Aziyo Biologics, Inc.

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.

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.

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.