Ladies and gentlemen, thank you for standing by. Welcome to Aziyo Biologics Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your speaker for today, Leigh Salvo. 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, Aziyo released financial results for the second quarter ended June 30, 2021. A copy of the press release is available on the company's Web site. 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 Factors section of our public filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2020, as updated by our quarterly report on Form 10-Q for the quarterly period ended June 30, 2021. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 9, 2021. Aziyo 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 on the company's earnings release for the second fiscal quarter ended June 30, 2021, which is accessible on the SEC's Web site and posted on the Investor Relations page of Aziyo's Web site at www.aziyo.com. And with that, I will turn the call over to Ron Lloyd.

Thanks, Leigh. Good afternoon everyone and thank you for joining us. Aziyo delivered strong results again in the second quarter of 2021. Net sales increased substantially compared to the year ago quarter as well as pre-COVID levels. We continue to hit our internal milestones in the development of our next generation CanGaroo Envelope. And our two main clinical trials for CanGaroo continue to roll according to our plans. We've also made meaningful progress in our orthobiologics soft tissue reconstruction and contract manufacturing businesses. I'll share more details on all these areas in a few minutes. But first, I'd like to provide an update on the actions underway with regard to the recent recall of a single donor lot of our FiberCel product. As many of you know from our recent communications, we were notified in late May that several patients who had surgery that included our FiberCel product experienced post surgical infections, including some patients that tested positive for tuberculosis. Our team immediately took action to investigate the matter. This led to our voluntary recall of a suspected single donor lot of this product. We worked with our distributor to account for all hospitals that received this lot. All unused product in this lot has now been secured in quarantine. Under the direction of the CDC, samples of the returned units have been analyzed at the U.S. government lab and have tested positive for mycobacterium tuberculosis. Based on currently known information, we have no reason to believe that other donor lots of FiberCel are affected. We remain committed to providing products that enable physicians deliver the best possible care for their patients. While this is an extremely unfortunate event, we have thoroughly reviewed our procedures for screening donors and producing FiberCel, and we've not identified any deviations from our established…

Thanks, Ron. As mentioned, net sales for the three months ended June 30, 2021 were $12.2 million, a 42% increase from $8.6 million in the same period of the prior year. This included a 35% increase in sales of core products and 81% growth in our non-core products year-over-year. We estimate the second quarter revenue loss attributable to the FiberCel recall, including reimbursement for return product and the subsequent suspension of purchases by the distributor, to be approximately $1.1 million. Gross margin for the second quarter of 2021 was 46% as compared to 44% in the corresponding prior year period. The improvement in gross margin was primarily related to increased efficiency associated with higher production volumes compared to the year ago quarter, as well as other operational improvements. These gains were offset by the impact of costs recorded related to the FiberCel recall and the lower margin contribution of net sales from non-core products. We also look at gross margin excluding the impact of non-cash amortization of intangible assets. And on that adjusted basis, Q2 gross margin would have been 53% versus 54% in the year ago quarter. Total operating expenses for the second quarter of 2021 were $10.2 million, a 35% increase from the second quarter of 2020. The main contributors to the increase were growth in commercial spending associated with higher net sales, expenses associated with operating as a public company and development costs associated with our next generation CanGaroo Envelope project. Net loss for the quarter was $2.4 million as compared to a net loss of $5.2 million in the second quarter of 2020. The current year second quarter included one-time gains totaling $3.6 million, primarily related to the forgiveness of Aziyo’s PPP loan. Loss per share in the second quarter of 2021 was $0.23 compared to…

Thank you. [Operator Instructions]. Our first question comes from the line of Matthew O’Brien with Piper Sandler. Your line is open. Matthew O’Brien: Thanks for taking the questions. Ron or Matt, can you just talk a little bit about the remediation process from here with the agency as you're trying to get FiberCel back on the market? It sounds like the inspection went well. You've identified the one lot. You're not expecting any sales in Q3. Is it possible that you could start selling in Q4 or maybe even early next year? And then can you maybe match this frame up potential litigation exposure, if you can at this point, and then any kind of insurance coverage that may offset any settlements or outflows that may happen as a result of any litigation?

