Aziyo Biologics, Inc.

Welcome to SEO Biologics' fourth quarter and full year 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 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 Lee Salvo with 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 quarter and full year ended December 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 partnership 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 factors section of our public filings with the SEC, including ASEO's quarterly report on Form 10-Q for the quarterly period ended September 30, 2021, as such factors may be updated from time to time in ASEO's other filings with the SEC, including ASEO's annual report on Form 10-K for the fiscal year ended December 31, 2021, to be filed with the SEC, accessible on the SEC's website at www.sec.gov. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 3, 2022. ASEO Biologics displays any intention or obligation, except it's 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 on the company's earnings release for the fourth quarter and full year ended December 31, 2021, which is accessible on the SEC's website and posted on the investor page of ASEO's website, at www.azio.com. And with that, I'll turn the call over to Rod.

Thanks, Lee. Good afternoon, and thank you all for joining us. I'm incredibly proud of the progress we've made in setting up 2022 as a breakout year for Zio. By the end of this month, we anticipate submission of a 510K application for Kangaroo RM, our next generation envelope, and continue to plan for this product launch in the second half of the year. Targeting an estimated $600 million annual addressable market, we believe Kangaroo RM has the potential to reach more than $100 million in annual revenues and be a core driver of our value creation over the next several years. In parallel, we've continued to advance Simpliderm, our soft tissue reconstruction product, as well as our orthopedic and spine repair platform through a combination of product development, clinical data, expanded market access, and new distribution partnerships. These products not only contribute to our top-line revenue today, but are additional drivers of future growth. And in December, we completed a pipe financing that yielded net proceeds of approximately $13.8 million, which enabled us to further scale our commercial activities, generate data through our ongoing clinical studies, and support the remaining development costs associated with the filing for Kangaroo RM. As we reflect on 2021, undoubtedly our team navigated through unprecedented challenges, both from the enduring disruptions associated with the pandemic, as well as the fiber cell related recall. Despite these extraordinary headwinds, the goals and timelines that we've been working towards since our decision to become a publicly traded company in 2020, have remained largely on track. I am confident we have the right levers in place to ensure Zio's success and deliver long-term value to our customers and shareholders. With that as a backdrop, I'll now provide highlights and updates for each of our product portfolios, starting with our flagship product, Kangaroo. The momentum we started to see in the second half of the year carried through most of the fourth quarter. As a reminder, our kangaroo and cardiovascular products are sold primarily through a direct sales force of approximately 30 representatives. This organization leverages our partnerships with Boston Scientific and Biotronic to enhance our presence throughout the United States. The investments we've made in our commercial organization have translated to significant growth already, But more importantly, we believe the experience and relationships of this group will be a critical asset in driving a successful launch of Kangaroo RM. As we've discussed on previous calls, we also benefit from multiple agreements with major GPOs and healthcare delivery systems, especially Kangaroo's designation by Premier as a breakthrough technology. During the fourth quarter, we continued onboard individual Premier member hospitals as new customers, which was an important driver of our growth in the kangaroo business. Utilization within existing accounts also increased in the fourth quarter, demonstrating that physicians are seeing the benefits of the only biological envelope available on the market. We expect this momentum will continue to expand in 2022. To further validate kangaroos' unique biological remodeling benefits, we continue to enroll patients in our HEAL and de novo clinical studies. As a reminder, the HEAL study compares patients with the kangaroo envelope against patients with either a synthetic envelope or no envelope at time of CID change-out. The kangaroo registry study follows de novo kangaroo or no envelope patients for up to five years. Based on current enrollment trends, we hope to have interim readouts from both studies later this year. And most importantly, we expect FDA submission by the end of the first quarter for Kangaroo RM, our next-generation biological envelope loaded with the antibiotics rifampin and minocycline in a dissolvable polymer ring. We are confident this enhancement will drive further utilization and significantly improve our competitive advantage within hospitals and major healthcare systems in the U.S., We continue to receive feedback from potential customers that this will be a compelling offering once cleared for sale. Notably, in a recent market research study among U.S. electrophysiologists currently using envelopes, more than 80% indicated they would consider using a biological envelope that also contained antibiotics. We look forward to launching Kangaroo RM in the U.S. market given its potential to contribute $100 million or more to our top line in the coming years. We also see upside opportunities to extend the Kangaroo franchise through launches outside the U.S. and by developing additional applications for other implantable electronic devices. Turning to our other core products, in the soft tissue reconstruction area, we continue to make progress in our SimpliDerm business. Our plan for this product is to generate clinical data, expand access through payers and hospital systems, and drive product sales through our national distributor network. Despite the market headwinds in the fourth quarter, we are pleased to see another quarter of significant growth. Further supporting growth in this part of our business is a recent peer-reviewed publication reporting on a multi-site retrospective study of simploderm use in reconstructive surgery compared to the current market-leading product. The paper reports on procedural statistics and