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spk00: Good day, ladies and gentlemen, and welcome to the Azalea Biologics fourth quarter and full year 2022 financial results call. At this time, all participants are in a listen-only mode. A question and answer session will follow a formal presentation. To ask a question, press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, press star 0 on your telephone keypad. Please be advised that today's conference is being recorded. I would now like to hand the conference call over to Matt Steinberg, FinPartners.
spk03: Thank you, Operator, and thank you all for participating in today's call. Earlier today, Azio released financial results for the quarter and full year ended December 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 the federal securities laws which are pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that do not relate to matters of historical facts 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 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 annual report on Form 10-K for the year ended December 31, 2022, to be filed with the SEC, accessible on the SEC's website at www.sec.gov. Such factors may be updated from time to time in ASEO's other filings with the SEC. The conference call contains time-sensitive information and is accurate only as of the live broadcast today March 22, 2023. 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. A reconciliation of this non-GAAP financial measure The most directly comparable GAAP financial measures is available in the company's financial results released for the fourth quarter ended December 31st, 2022, which is accessible on the SEC's website and posted on the investor page of the ASEO website at www.aseo.com. And with that, I will turn the call over to ASEO CEO, Randy Mills.
spk05: Good afternoon, and thank you for joining the call. Today, we will provide an overview of our business, including recent achievements, and lay out our key goals and objectives for 2023. We concluded 2022 on a very strong note, posting record annual revenues of $49.2 million, led by robust sales growth of our Simpliderm and Kangaroo product lines. Matt will provide additional details on these and other financial results later on in the call. But first, I would like to address the announcement we made on Monday regarding the receipt of a non-substantially equivalent, or NFC, determination from the Food and Drug Administration for our Kangaroo RM antibacterial envelope. As a reminder, Kangaroo RM is the latest advancement of our Kangaroo product line and contains the antibiotics rifampin and minocycline, which have been shown in preclinical testing to prevent bacterial colonization. As noted in Monday's announcements, The items in the NSE relate to drug testing and centrally a request by FDA to modify an in vitro drug release assay employed as a manufacturing control that is used primarily to assess batch-to-batch variation and support manufacturing process changes. We believe that the most expeditious path forward is to work with FDA to provide the additional data requested in a timely manner. While we cannot provide a firm timeline of how long this will take right now, we do know that the request does not involve the generation of any additional human or animal data. Our team is already hard at work, and we will provide updates on our progress. While we work diligently to resolve the FDA's outstanding questions around Kangaroo RM, we continue to expand the opportunities for our other product lines. As announced earlier today, we have entered into a distribution agreement with Sientra for our Simpliderm Acellularized Dermal Matrix. This partnership allows us to further accelerate the rapid growth of Simpliderm, It also supports our overall growth strategy of profitably expanding our proprietary biologic platforms to improve patient outcomes. Now let me provide a quick overview of our company. Everyone at Azio is focused on our mission of humanizing medical devices for better patient outcomes. Our marketed products and pipeline programs are designed to mitigate the key mechanisms of failure that commonly occur with implantable medical devices. These failures include migration, fibrosis, erosion, and infection. Kangaroo and Simpliderm are indicated for use in over 700,000 surgical procedures each year and address a staggering $7.5 billion in added cost associated with surgical complications. Our Kangaroo RM technology is designed to address key mechanisms of device failure, namely infection, and we are confident that we are strongly positioned to capture a significant portion of the $600 million pacemaker protection market. it is important to reiterate that FDA's completed review did not raise any additional questions surrounding the appropriateness of the pathway or the majority of the data submitted to support the filing. Consequently, we do not expect to appeal the decision, and we believe that the most expeditious path forward is to work with the FDA to provide the additional data requested. Regarding our SimpliDerm product lines, Breast reconstruction is a $500 million market, providing us with significant growth potential in an evolving competitive landscape. The market leader in this space was acquired by a major pharma company, creating an opportunity for us to take market share, and we have already witnessed rapid uptake of simploderm among surgeons who perform breast reconstruction surgeries. and we are not the only ones excited about the benefits that Simpliderm has to offer. As announced earlier today, we have entered into a sales agreement with Cientra for Simpliderm. Cientra is a medical aesthetics company focused on progressing the art of plastic surgery and is a leading manufacturer and distributor of silicone breast implants. They have an extensive network with 55 dedicated sales professionals and a trusted surgeon relationship across the United States. We believe this partnership will accelerate the already impressive sales trajectory of Simpliderm. I'll now turn the call over to Matt for a review of our financial results.
spk04: Matt?
