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spk04: Thank you for standing by and welcome to the ZeoBioLogic Q1 2022 earnings conference call. At this time, all participants are on a listening mode. After the speaker's presentations, there'll be a question and answer session. To ask a question at that time, please press star then one on your touchtone telephone. As a reminder, today's call is being recorded. I will now turn the conference over to your host, Ms. Leigh Szabo, Investor Relations. And you may begin.
spk05: 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 ended March 31st, 2022. 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 impacts 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 listed description of the risk and uncertainties associated with our business, please refer to the risk factor section of our public filings with the SEC, including ASEO's annual report on Form 10-K for the year ended December 31st, 2021, as such factors may be updated from time to time in ASEO's other filings with the SEC, including ASEO's quarterly report on Form 10-Q for the quarterly period ended March 31st, 2022, 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, May 9, 2022. 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 first fiscal quarter ended March 31, 2022, which is accessible on the SEC's website and posted on the investor page of ASEO's website at www.aseo.com. And with that, I'll turn the call over to Ron.
spk03: Thanks, Leigh. Good afternoon, and thank you all for joining us. I am pleased to announce that ASEO is off to a great start in 2022. So far this year, we're meeting our key product development milestones, delivering solid commercial results, and making significant progress in improving our operational efficiency. As expected, we submitted our 510K application for Kangaroo RM, our next-generation biomaterial envelope which was subsequently accepted for review by the FDA. As a result, we continue to plan for commercial launch in the second half of this year. We're obviously very excited about this milestone and confident that with FDA clearance, Kangaroo RM can drive significant future growth for Zio as the only biomaterial envelope with antibiotics approved for implantable electronic devices in the United States. an estimated $600 million annual market. In Q1, sales of our flagship Kangaroo product saw robust year-over-year growth in excess of 25%. Our direct sales force, with support from our partners Boston Scientific and Biotronic, was successful in driving further product adoption. In our soft tissue reconstruction product, Simpliderm, We also saw meaningful contribution to our top-line results, with year-over-year growth also exceeding 25%. With continued advancement of clinical data and expanded access with hospital systems, I am confident that SimpliDerm has the potential for further market expansion and sustainable future growth. Overall, while our business did see some negative impacts from the Omicron variant chapter quarter, As we noted on our last call, we were able to navigate those challenges and deliver strong revenue results in the first quarter, with overall growth in our continuing operations of 14% versus the first quarter of last year. We also saw a substantial improvement in our gross margin, which increased by 5 percentage points compared to the last two quarters of 2021. I am looking forward to continued progress in all of these areas. Turning to some of the highlights and updates for each of our product portfolios. First, in our products for implantable electronic devices, as I noted earlier, our 510 application for Kangaroo RM is now under review by the FDA, and we remain committed to tracking to a timeline that will enable launch in the second half of 2022. Come 2023, we anticipate this enhanced product to be the primary growth driver of our business. Looking out even longer term, we believe this product has the potential to exceed $100 million in annual sales, with further upside driven by opportunities to expand this platform to international markets outside of Europe, as well as develop applications for other implantable electronic devices. In Q1 of 2022, we once again saw significant strength from Kangaroo's sales largely due to new account growth and greater penetration into existing contracted hospitals. As a reminder, our Kangaroo and cardiovascular products are sold primarily through a direct sales force that leverages our partnerships with Boston Scientific and Biotronic to enhance our presence throughout the United States. We continue to work closely with our partners and are pleased with the progress that we've made thus far in 2022. Our partners are particularly excited about the FDA filing related to Kangaroo RM and the prospects of having that product on the market later this year. Continued investments in our commercial organization have already demonstrated a positive return and we believe will be a significant lever as we prepare for the launch of Kangaroo RM. As our reps have gained more tenure, we've been encouraged by their increasing productivity and pleased to see growing traction in driving usage of Kangaroo. We continue to leverage our breakthrough designation for Kangaroo at Premier, and the majority of our new accounts fall under this hospital network. Sales traction is also beginning to take hold internationally. Kangaroo sales in Europe remain a small percentage of our total, but we've begun to see uptake through our distribution partners there and believe international opportunities can be a meaningful contributor to our long-term growth. More information about the benefits of our Kangaroo platform is also reaching investors. In mid-April, Calend hosted a key opinion leader call with two leading U.S. electrophysiologists. On this call, the doctors discussed the remodeling benefits of Kangaroo, and how they envision its future use with implantable electronic devices. We were pleased to hear that both doctors support the benefits of creating a natural, systemically