Sure, Matt. let me start and try to address that. I think you have quite a number of questions built into there. So let me see if we can start and address them. So your first question was around FiberCel and the ability to resume commercial sales of that product. Again, just to reiterate, this was a single donor lot issue. We again recalled this lot. We've looked at all of our procedures and protocols. We've seen that there was no deviation, anything that we have done relative to these protocols, which again are based on regulatory and industry standards. The FDA, as you mentioned, inspected our facility, saw no issues, issued no Form 483. So from an overall regulatory perspective, there's nothing really that stops us from selling FiberCel as it stands today. In addition, we've gone on and made some adjustments into our donor screening, for example, excluding donors that spent a significant amount of time in other countries that could have higher rates of TB. And so from our perspective, right now FiberCel cell could be available commercially. We do obviously sell the product through our partnership with Medtronic. And Medtronic made the decision to cease sales of this product as we were going through the recall process. And so as of this time, they've not given us an indication on their decision to resume sales. But there's nothing stopping us from a regulatory standpoint in terms of commercializing FiberCel. And so let me turn it over to Matt to go a little bit more through your questions as it relates to coverage.

Yes, Matt. So I think you asked about potential exposure from a litigation perspective, and it is true. We've had several claims filed associated with this matter, but it's really very, very early in the process still. And so as Ron mentioned, we've been through our own processes and kind of done a thorough review on our end. And we haven't identified any deviations from normal processes, either our normal processes or those generally accepted throughout the industry. So from that perspective, we felt like that is, I guess, a strong point in our favor when it comes to any claims that might be made against us. But it really is just too early to put numbers on what the estimated exposure is. As you would expect for companies like us in this industry, we have insurance that is designed to help a company like ours deal with a situation like this. And I'm confident that we'll work through the situation from a financial point of view. But it's just a little early to put any numbers on it. We haven't established any kind of a reserve in our Q2 financials related to this matter. Matthew O’Brien: Thanks. And then, Ron, have you had conversations, I'm sure you have with Medtronic, and you're basically waiting for them at this point. And if they’ve given you any kind of indication when they may make a decision, or do you think they may eventually just walk away just given what occurred here?

Ron, I think you may be on mute still.

Yes. Obviously, Matt, we talk to Medtronic weekly as we work through this recall process. And so, again, our focus first initially is on the recall, securing the product, also working through with the CDC, and then trying to make sure that patients that received the product are getting the appropriate medical care. And so that's where our focus and energy has been. And again, in conversations with them, they've not indicated a timeline here. And so I'd hate to speculate as to when that decision is going to be made. I would like to say though, as you know, we also sell other viable bone products through our other partnerships. And we're pleased to see the continued momentum of this business through our other partnerships. In addition, we're also looking at adding additional partnerships. And those conversations are going well, as we look to add some additional relationships and partnerships for our viable bone products. Matthew O’Brien: Got it. And then just last one for me, it's just on the CanGaroo side of things. I think, Matt, you said the core business is up 6% sequentially. I don't believe that includes the impact of FiberCel in the quarter. So I'm assuming it would be up more if you included FiberCel. But how are things going from a CanGaroo perspective? You've got a lot of sales reps now. Premier, you've got Providence. Can you just talk a little bit about the momentum that you're seeing there, across the various channels of selling that product? Thanks.

Sure. So, Matt, let me address that. So I know we don't break out our sales and details related to our core products. But we have shared in previous calls kind of what was the leading product category as we think about the performance for the quarter. And when you look at our Q2 performance, actually the CanGaroo product, when we look at our sequential growth versus Q1, was our leading product category in terms of Aziyo growth. And so we're excited about that. And that growth I think is really coming from two main factors. The first is we've been able to add new accounts. This has come through, mainly through our Premier agreement that we signed last December. As you recall, we received breakthrough designation based on the CanGaroo technology. And so we've been active and adding additional Premier accounts. And we're excited for Q2 to actually sign another integrated network with Providence Health System. So we think, again, as we continue to add accounts, that's going to continue to drive the CanGaroo business. And then the second factor here is that our messaging, as it relates to CanGaroo, and the remodeling benefits of having a biological envelope is really resonating more with customers. And that's leading to initial and expanded use of CanGaroo. And as you know, we just finished the HRS meeting. And at that meeting, very pleased to see the progress in terms of our conversations with doctors and their ability now to gravitate towards the remodeling benefits and the patients that will benefit from this. And we think that collectively with the additional expansive accounts, we’ll continue to derive CanGaroo growth as we look at the second half of this year. Matthew O’Brien: Great. Thank you.

