Aziyo Biologics, Inc.

Good day and thank you for standing by. Welcome to the SEO Biologics third quarter 2021 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to speaker today, Lee Salvo, Investor Relations. Please go ahead.

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 third quarter and it's September 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 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, November 9, 2021. ASEO 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. 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 third fiscal quarter ended September 30, 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 Lloyd.

Thank you, Lee. Good afternoon, everyone, and thank you for joining us. Since our last call, we've continued to execute on our business strategies and achieved $11.5 million in revenue for Q3. Year-to-date, we have generated over $36 million in total revenues, a 21% increase over the corresponding period in 2020. More importantly, we're preparing for a seminal year in 2022. As we look to next year, we see several catalysts for growth. With Kangaroo, we'll be scaling our commercial organization, generating clinical data, and advancing Kangaroo RM, our next generation product with antibiotics. We remain on track to file Kangaroo RM in Q1 and continue to plan for approval in the second half of next year. We believe Kangaroo RM has potential to exceed $100 million in revenues and be the core driver of value creation for Zio over the next few years. Second, with Simpliderm, we're expecting new clinical data, greater market access, and continued growth. For both Kangaroo and Simpliderm, we're building off strong momentum that's been created over the second half of this year. And third, within our orthopedic and spine business, we anticipate bringing on board additional partners and launching new viable bone matrices as we return to growth mode. In addition, to further support the safety of these products, we'll have in place new screening and testing procedures, which we believe will set a new standard in the industry. Finally, we're participating in a patient support program for those impacted by our single donor lot recall of fiber cells. While it's very early in the litigation, we feel confident we have our arms around the legal challenges of this recall and believe they'll be manageable within the company's resources. Now going a bit deeper in each of the main areas of our business, I'll start with Kangaroo. Kangaroo is the only commercially available biological envelope that forms a natural, healthy pocket for holding implantable electronic devices. We're making exciting progress on the commercial and medical fronts to showcase the remodeling benefits of this product. Despite the headwinds of COVID that negatively impacted CRM device placements in August and September, sales of Kangaroo improved during the quarter. There were several factors that drove this growth, including growing awareness within the electrophysiology medical community for Kangaroo's remodeling benefits. the impact of peer-to-peer programs, which have been very influential in developing new users, opening of new accounts by leveraging our recently signed contracts with healthcare delivery systems and our breakthrough designation within Premier, as well as continued contributions from our partnerships with Boston Scientific and Biotronic. More specifically, during the quarter, we saw increased productivity from our U.S. direct sales force, as our newer reps gained tenure throughout the year and access to our customers reemerged, and we're very encouraged by this increased momentum, both in higher utilization within existing accounts as well as the opening of new accounts. And we see significant opportunity for additional expansion. Also encouraging was the traction we saw with our partners in Q3, with Boston and Biotronic placements of Kangaroo reaching their highest levels for the year, In parallel, we've been successful in mining opportunity through our premier breakthrough technology designation, as well as with other healthcare system partners. These relationships have been key to driving kangaroo sales, and we expect to achieve further leverage through these relationships going forward. We're also confident in our opportunity to add additional healthcare systems in the future. Outside the U.S., we saw increased sales of our Kangaroo Envelope in Europe due to the launch of our new expanded label. As a reminder, Ezeo received approval in January that now permits Kangaroo Envelope to be hydrated and agenomized in solution prior to implantation. This new label was launched in Q3 through our partnership with Biotronic, leveraging clinical data that was presented at the European Society of Cardiology annual meeting this summer. As an update on the clinical front, both the HEAL study and the de novo study are progressing as expected. We look forward to this clinical data for Kangaroo, and we're confident the results will further validate the unique clinical benefits derived from our biological envelope. On the product development front, as mentioned earlier, Kangaroo RM remains on track for FDA submission in the first quarter of 2022. and we're planning for clearance and launch in the second half of the year. The new envelope will be enhanced by adding the antibiotics for FAMPEN and minocycline. Our team continues to execute against these key milestones for this biological product. And again, we're confident in its potential to create substantial long-term growth for EZL. In the soft tissue reconstruction area, we continue to make progress in our SimpliDerm business. Our goal with this product is to generate clinical data, expand access through payers and hospital systems, and drive product sales through our national distributor network. We're completing a clinical study comparing Simpliderm to a market-leading product and plan to submit the results this quarter for publication early next year. We'll leverage this data and our prior publications to expand market access. Finally, we're pleased with the progress our distributor network is making in opening new accounts and further penetrating existing accounts, which is driving sequential quarterly sales growth. Turning to our products for the orthopedic and spine repair market, starting with an update on the recall of a single donor lot of our FibroCell product. While this was an unfortunate event, we conducted a thorough review of our procedures for screening donors and producing FibroCells. and found no deviations from established industry and regulatory protocols. The FDA also completed an inspection of our Richmond, California facility in June and issued no Form 483 observations, meaning that they also found no deviations from accepted protocols and standards. Nonetheless, we remain committed to supporting patients that were impacted by this event They've agreed to fund a patient support program in which we'll participate as a limited sponsor with Medtronic. Under this program, qualifying patients may receive reimbursement for out-of-pocket medical and incidental expenses related