vascularized pocket for implantable electronic devices. They also shared their enthusiasm for the potential FDA approval of our next generation Kangaroo envelope preloaded with antibiotics. Investors interested in learning more about this event can visit our website or email us at investorsatazeo.com. In late April, we attended the Heart Rhythm Society meeting and met with EPs throughout the conference. It was great to see that interest in Kangaroo as a biological solution for specific patient types, especially de novo patients, is continuing to grow. We also conducted market research for KangarooRM, We found that EPs were impressed by the product's design and its performance in our preclinical studies. As an update on our clinical trials for Kangaroo, enrollment in both the HEAL and the NOVO studies are progressing well. We continue to enroll patients and anticipate interim readouts from both studies later this year. 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-up. The kangaroo registry study follows de novo kangaroo, and no envelope patients for up to five years. Turning to our other core products, sales of our soft tissue reconstruction product, Simpliderm, continued to expand in the first quarter. As we highlighted in our last call, we recently published clinical data confirming that Simpliderm clinically comparable to the market-leading Acellular Dermis product, is proving to be a key factor in expanding market access with hospitals. We believe Simpliderm is now better positioned than ever to capitalize on the estimated $500 million total market. Moreover, our national distributor network has been a strong asset for us. We're pleased with their ongoing ability to generate revenue and anticipate growing momentum throughout the rest of this year. Turning to our products for orthopedic and spine repair, which include Vibone, OsteGrow V, and our fiber VBM, we saw results in line with recent quarters and we're pleased with the continued traction in this category with our existing partners. One of our goals for 2022 is to identify and onboard new distribution partners. As this process evolves, we believe that we're on track to see benefit of additional partnerships and relationships in the second half of the year. which will coincide nicely with our targeted launch of Kangaroo RM. We also have the ability to create additional products in the orthopedic and spine repair space by leveraging our viable bone matrix platform. We anticipate launching at least one more product this year to complement and further expand our existing portfolio. Lastly, our contract manufacturing business saw significant growth over a year-ago quarter, as well as the fourth quarter of 2021. We are pleased with our partners' contribution in leveraging our tissue processing and development capabilities of our Richmond, California facility. We are seeing strong growth in revenue and margin improvement in this category of our business. In summary, the ASEA team is off to an excellent start in 2022, and we continue to deliver on our major catalysts for growth. These include, first and foremost, in our Kangaroo business, our 510K submission, which has been accepted for review by the FDA for Kangaroo RM. Pending FDA clearance, we expect to commercially roll this product out by the end of the year. We're also expecting data readouts from our clinical trials to support the product line's 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 current levels and continue contribution to our bottom line. And finally, as discussed in previous calls, we're implementing multiple efficiency initiatives across our entire business that have already begun to yield a margin improvement with further gains expected throughout the year. With that, I'll turn the call over to Matt to provide a review of our first quarter results and outlook for the rest of 2022. Thanks, Ron. Net sales for the three months ended March 31, 2022, were $11.5 million, a 10.8% decrease from $12.9 million in the same period of the prior year. However, excluding the sales of fiber cells, we saw 14% growth over the first quarter of 2021. Gross margin for the first quarter of 2022 was 37% as compared to 49% in the corresponding prior year period and 31% in the fourth quarter of 2021. We also look at gross margin excluding the impact of non-cash amortization of intangible assets. And on that basis, Q1 would have been 45% versus 56% in the year-ago quarter and 39 percent in the fourth quarter of 2021. The decline in gross margin compared to the prior year quarter primarily relates to product mix and lower yields in the company's viable bone product line. However, the sequential improvement in gross margin is an indicator of the more recent efficiency improvements in our enrichment production facility. Total operating expenses for the first quarter of 2022 were $11.2 million, a 12 percent increase from $10 million in the first quarter of 2021. The increase was primarily due to higher expenses related to the development of Kangaroo RM. Loss from operations was $6.9 million for the first quarter of 2022, as compared to a $3.7 million loss for the year-ago quarter. Net loss for the period was $8.1 million, as compared to a net loss of $5.1 million in Q1 2021. Loss per share in the first quarter of 2022 was $0.60 compared to a loss per share of $0.50 in the year-ago quarter. We ended Q1 with a cash balance of $22.2 million and total liquidity, including availability under our revolving line of credit, of $23.1 million. Turning now to our outlook for the full year 2022, we continue to project net sales in the range of $47 to $50 million. Excluding approximately $4.9 million of fiber cell sales in 2021, which has been discontinued, this range represents expected 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 by the fourth quarter. We remain excited about the additional milestones we expect to achieve in 2022, as well as our ability to drive long-term growth and shareholder value. And with that, we'd like to open up the call for your questions.