Thank you. Our next question comes from the line of Josh Jennings with Cowen. Your line is open.

Thanks for taking the questions. Ron, I was hoping to just follow up on the updated discussion [indiscernible] has that fully been derisked now? What are the next steps within that discussion process that you’re expecting [indiscernible]

Yes. So the FDA did their for cause inspection based on the recall, as you would imagine. Again, we're pleased with the inspection results. Again, no Form 483s. It was, from our perspective, a very thorough review. And we're pleased again that -- again, as we also noted that there was no deviations for any of our processes as it relates to the screening or production of FiberCel. So again, from a regulatory standpoint, we feel very good in the processes that we have based on regulatory requirements and industry standards. But as we've also mentioned during the call, that we want to continue to go beyond that. So again, we're going to continue to make adjustments as it relates to donor screening and potentially look at testing for additional pathogens as it relates to these products. And again, I think our goal through continuous improvement is to set a new standard for the industry as it relates to this category of products.

[Question Indiscernible]

Yes. So we don't necessarily break out, again, any specific product area. But as we mentioned, we are pleased with the continued growth within our Viable Bone Matrix product category and through our partnerships. We continue to see that building as we go in the second half of the year. But I think it's important to remember from a company standpoint that we are a diversified regenerative company, again, advancing outcomes in patients receiving implantable medical devices. And I think it's important to take a step back here and remember the benefit of our diversity. This diversity has served us well. If you think back during the COVID pandemic, even despite the impact on surgical procedures, we actually exhibited growth from a company perspective due to our diversity. And so again, we have the opportunity here, as you think about going forward, is to build off the benefit of a diversified portfolio. So we anticipate to drive continued growth within CanGaroo, again, as we mentioned, with our other viable bone products, those partnerships, again, through SimpliDerm and our contract manufacturing. So we're really excited about the opportunity here for the second half of the year again build off this diversity that we have from a company perspective.

Great. And then one last question on SimpliDerm [indiscernible] And then any update on when the advisory committee would reschedule and when do you expect that [indiscernible] receive approvals for reconstruction, and when that is expected? Thank you for taking the questions.

Sure. Yes, we're excited about the continued momentum that we're building here with SimpliDerm. And in the second quarter, we actually received our first publication on the product, was published in June. This looked at a series of patients with about more than 100 implants of our SimpliDerm product versus the market leader in this category. And from this study, we showed that SimpliDerm was safe and effective. So it's great to have our first peer-to-peer article out in the public domain, again, up against the market leader, again, showing excellent safety and efficacy. And already from this study, which again just happened in June, we're already seeing the benefits of being able to now add some additional accounts based on this publication. And we're also able to leverage the Health Trust contract that we were awarded back in beginning of March. And so that's also helped us build momentum. And then we sell the product predominately through a distributor network. We added three more regional distributors for our SimpliDerm versus in Q2. And so I think collectively, having additional distributors, the publication, and then again access into more accounts through contracting will help us further expand the business. As it relates to the FDA and their workshop, we have yet to hear a date for that workshop. And getting the FDA has been a little bit preoccupied here still with COVID activities. But we're anxious for them to bring forth and host that workshop. So we have a chance to talk about the opportunity of human dermis tissue for breast reconstruction. So at this point, we're still waiting for that workshop to be scheduled.

Understood. Thanks for all the updates.

Thank you. Our next question comes from the line of David Rescott with Truist. Your line is open.

Hi, guys. Thanks for taking our questions. I appreciate some of the guidance you gave around Q3 and the commentary on how the guide does not assume there's going to be a significant impact to surgical procedures in August or September. But could you provide I guess or discuss some commentary on whether or not there has been an impact in the month of July from the surgeons? And is there any reason in the fourth quarter that we shouldn't be thinking about kind of similar historical trends that we've seen previously? I'm not sure if maybe the recall of FiberCel has impacted or had supported fourth quarter growth sequentially, just any color here would be helpful?

