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star, then 1 on your touch-tone phone. I'll now turn the call over to Lee Salvo, Investor Relations. Lee, you may begin.

Thank you, and thank you all for participating in today's call. Joining me are Ron Lloyd, Chief Executive Officer, and Matt Ferguson, Chief Financial Officer. Earlier today, ASEO released financial results for the first quarter ended March 31st, 2021. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that do not relate to matters of historical fact or relate to expectations or predictions of future events, results, or performance are forward looking statements. All forward looking statements, including without limitation, those relating to our operating trends and future financial performance, the impact of COVID-19 on our business and prospects for recovery, expense management, expectations for hiring, growth in our organization, market opportunity, guidance for revenue, gross margin and operating expenses, commercial expansion, and product pipeline development, expected future product launches and milestones, and expected results and performance of our partnerships and commercial products, including patient outcomes, are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factor section of our public filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2020. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 4, 2021. Azeo Biologics disclaims any intention or obligation, except as required by law, update or revise any financial projections or forward-looking statements whether because of new information future events or otherwise also during this presentation we refer to gross margin excluding intangible asset amortization which is a non-gap financial measure a reconciliation of this non-gap financial measure to the most directly comparable gap financial measure is available on the company's earnings release for the first fiscal quarter ended march 31st 2021 which is accessible on the SEC's website and posted on the investor relations page of ASEO's website at www.aseo.com. And with that, I will turn the call over to Ron.

Thanks, Lee. Good afternoon, everyone, and thank you for joining us. We were very pleased to see the momentum in our business that emerged in the second half of 2020 continue into our first quarter performance. We saw meaningful traction across our product portfolios and strong execution towards our mission of providing advanced regenerative medicine products that can improve the outcome in patients undergoing implantable device-related surgery. We believe we are on track to meet or exceed our key goals for the year, and we're establishing a solid foundation for the sustained long-term growth of our company. As a quick reminder, our core product platforms address three primary markets. implantable electronic devices such as pacemakers or defibrillators, bone repair and orthopedic and spine procedures, and soft tissue reconstruction. Additionally, we fulfill tissue processing contracts through our Richmond, California manufacturing facility as a highly leverageable component of our business. In my prepared remarks today, I'll cover recent highlights and accomplishments in each of these primary markets. as well as updates on the progress of our goals we set for 2021. Matt will go into more detail on our financials and guidance, and then we'll open the call for your questions. Turning briefly to our recent financial highlights, the ASEO team once again delivered strong results, including total revenue of $12.9 million, a 31% increase over the first quarter of 2020. And despite the seasonality we typically see in the first quarter following higher year-end purchasing patterns, as well as ongoing COVID-related impacts in key territories, our total revenue grew 3% sequentially over the fourth quarter of 2020. Core product revenue contributed the vast majority of this at $10.7 million, representing a 29% increase year over year. and a 4% sequential increase over the fourth quarter of 2020. Growth in core product revenue also increased substantially in comparison to pre-COVID levels, growing 49% from Q1 2019 to Q1 2021. We attribute these strong results to a number of factors, including the performance of our direct sales organization, the strength of our partnerships, in the market share we've been able to capture as a result of the quality of our product portfolio. Turning now to some recent highlights in our business and how we see the trending of this in the current quarter and through the remainder of this year. Starting with our products to address the market for implantable electronic devices, we've made significant progress advancing our Kangaroo envelope over the past several months. Kangaroo is the only commercially available biological envelope that forms a natural, systemically vascularized pocket for holding implantable electronic devices. We're excited about our commercial progress, product advancements, and clinical trials currently underway. On the commercial front, we continue to build our presence in the US through a combination of direct sales reps and our commercial partnerships with Boston Scientific and Biotronic. At the end of March, we had 29 direct sales reps and we're encouraged by the recent progress made in onboarding our new reps. Our plan is to selectively continue to add sales headcount throughout 2021, with hiring targets more heavily weighted towards the second half of the year as we approach additional development