directly to seeking testing or treatment related to the recall. This program is designed to support patients and ensure that they are not delaying any necessary treatment. We remain committed to providing high-quality, safe, and effective products. As such, we've developed and implemented measures to further enhance the safety of future production lots for our viable bone matrix products. These measures include implementing heightened donor screening procedures and developing additional methodologies to test tissue products. We believe these safeguards exceed applicable FDA and industry standards for donor screening and testing. Despite these actions, we were obviously disappointed to receive notice from Medtronic of the company's decision to discontinue distribution of any cellular bone matrix products, which includes an existing agreement for Xeo's FibroCell product. As mentioned in previous communications, our agreement with Medtronic for our fiber-based, viable bone matrix product was non-exclusive, and we continue to sell this fiber-based product through our other partners. We remain confident that the quality performance of our products will enable us to expand business through our existing partners, as well as secure additional distribution partners for our products that we have on the market today, as well as pipeline products we plan on launching in 2022. Turning to our non-core contract manufacturing business, we saw upside in the quarter, largely due to fulfilling the supply requests from a new customer building inventory in advance of their product launch. Going forward into Q4, we anticipate that this segment of our business will return to levels more in line with the first half of this year. Finally, I'll mention that we recently welcomed Peter Edwards to the company as our general counsel. His extensive legal and business experience in the healthcare space has already proven valuable in numerous aspects of our business. His addition makes a strong team stronger. And together, we believe we're poised for great accomplishments in the years ahead. With that update, I'd like to turn the call over to Matt. Thank you, Ron. As mentioned, net sales for the three months ended September 30th, 2021, were $11.5 million, a 3% decrease from $11.8 million in the same period of the prior year, and a 5.6% decrease from $12.2 million in the second quarter of 2021. Net sales of core products were $8.6 million in the third quarter of 2021, compared to $10.3 million for the third quarter of 2020. And net sales of non-core products were $2.9 million in the third quarter of 2021, compared to $1.4 million in the third quarter of 2020. The decrease in core products was driven primarily by a decline in our orthopedic and spinal repair business, following the discontinuation of sales of FiberCell by its distributor. The sales across product lines were also impacted by lower procedure volumes in certain geographies due to the resurgence of COVID-19 hospitalizations. These decreases were partially offset by growth in our Kangaroo and Simpliderm product lines. And as Ron mentioned, the significant increase in non-core products was driven primarily by one contract manufacturing customer building inventory for a new product launch. Gross margin for the third quarter of 2021 was 32.1%, as compared to 47.1% in the corresponding prior year period and 46.2% in the second quarter of 2021. We also looked at gross margin excluding the impact of non-cash amortization of intangible assets, And on that basis, Q3 would have been 39.5% versus 54.3% in the year-ago quarter and 53.1% in Q2 2021. The decrease in gross margin was primarily due to lower yields in our orthopedic and spinal repair product lines related to heightened donor screening criteria ahead of the implementation of enhanced product testing, as well as write-downs of inventory in certain categories. Together, these factors impacted margins by approximately 12 percentage points, and we do not expect these costs to continue at similar levels going forward. Total operating expenses for the third quarter of 2021 were $10.7 million, a 30 percent increase from $8.2 million in the third quarter of 2020, and a 4 percent increase from $10.2 million in the second quarter of 2021. The main drivers of the increase compared to the year-ago period were R&D spending related to Kangaroo RM development and G&A increases related to operating as a public company. Loss from operations was $7.0 million for the third quarter of 2021 as compared to a $2.7 million loss for the year-ago period. Net loss for the quarter was $8.3 million as compared to a net loss of $6.7 million in the third quarter of 2020 and $2.4 million in the second quarter of 2021. Net loss per common share in the third quarter of 2021 was 81 cents compared to a loss of $15.79 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 September 30th, we had a cash balance of $22.6 million, with an additional $4.5 million available for borrowing under our working capital line of credit, resulting in total liquidity of $27.1 million. Turning now to our outlook for the business, we project full-year 2021 net sales in the range of $47 to $48 million, which represents growth over 2020 of 10 to 12.5%. Providing a bit more color on the final quarter of the year, within our core products, we've been seeing solid growth in Kangaroo and Simpliderm, and we expect that to continue. However, this growth is being offset by softness in our bone repair business, primarily due to our fiber cell distributor exiting the market. We expect the net result of this to be core product sales in the fourth quarter in a similar range to the Q3 results. And as we look ahead to 2022, we're confident we'll see core product sales grow on a sequential basis and for the full year. As we advance Kangaroo RM, sign up additional orthopedics and spine partners, and make further gains with Simpliderm. In our non-core business, as Ron mentioned, we expect Q4 sales to settle back close to the levels achieved in Q1 and Q2 of this year. But there again, we also see multiple opportunities for growth in 2022. And with that, let me now turn the call back to Ron for closing comments. Thanks, Matt. There's no question we face challenges in 2021, but I'm proud of how the team has managed through these events. Again, as we looked at 2022, we see multiple opportunities to increase value in the company. In Kangaroo, we'll be scaling our commercial organization, generating clinical data, and plan to be launching Kangaroo RM. With Simpliderm, we're expecting new clinical data greater market access, and continued growth. And within our orthopedic and spine business, we anticipate bringing new partners on board and launching new viable bone matrices as we return to growth mode. In closing, I want to thank the Azio team for their continued drive towards the success of our company. We have a very dynamic future ahead with the number of catalysts on the horizon that I am confident will enable the company to realize its full potential in shareholder value. And with that, we'd now like to open up the call for your questions.