outcomes in more than 100 patients. The study concluded that Simpliderm is clinically equivalent to the market-leading Acellular Dermis product. We believe this publication will help increase acceptance of our product, both among practitioners and payers, in what is currently an approximately $500 million total market. And in our products for orthopedic and spine repair, which include Vibone, OsteoGro V, and our Fiber VBM, we saw steady performance through our distribution partners through most of the quarter. Excluding the impact of fiber cell sales, the long-term trend for our orthopedic and spine repair business is headed in the right direction, with growth in the high single digits for the full year of 2021. We are working diligently to complete development of multiple new products as well as to sign new distribution partners for our products within the orthopedic and spine repair business. As the process to onboard new partners takes time, we'll likely see the benefit pay off later this year, setting up a very strong 2023. Turning to our contract manufacturing business, we continue to see meaningful revenue contribution during the fourth quarter as our partners leverage the tissue processing and development capabilities of our Richmond, California facility. Overall, this part of our business augments our growth while utilizing the available capacity at our manufacturing facility and contributes positively to our bottom line. In summary, as we look towards 2022, we have several important and exciting catalysts ahead. First and foremost, In our Kangaroo business, we have our 510K filing and anticipated clearance of Kangaroo RM. We're also expecting data readouts from our clinical trials to support the product lines, remodeling benefits, and commercial differentiation. For Simpliderm, we'll leverage recently published clinical data to expand our customer base and support continued robust growth. In our orthopedic and spine business, new product launches, and new partnerships are expected to drive steady growth from the current levels and continued contribution to our bottom line. And finally, as we've discussed in previous calls, we're pursuing multiple efficiency initiatives across our entire business to increase our margins and improve our productivity. With that, I'll now turn the call over to Matt to provide a review of our fourth quarter results and outlook for 2022. Thanks, Ron. Net sales for the three months ended December 31st, 2021, were $10.9 million, a 13% decrease from $12.5 million in the same period of the prior year. However, excluding the sales of FiberCell, we saw 6% growth over the fourth quarter of 2020. In late December, as was broadly experienced across much of the healthcare sector, the Omicron variant spike had a meaningful impact on our business. which has continued into the current quarter, as COVID-related hospitalizations and labor shortages in the hospital setting impacted patients' ability to move forward with procedures. And while we're starting to see improvement as patients return to hospitals for postponed procedures, we do expect this will have some impact on our sales in the first quarter. Gross margin for the fourth quarter of 2021 was 31.2%, as compared to 48.3% in the corresponding prior year period. We also look at gross margin excluding the impact of non-cash amortization of intangible assets. And on that basis, Q4 would have been 39.0% versus 55.1% in the year-ago quarter. The lower gross margin in Q4 2021 was mainly attributable to increased inventory reserves in our human tissue business, which in total impacted gross margin by approximately 10 percentage points, or $1.1 million. Despite gross margins coming in below our target levels over the last two quarters, as Ron mentioned, we have a number of efficiency initiatives that are underway, and we expect them to generate meaningful results in 2022. I expect gross margin, excluding intangible asset amortization, to return to 50% or better in the coming quarters. Total operating expenses for the fourth quarter of 2021 were $11.2 million. a 12 percent increase from $10.0 million in the fourth quarter of 2020. The increase was mainly due to development costs associated with our Kangaroo RRM development program. Loss from operations was $7.8 million for the fourth quarter of 2021, as compared to a $4.0 million loss for the year-ago quarter. Net loss for the period was $9.1 million, as compared to a net loss of $5.4 million in Q4 2020. Loss per share in the fourth quarter of 2021 was 82 cents compared to a loss per share of 57 cents in the year-ago quarter. We ended 2021 with a cash balance of $30.4 million and total liquidity, including availability under our revolving line of credit, of $32.5 million. Our year-end cash balance includes the $13.8 million in net proceeds from our December equity financing, And including the shares issued in that transaction, we now have approximately 13.6 million shares of common stock outstanding. Now, turning to our full-year results, net sales for the full year 2021 were $47.4 million, an 11% increase compared to the full year 2020 net sales of $42.7 million. Excluding the impact of FiberCell, we saw 19% revenue growth, over the full year 2020. Gross margin for the full year 2021 was 40.1% as compared to 48.2% in 2020. Excluding the impact of non-cash amortization of intangible assets, gross margin would have been 47.3% in 2021 as compared to 56.1% in 2020. Total operating expenses were $42.1 million for the full year compared to $34.2 million in 2020. Net loss for the full year was $24.8 million, which compares to $21.8 million in 2020. Loss per share for the full year, including the accretion of deemed dividends to preferred stockholders, was $2.38 compared to $8.88 in 2020. Turning to our outlook for the full year 2022, We project net sales in the range of $47 to $50 million. Excluding approximately $4.9 million of fiber cell sales in 2021, this range represents growth of 11% to 18%. The biggest variable in this range has to do with the timing of clearance and launch of Kangaroo RM. The low end of the range assumes no contribution from Kangaroo RM by the end of the year. And the high end assumes clearance and commercial availability during the fourth quarter. This guidance also assumes some continuing impact of COVID during the first half of the year, with procedure volumes largely returning to more normal levels in the second half. We remain excited about the milestones we expect to achieve in 2022, and we believe we are well positioned to drive growth and shareholder value for years to come. And with that, we'd like to open the call for your questions.