milestones with our pipeline program of adding antibiotics to Kangaroo. The breakthrough designation for Kangaroo that we received last December with Premier significantly expanded our market opportunity in the U.S., and further validated the value and safety this product offers patients. In the first quarter of this year, we benefited from contract expansion within Premier, with a number of these new accounts now ordering product. We're encouraged by this valuable continuing contribution from this relationship. Outside of the U.S., following CMARC approval in January to update the label instructions for Kangaroo to include hydration with the antibiotic gentamicin, We're working with our partner, Biotronic, to further expand sales in Europe. We'll begin shipping product with our new hydration label to customers this month. On the product development front, we remain on track to bring to market our next generation kangaroo envelope next year, which will be enhanced by adding the antibiotics rifampin and minocycline to our biological envelope. We're continuing to advance down the path of manufacturing validation, followed by data collection and in vivo and in vitro studies. Our goal remains to reach FDA submission in Q1 2022, with product launch in the second half of 2022. This next-generation product has the potential to be a leader in its category, and we view this as a key driver of long-term growth beginning in the second half of next year. Finally, on the clinical front, we continue to enroll patients into our HEAL studies, which is designed to investigate the biologic and clinical effects at time of CIED change-out in patients with kangaroo versus those with Medtronic's Tyrex envelope or no envelope at all. We also recently announced the initiation of a study to evaluate the clinical profiles, procedural details, and post-implant outcomes in patients receiving kangaroo or no envelope during your initial or de novo CIED placement. We believe the benefits of Kangaroo may be even more pronounced in patients receiving their first CID implant. And for this reason, this study focuses on the de novo implant patients. We look forward to the insights from both these valuable studies, including patient profiles, clinical decision making by physicians, and of course, patient outcomes. Now turning to our next product group and market, Orthopedic and Spine Repair Market, Our product platform in this market consists of Fibrocell, ViBone, and OsteGrow-V. Overall, we're seeing the benefits of market share expansion within both new and existing accounts for this product portfolio, which we believe further validates the importance of both the scientific properties as well as the differentiated capabilities that we've built into this ViBone product platform. More specifically, during the first quarter, we continue to work with our partner Medtronic to expand fiber cell sales, and we're very pleased by the growing market acceptance of this product. In particular, positive feedback from end users supports our confidence in the scientific capabilities that we've developed and deliver to market truly differentiated products. We're also generating additional characterization data to further support the unique features of this product in the marketplace. In January, our partner Surgilite Holdings launched ViBone Multiple, which is complementary to our existing ViBone product. ViBone Multiple is a next generation viable cell bone matrix processed using a proprietary method optimized to protect and preserve the health of native cells to potentially enhance new bone formation. This product contains cancellous bone particles as well as demineralized cortical bone fibers, delivering the necessary components for bone formation along with excellent handling and cohesive properties. And finally, we continue to add orthopedic and spine partners to support the sales of OsteGrow V and our viable bone product portfolio. And lastly, we're seeing expanded product awareness and clinical evidence as well as growing market access in our third product portfolio addressing soft tissue reconstruction. Our primary product in this market, Simpliderm, is increasingly receiving positive feedback from our physician customers. As we announced from our last call, effective March 1st, Simpliderm was added to Health Trust Purchasing Group platform. This designation now provides access for our direct sales reps and distributors the health trust member facilities representing more than 1,600 hospitals and health systems in the U.S. In addition, we continue to collect clinical data on Simpliderm compared to other human dermis products and look forward to the results in publications later this year. In summary, we've consistently demonstrated our ability to generate robust sales growth for our core products. and we continue to make substantial progress advancing our pipeline of new products that we anticipate will drive growth well into the future. Turning to our contract manufacturing business, we're pleased to see further contribution in the first quarter from several contracts that commenced in the fourth quarter, resulting in 36% year-over-year revenue growth. Looking ahead, we believe that offering tissue processing for a range of third-party healthcare companies can continue to positively impact our business. It is also quite efficient as it leverages the available capacity in our manufacturing facility and also contributes positively to our bottom line. The additional revenue is also a good