spk02: Okay. Thanks, Randy. We continued to generate solid revenue growth in the fourth quarter and closing out a record revenue year. We achieved 17% growth in our fourth quarter 2022 net sales of $12.7 million. This growth was driven by strong performance within our Kangaroo and Simpliderm product lines, which in aggregate grew by 30% compared to the prior year period. Our growth margin expanded by eight percentage points on a GAAP basis to 39%, as compared to 31% in the previous year's period. On a non-GAAP basis, which we, considered to be more indicative of our operating performance, gross margin grew to 46%, up from 39% in the fourth quarter of 2021. The increase was due to efficiency improvements primarily in our human tissue processing operations. Total operating expenses were $13.8 million for the fourth quarter of 2022, compared to $11.2 million in the corresponding prior year period. The increase was primarily due to legal expenses and updated estimates of contingent liabilities in excess of currently available insurance coverage related to the 2021 recall of our fiber cell product. Increased sales and marketing also contributed to higher operating expenses, partially offset by a decrease in research and development. Our bottom line results for the fourth quarter of 2022 also included $5 million of other income related to a reduction of the company's revenue interest obligation which is based on the forecasted timing and extent of net sales for the company's kangaroo and cardiovascular product lines and the associated revenue and milestone payments. Combining all of these results, our net loss for Q4 2022 was $5.4 million as compared to $9.1 million in the corresponding prior year period. Turning to our full year 2022 results, as Randy mentioned, we achieved record revenue of $49.2 million. Excluding fiber cell sales of $4.9 million in 2021, net sales from current products increased 16% in the full year 2022 compared to the prior year. To provide greater transparency and perspective on these results, I'll now break down our 2022 revenue performance by each of our four business segments. Device protection produced $9.1 million in revenue and grew 15%. Women's health generated $7.5 million, growing 48%. Orthobiologic sales were $25.3 million, representing growth of 15%, excluding fiber cell, that is. And lastly, cardiovascular produced $7.3 million in sales, which was down 3% from the prior year. As of year-end 2022, our cash position was $17 million. We remain focused on prudently managing our expenses and reducing our cash burn, In that regard, earlier this week we implemented a significant reduction in our workforce, whereby we lowered headcount by about 12%. This translates to annualized expense savings of approximately $4 million. Going forward, we continue to work on a number of strategic transactions, and we anticipate these deals will accelerate revenue growth while also reducing cash burn. However, because we can't predict the exact timing or implementation periods for these relationships, It would be difficult to provide specific revenue guidance at this time, so we've chosen to hold off on that for the time being. We expect to revisit this later in the year as we gain more clarity on Kangaroo RM and other strategic milestones for our business. We look forward to updating you on our progress. And with that, I'll hand it back to Randy. Thanks, Matt.
spk05: We're poised for a transformational year at ASEO. With almost $50 million in revenue, 30% growth in our proprietary lines, and the use of our products in over 50,000 surgeries annually, we are well positioned to capitalize on the multitude of opportunities that lie ahead. As we move forward, our priorities are to, one, run our four business units as effectively as possible, looking for opportunities, such as our recent pickups in gross margin, to improve our profitability. Two, work with FDA to gain clearance of Kangaroo RM. We want to do this quickly, but more importantly, we want to get this done to FDA's satisfaction. And we have confidence in our team, now led by our Chief Scientific Officer, Dr. Michelle Williams. And three, continue to profitably scale our businesses by entering into strategic partnerships like the one we announced today with Cientra, that fuel rapid growth in a cost efficient manner. Lastly, a note of gratitude. Our ability to continue executing on our strategy for humanizing medical devices for better patient outcomes would not be possible without the dedication of our employees, the ongoing support of our partners and investors, and continued physician and patient trust in our products and mission. Thank you to all involved. And with that, I'll turn the call back over to the operator for questions.
spk00: Thank you. And ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Ross Osborne with Cantor Fitzgerald. Please state your question.
spk01: Hi, guys. Congrats on the strong 4Q and simple Durham partnership. Starting with the FDA notice, I understand you do not want to provide an updated timeline for approval and commercialization, but as far as providing the FDA with the requested data, Can you walk us through the lab test and data you need to perform in detail and a level of difficulty of this quality control test as well as the bar that the FDA is asking for?
spk05: Ross, thank you. It's Randy. Great question. What I can – so the specific test that we're talking about is called an in vitro elution assay. And – So what I can tell you about it is the FDA is looking, this is a test that's done after manufacturing on each lot. And what it's designed to do is to detect batch to batch variability. What the FDA is looking for us to do is develop a method where we can get the antibiotic off of the eluting disc and off of the kangaroo membrane itself and into solution in a faster manner than would otherwise happen naturally so instead of normally we would take the device and we would we would put it into a beaker of basically water or saline we would allow the antibiotic to elute over over time What they've asked us to do is to accelerate that test and to do it instead of what would normally take a few days, to be able to get it done within a few hours and more completely get the antibiotic out of the disc, off the device, and into solution. And there are a number of different ways to do that. including using things like detergents and DMSO and acidic conditions and the like. And that's what our R&D team is developing. It's fairly straightforward. It will require, though, some assay validation. Then we'll have to gather that data and package it up and send it back to FDA. I would say in a pre-COVID environment, this would be a lot easier. to nail down. It seems like particularly when something like this requires the use of outside vendors, what normally would have been more predictable becomes a little less predictable and so that's why we're hesitant to give any more exact timeline on this. We don't think though this is a protracted kind of situation where it's going to require you know, like I said, long-term sort of animal studies or anything like that. And as soon as we do know more about the timeframe, Ross, we will obviously make that known.