spk04: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touchtone telephone. Again, to ask a question, please press star then 1. Our first question comes from David Rescott of Truist Securities. Your line is open.
spk01: Hey, guys. Can you hear me? We can, yeah. Hey, great. Thanks for taking the questions. I guess first, Kangaroo, you mentioned 25% growth here in the quarter. Would there maybe be some new accounts as well as the existing accounts? But I guess You know, could you provide any color on what maybe is impacting them and perhaps, if at all, you know, the submission here of the 510K has driven any incremental growth thus far?
spk03: Yeah, sure. Thanks for the question, David. The answer to the latter part, I don't believe the submission of the Kangaroo RM is impacting the current growth that we're seeing for Kangaroo. The growth rate that we're seeing really is attributed to the Benefits that physicians are now seeing with kangaroo and the remodeling benefits that the product provides and so I think the Biological aspect of our product and these benefits are starting to really resonate with our customers And as such, you know, I think we're seeing that as being a key driver I think the second factor here is as you know, we've got the breakthrough designation from premier and And we've continued to leverage that breakthrough designation to add more accounts. And as we think about our growth in Q1, actually, the majority of our volume increase came through new accounts. So we're excited to see this uptick in new accounts and then the volume that is being generated from these new accounts, because obviously that's very exciting news as it relates to future growth. And then finally, we are also driving deeper penetration in terms of our CranGuru sales in our existing accounts, and we're all doing that in conjunction with the partnerships that we have with Boston Scientific and Biotronic. So I think that's the main reasons for the growth that we're seeing in Kangaroo, and I think it sets us up very nicely for additional growth this year. And, of course, obviously we're very excited then to have the potential to launch Kangaroo RM in the second half of the year, which will then give us the opportunity also to talk about the benefits of having it preloaded with antibiotics.
spk01: Okay, that's helpful, and it actually leads a little bit into the next question, but I guess could you talk maybe a little bit about, you know, probably a little color on how you're investing ahead of this launch? I mean, you know, as far as the accounts that you're in now, I mean, really where do you see some low-hanging fruit and perhaps, you know, how you're really thinking about leveraging kind of the existing Boston and Biotronic partnerships ahead of this launch? And as a second kind of part of that question, you know, how do we think about this incremental op-back spend as we progress through the rest of the year? Thanks.
spk03: Sure, so yeah, we're obviously very excited about Kangaroo RM. As we think about it, we really have two benefits with this product. We've got the continuation of the biological aspect that comes with Kangaroo, and then the ability to have it then loaded with antibiotics to reduce the risk of infection. So we see it as an opportunity to drive growth for this product in both de novo patients and then patients with change-outs which have a higher rate of infection. So we're currently in the launch planning phases for this product. We have a very comprehensive launch strategy that we've developed. We look forward to working with the FDA to get this product through clearance. And then, as I mentioned before, hopefully rolling this product out in the second half of this year. As it relates to our partners, we've had a chance to spend time with them. We just completed the Heart Rhythm Society meeting earlier this month and had a chance to be with our partners at that meeting. Obviously, they're very excited about the submission of Kangaroo RM. They're looking forward to participating and assisting us with the launch of the product. And they see the opportunity of this product also as a way to be able to partner with the Kangaroo product in their devices and see as an opportunity to also be able to communicate to their customers the benefit of using Kangaroo with their specific devices. As it relates to the OpEx portion of your question, Matt, why don't you address that? Sure. So in terms of OpEx, I think Q1 is a pretty good indicator of where we expect to be on a quarterly basis for most of the year.
spk02: We might see a bit of an uptick in Q2 as we're continuing to have somewhat elevated R&D spending related to the completion of Kangaroo RM.