source of capital to further drive growth in our core product platforms. As we enter the second quarter, we see opportunities for sustained growth across all product lines. We're encouraged by the growing number of vaccinations and the many positive signs of truly turning the corner on the pandemic that's gripped the world for most of the past year. For Zio, this means better access to hospital customers and, of course, an increase in patients that can benefit from our products. We're pleased with the momentum we're seeing in the first part of Q2 and are looking forward to continuing our growth as we move through the year. Based on this favorable outlook, we're increasing our guidance for 2021 revenue to a range of $52 to $54 million. In addition to growing revenues, we're proud of the many milestones we've reached in our core product portfolio, and we're confident we're on track to achieve many more in the coming quarters. Our key priorities are unchanged, and as such, we remain focused in 2021 on the following. First, expanding our direct sales force and growing revenues of our core products. Second, developing our next generation Kangaroo envelope with integrated antibiotics. And third, generating clinical data that further differentiates the uniqueness of our core products. We'll also continue to evaluate opportunities to add synergistic products through partnerships or acquisitions to augment the long-term growth opportunity we see in our existing businesses today. To close, I'm truly encouraged by the progress we've made in spite of the many challenges to the healthcare delivery system. I've been inspired every day by the resilience and ongoing motivation of our team to advance our vision and improve the standard of care for patients treated under a wide range of implantable device procedures. We have a number of very exciting growth catalysts on our horizon, and I look forward to sharing the achievement of key milestones along the way. With that, I'll turn the call over to Matt to provide a review of our first quarter results and guidance for 2021. Thank you, Ron. As mentioned, net sales for the three months ended March 31st, 2021 were $12.9 million, a 31% increase from the $9.9 million in the same period of the prior year. This included a 29 percent increase in sales of core products and 36 percent growth in our non-core products. While our top priority is the continued growth in our core products, we were pleased to see our contract manufacturing business once again contribute more than $2 million to our top line as a result of several recently signed contracts that are driving performance in this area. Gross margin for the first quarter of 2021 was 49 percent. as compared to 53% in the corresponding prior year period and 48% in the fourth quarter of 2020. We also look at gross margin excluding the impact of non-cash amortization of intangible assets. And on that basis, Q1 would have been 56% versus 61% in the year-ago quarter and 55% in Q4 2020. The lower year-over-year gross margin in Q1 2021 was primarily due to the impact of one-time non-recurring events in the first quarter of 2020, whereas the improvement in gross margin from Q4 of 2020 resulted from continued improvements in operational efficiency. We're pleased with the sequential improvements in gross margin we've seen in each of the last three quarters and expect continued improvement as we move through the year. Total operating expenses for the first quarter of 2021 were $10 million, a 19% increase from $8.4 million in the first quarter of 2020. The increase primarily resulted from costs related to operating as a public company and development costs associated with our program to add antibiotics to our kangaroo envelope. Loss from operations was $3.7 million for the first quarter of 2021 as compared to a $3.2 million loss for the year-ago quarter. Net loss for the quarter was $5.1 million, as compared to a net loss of $4.6 million in the first quarter of 2020. Loss per share in the first quarter of 2021 was 50 cents, compared to a loss of $7.03 per share in the year-ago quarter. which was prior to the conversion of the company's preferred stock into common stock in association with the company's Q4 2020 initial public offering. As of March 31st, 2021, we had a cash balance of $30.5 million with an additional $4.5 million available for borrowing under our working capital line of credit. Turning to our outlook for the full year 2021, As Ron mentioned, we're encouraged by the traction we've continued to make, and while COVID continues to pose some risk of uncertainty to our operating results, we anticipate the macro environment will continue to improve and expect to continue to execute at or above our original plan for the year. We now expect the total net sales to range between $52 and $54 million, representing growth of approximately 22 percent to 27 percent over total net sales for the full year 2020. This compares to our previous full year 2021 guidance of $50 to $52 million provided on March 1st, 2021. To the extent we achieve net sales ahead of our original plan for the year, we expect to reinvest those gains back into the business through a variety of commercial and R&D initiatives, which will be designed to bolster long-term growth. In summary, Our business and finances are in solid shape, and we look forward to continuing to share our progress with you at future investor events and quarterly calls. And with that, Ron and I would like to open the call for your questions.