Aziyo Biologics, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to ASIO Biologics Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during this session, you will need to press star then 1 on your telephone. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker for today. Lee Saville, 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 second quarter end of June 30, 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 revenues, 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, as updated by our quarterly report on Form 10-Q for the quarterly period ended June 30, 2021. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 9, 2021. Azalea Biologics disclaims any intention or obligation, except as required by law, to 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-GAAP financial measure. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure is available in the company's earnings release for the second fiscal quarter ended June 30, 2021, which is accessible on the SEC 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 Lloyd.

Thanks, Lee. Good afternoon, everyone, and thank you for joining us. ASEO delivered strong results again in the second quarter of 2021. Net sales increased substantially compared to the year-ago quarter, as well as pre-COVID levels. We continue to hit our internal milestones in the development of our next-generation Kangaroo envelope, and our two main clinical trials for Kangaroo continue to roll according to our plans. We've also made meaningful progress in our orthobiologics, soft tissue reconstruction, and contract manufacturing businesses. I'll share more details on all these areas in a few minutes. But first, I'd like to provide an update on the actions underway with regard to the recent recall of a single donor lot of our fiber cell product. As many of you know from our recent communications, we were notified in late May that several patients who had surgery that included our fiber cell product, experienced post-surgical infections, including some patients that tested positive for tuberculosis. Our team immediately took action to investigate the matter. This led to our voluntary recall of a suspected single donor lot of this product. We worked with our distributor to account for all hospitals that received this lot. All unused products in this lot has now been secured and quarantined. Under the direction of the CDC, samples of the returned units have been analyzed at the U.S. government lab and have tested positive for microbacterium tuberculosis. Based on currently known information, we have no reason to believe that other donor lots of Fibrocell are affected. We remain committed to providing products that enable physicians to deliver the best possible care for their patients. While this is an extremely unfortunate event, we have thoroughly reviewed our procedures for screening donors and producing fiber cell, and we've not identified any deviations from our established protocols, which are based on industry standards and government requirements. Following the recall, the FDA also completed an inspection of our manufacturing facility and quality control records and made no Form 483 observations. Importantly, our culture at ASEO is built on the principle of continuous improvement in the safety, efficacy, and quality of our products, and the well-being of our patients is our highest priority. We've already made adjustments in our donor screening criteria, and our goal is to broaden detection of disease beyond existing industry standards and regulatory standards. We believe this experience can be a catalyst for further advancing the state-of-the-art for all products, in this category. Regarding the current suspension of sales of Fibrocell by our distribution partner, they have not indicated any decisions as yet on the resumption of their sales of Fibrocell. Now, turning briefly to our second quarter financial highlights. Total revenue was $12.2 million, a 42% increase over the second quarter of 2020, and a 26% increase over the second quarter of 2019. Core product revenue was $10 million, representing a 35% increase year-over-year and a 53% increase over the second quarter of 2019. Excluding sales at Fibersell, we saw our total revenue grow 4% over the first quarter of 2021, and our core products revenue grew 6% sequentially. As a reminder, our core product platforms address three primary markets, implantable electronic devices such as pacemakers or defibrillators, bone repair and orthopedics 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. Core product growth in the quarter was primarily attributable to an increased awareness and further validation of the remodeling benefits of our regenerative medicine products. We believe that our products are truly unique and we're pleased to see the continued traction of our products reaching new patients. Turning now to some of the recent highlights in our business and how we see this trending in the current quarter and through the remainder of the year. Starting with Kangaroo. Kangaroo. our unique biological envelope for stabilizing implantable electronic devices. Throughout the second quarter of 2021, we made further commercial and product development advancements, as well as the progress on two clinical trials underway. We continue to add accounts to the Premier breakthrough designation that we received last December. The partnership with Premier, again, a network of more than 4,000 hospitals is enabling us to sniffly expand our market opportunity in the United States. Additionally, we were delighted to execute a partnership agreement in Q2 with another integrated delivery network, Providence Health System. This partnership with Providence should allow us to further expand our market share, and we look forward to working with them in the coming quarters. We've also made progress expanding our field sales organization and ended the quarter with 31 sales professionals in this part of the business. We are pleased to see the traction our existing sales reps have made in further penetrating the market and driving growth and awareness. For the second half of 2021, we are focused on continuing to increase the productivity of our reps and leveraging the partnerships of Boston Scientific and Biotronic to further expand sales. We expect to hire additional reps starting in 2022 as we approach the planned launch of our next generation Kangaroo envelope. On that note, we're also excited to see the continued advancement of this new product. Most recently, we achieved the next milestone on our path to FDA submission with the recent completion of manufacturing validation. we remain on track to reach FDA submission in Q1 of 2022. As reminded, the next generation Kangaroo envelope will be enhanced by adding the antibiotics rifampin and minocycline to the envelope. Following FDA submission, we expect to receive FDA clearance and launch the product in the second half of 2022. This biological product with antibiotics has the potential to create substantial long-term growth for Zio. As an update on the clinical front, both the HEAL study and the de novo study are progressing nicely with continued enrollment. We look forward to this clinical data for kangaroo, and we're confident the results will further allow us to demonstrate the unique clinical benefits derived from a biological envelope. Now turning to our orthopedic and spine repair business. As a reminder, our product platform in this market consists of Fibrocell, BiBone, and OsteGrow-V. Despite the fiber cell recall and subsequent suspension of purchases by our U.S. distributor, we were very pleased to see the continued momentum among our other viable bone matrix partners. This product platform continues to be an important component of our business with differentiated products and a highly efficient commercial model. The last two areas of our portfolio I'd like to comment on are soft tissue reconstruction, business, and our contract manufacturing. In soft tissue area, we continue to make progress in our SimpliDerm business. Working primarily with our independent distributors, we're able to bring on several new accounts during the second quarter of 2021. We also recently signed up three new regional distributors and look forward to these new partners further increasing our penetration of this market in the second half of the year and beyond. The second quarter also saw the publication of the first peer-reviewed journal article related to Simpliderm. We see this publication in the June issue of Plastic and Reconstructive Surgery as an essential first step in building the body of evidence to support Simpliderm's more widespread adoption. I think it's important to reiterate the value of the diversity that exists in our core products portfolio, and we firmly believe this portfolio provides a stable foundation to build from. We're especially appreciative of this diversity when we encounter temporary hurdles with one product, as was seen in the case of FibraCell in the second quarter. Lastly, we continue to see steady contribution from our contract manufacturing business. Sales were $2.2 million in the second quarter of this year, significantly higher than levels we saw for most of last year. As discussed on prior calls, we believe we have good visibility in this part of our business and expect it to grow in the second half of 2021. As we look forward, I am as confident as ever in the opportunity that we have in each of our product portfolios to deliver differentiated regenerative medicine products that improve outcomes in implantable device-related surgeries. We're making meaningful progress with our commercial organization and sales channel partnerships that penetrate and expand high-growth markets while advancing a robust pipeline and generating clinical data. And with that, I'll turn the call over to Matt to go through our financial results in greater detail.