spk03: I would think about R&D dropping off a bit in the latter half of the year, and that may be offset somewhat by increases in SG&A as we prepare for the launch of Kangaroo RM in anticipation of the FDA clearance. But all in all, I think pretty similar levels of OPEX to what we've seen in the first quarter here.
spk01: Okay, that's helpful. Thanks for taking the questions. Thank you.
spk04: Again, ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touchtone telephone. Our next question comes from Josh Jennings of Calhoun. Your line is open. Thank you.
spk02: Hi, this is Brian here for Josh. Thanks for taking my questions. Hi, Brian. Hi. On the first quarter results, can you help characterize the strength in contract manufacturing? Is this existing customers or did you add customers? And how are you projecting growth specifically for contract manufacturing within your annual guidance?
spk03: Sure. So thanks, Brian, for the question. If you recall, Back to 2021, we spent a fair amount of time in 2021 lining up new partners for our contract manufacturing business. And so we're seeing really the result of the partnerships that we've really added last year come to fruition as it relates to the growth that we saw in the second half of last year, then obviously a very strong Q1 for this year. And so we're pleased with that performance. Again, we've been able to really leverage our product manufacturing, but also really our R&D aspects of our Richmond, California facility to our partners to make sure that we were designing and manufacturing the appropriate products for them. And again, the new partners we brought on board have been a significant contributor to our growth that we've seen for the business in Q1. And we would anticipate that we would have roughly the similar level of sales from contract manufacturing in the subsequent quarters for 2022.
spk02: Okay, that's very helpful. Thank you for that. On the RM filing, you disclosed that the filing was accepted, which I would interpret that you're on a fairly standard review timeline. Have you reached a point where the agency has agreed upon the sufficiency of the filing, or is that coming at the 60-day mark? Or just how should we think about the submission timeline from here?
spk03: Yeah, sure. So we submitted the application. The FDA reviewed the application of what we've turned in and then accepted it for substantial review. And so now it's under active review within the FDA. And at this point, we've not heard back from the FDA as it relates to any substantial questions or comments on this application. And so we'll wait to hear from the FDA, and then, of course, we'll hopefully be able to work closely with them to address any questions that they may have. So from a timeline standpoint, at this point, since we haven't heard anything back yet, it's probably not appropriate to be able to give you more specifics on timing. And again, I think from our perspective, we're still planning for a launch in the second half of this year.
spk02: Thank you. And if I could just ask one more on the HEAL study interim analysis. Can you remind us of the study size you're targeting for the interim analysis and what the potential outcomes are? I guess my main question is, is there a possibility that you stop that early and just the use of the data? Should we think about that data potentially being used for a label claim, or should we think of it as primarily being used for I guess, commercial non-regulatory purposes. Thanks again for taking my question.
spk03: Yes, so the HEAL study, again, is comparing patients that are coming back in for change-out that have previously received Kangaroo or a synthetic envelope or no envelope at all. And then we'll look at, basically, the soft-healing tissue characteristics around those implants and look at complications that arise through that procedure. Our goal is to enroll 100 patients, roughly a third in each group. As it relates to the interim analysis, we're going to basically look at where we stand basically in the second half. We start in the second half of this year, see where we are from a patient perspective, and hopefully we'll have a large enough sample size that we can then run an interim analysis and look at the results. And to address your latter part of that question, it really, from our perspective, this is not really designed to change a label. It's really just to get us the clinical evidence that physicians are telling us every day that they see when they see kangaroo patients coming back for change-outs. We're trying to collect and quantify that same information then to share to other physicians so they also can understand the benefits of kangaroos. So it's really more from a market education, customer education perspective.
spk02: Great. Thank you again.
spk04: Thank you. Again, if you'd like to ask a question, please press star then 1. One moment, please. I'm showing no further questions at this time. I'd like to turn the call back over to Ron Lloyd, CEO, for any closing remarks.
spk03: Yes, thank you. And so just to close here, As I think about the Azio team, I want to first of all thank them and compliment them. Again, we show that we have the ability to execute, and I'm proud of the results of Q1, as well as the filing for Kangaroo RM, because, again, it reiterates and shows our ability to drive execution from a company perspective. We're also very excited and obviously confident about the future. We have a number of near-term growth catalysts, and we look forward to updating you on those catalysts as we proceed here throughout 2022, and look forward to getting updates at our next earning call. So, again, thank you very much for your time today.
spk04: Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
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