spk01: Okay, understood. And thanks for the additional color there. And then maybe turning to a potential partnership for Kangaroo RM following the FDA pushback. You know, if this does not occur or is delayed, how should we think about your burn rate this year? And can you provide a little bit more color, you know, just on your cash runway? Outside of the headcount reduction? Sure.
spk05: You know what? I'll just make a quick comment. We are still actively involved in the creation of a partnership for Kangaroo RM, and this setback did not derail that. It might delay it a little bit, but it certainly didn't derail that. So that's something we still think is in our future, and if that changes, we'll let you know. Matt, you want to provide guidance on that?
spk02: Sure, sure. So, as we mentioned, Ross, we ended the year at about $17 million, and we have taken some actions recently, difficult though they may be, to reduce our cash burn and reduce expenses more generally, and that involves some headcount reductions that took place this week. We're also, we have started to implement and will continue to implement other cost savings initiatives that don't have anything to do with headcount. So we think that actually will make a very material difference in our cash burn. Historically, if you look back over the last few quarters, we've been averaging about $5 million a quarter in our burn rate. And we actually believe that we can more or less cut that in half, so end up in the $2 to $3 million per quarter range over the course of the next couple of quarters. So we're We're working that process in a very detailed, bottoms-up way, but that's our objective, and I'm quite confident that we can get there. We will also be working on growth initiatives that will actually bring more money to the bottom line in a cost-efficient way. The Sientra deal is a great example of that, where we're generating a pretty healthy gross margin on that product line, and this way we'll gain access to a much bigger sales footprint with a company, with a partner, where this is a really strategically important product for them to add to the bag. So we're actually quite optimistic about what can be done with that partnership, and I know that Ciantra as a partner is very eager to get that up and running as well. So that's an example of something that we're doing. We actually have a number of other similar initiatives in the works, and we're looking forward to rolling that out over the coming weeks and months.
spk01: Okay, great. Thanks for taking my question.
spk00: Thank you. And just a reminder to the audience, to ask a question, press star 1 on your telephone keypad. To remove yourself from the queue, press star 2. Once again, to ask a question, press star 1 on your telephone keypad. Our next question comes from Josh Jennings with TD Cohen & Company. Please state your question.
spk04: Hi, good afternoon. Thanks for taking the questions. I was hoping to just ask about, it seems like Kangaroo Momentum is continuing in the fourth quarter, pre-Kangaroo RM approval, and was hoping to just better understand where does Kangaroo share sit today, and how should investors be thinking about continual momentum in front of Kangaroo RM approval? It sounds like it's not going to really slow in 2023. and that RM could accelerate the share gains that you're experiencing. But I wanted to get a little bit more color just on share and the momentum in 2023 so far.
spk05: Yeah, so Josh, thanks for the question. It would be difficult to sort of describe, I think, Kangaroo in a normal way that you would market share in that it really doesn't share the market anything else. It is not a direct competitor to any other product, and particularly it's not a direct competitor to Tyrex. The indications are actually explicitly different. So in that case, it really is in a class by itself. We've seen really nice growth in the kangaroo space absent the addition of of RM and we're very pleased that we have this base business. We also have this partnership with Boston Scientific for the distribution of Kangaroo and that's progressing nicely. Internally, we've also made some changes with our sales organization that we think will hopefully also focus and accelerate our sales force on the opportunities, particularly with RM. Or I'm sorry, with Kangaroo. So while we patiently, or if you're like me, impatiently wait the launch of RM, we are seeing continued nice growth with Kangaroo. at very healthy gross margins. And that is becoming a progressively more profitable business for us.
spk04: Understood. No, thank you. And then just on Simpliderm, just wanted to ask about the Cientra partnership. Congratulations on that. And I don't know if, I mean, our understanding is that Cientra has kind of mid-teen share in the augmentation segment and maybe stronger share in the recon segment. But just wanted to better understand how you view that opportunity. And does Sientra have any, just in terms of the Sientra salesperson's capabilities to sell Simpliderm? It sounds pretty straightforward, but any details you can share? And is Sientra currently selling an Acellular Dermal Matrix product or partnered with anyone else? Thanks for taking the questions.
spk05: Yeah, thanks, Josh. No, they are currently not selling an acelerized dermal matrix. They have the sales force of approximately 55 reps, including a segment of those reps that actually specialize just in reconstruction. They're actually reconstruction experts. Reconstruction has become a priority here. For them and for us You know what this this is really for us. It's like shooting simple term out of a cannon You know we have a limited Sales group now of our of our own that's distributing it, but it opens up the geography Geography for us in the United States really exponentially and and does so in a way that where the reps, these 55 reps that are carrying this product are in these cases every day where the product would be used. And so we think it's, for us, we think it could be a very, very significant acceleration of a product that's already growing, something in the order of 40% year over year. And so that's saying quite a bit. We also think it's a good partnership in terms of the product being as strategically important for Cientra as it is for ASEO. So we're super excited about it.
spk04: That's great to hear. Thanks again. Appreciate it.
spk05: Thanks, Josh.
spk00: Thank you. And there are no further questions today. And with that, we conclude today's conference. All parties may disconnect. Thank you all for your participation.
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