Hi, David. This is Matt. I'll try to speak to that. So we've seen the business hold pretty steady even as Delta has increased concerns about COVID generally around the country. And I think it speaks to the nature of the procedures that our products are used in. And we, of course, always see some fluctuation month-to-month, but we generally saw procedure trends and sales trends hold pretty steady if we went through July and just a few days into August here, but so far in August as well. So we're hoping that continues to be the case even in the face of increasing concerns that are obviously out there about the variant. We have heard some anecdotal comments about more elective procedures being curtailed a little bit in some geographies, but by and large that really has not affected us so far. I think the other part of your question just had to do with FiberCel and the expected contribution of that if we went through the year. There's no doubt that that was a driver of growth for us in the first quarter and into the second quarter until sales were suspended, and we're still hopeful that they will resume. We don't think that that will happen in Q3, but we'll see what happens after that. And that's really the reason why we limited our guidance to the third quarter just because of the lack of visibility around that one event. As Ron talked about, I think there are other dials that we can turn and other levers of growth that will be important for us, and that always had been important for us, both in our orthobiologics business and our viable bone products in addition to all of the other product lines. And as you already heard this past quarter, CanGaroo really led the pack in terms of driving growth from a sequential quarterly basis if you were to exclude the impact of FiberCel. We feel good about the business overall. We definitely see ourselves continuing on a growth trajectory. Except for the, call it, temporary setback of the suspension of FiberCel sales and we're focused on growth from here.

Okay, that's helpful. Thank you. I guess on margins, they expanded year-over-year on the quarter here and maybe more from a higher level. Now that the FiberCel is kind of out of the business maybe for the second half of the year, I guess could you touch on at all from a high level really how you're thinking about that impacting maybe gross and operating margins and whether or not that's impacted the ability for the company either to invest in the business going forward or do any type of tuck-in M&A? Just interested in how the recall here, the pause impacts kind of the forward expectations of growth the company previously had? Thank you.

Yes. So in terms of gross margins, as I mentioned in the prepared remarks of the call, we do expect that gross margins will continue to improve as we move through the year. So we were at about 46% on a GAAP basis in Q2 and I see that going up at least 2 or 3 points by the fourth quarter of this year. And there's room to grow after that as well certainly. I think the things that are driving the growth so far, and we'll continue to do so, we are really focusing much more intently on build scheduling and the product mix and just making sure that we're managing our inventory appropriately and incurring excess and obsolete charges more so than is necessary. And then we've also looked at some technology that is helping out. Some of that's in the early stages, but it's helpful. And I think there are some other opportunities in that area as well. From an operating expense point of view, we'll keep things pretty steady in most areas of the business I'd say over the next couple of quarters, but we will have some additional costs dealing with the recall and kind of legal and administrative costs associated with that. It's tough to put a number on those, but we're kind of planning on roughly an extra $1 million or so in the third quarter. And I don't see that continuing broadly or for a long time. But that's sort of what we would expect in the near term.

Okay. Thanks for taking our questions.

Thank you. Our next question comes from the line of Brandon Folkes with Cantor Fitzgerald. Your line is open.

Hi. Thanks for taking my questions. Maybe firstly just on FiberCel. Should Medtronic decide not to bring this product back to market, can you just talk about your options of thinking in terms of seeking a new partner or going this alone? And then secondly, you talked about potential additional partnerships. Any color in the environment you're seeing currently? Thank you very much.

Sure, Brandon. Yes, as we think about that business, it's a portfolio of products all built off of the Viable Bone Matrix platform. So we currently have a number of partnerships in place across a variety of products, of which Medtronic and FiberCel was one of our partners. Obviously with the size and scope of Medtronic, it was a large partnership. And so if Medtronic makes the decision not to resume, we would look to backfill that through assigning additional partners. And again, given the size and scope of Medtronic, it will take us probably a couple of partners to think about in terms of magnitude to backfill that level of volume. But again, as I mentioned, we're already in discussions with some partnerships for additional business and will continue to do so. We have the opportunity to bring out additional products off that platform to sign these new partnerships. And that's what we'll pursue going forward in the future.

Thank you. I'm not showing any further questions in the queue. I will now like to turn the call back over to Ron for closing remarks.

Great. Thank you. Just in closing, the Aziyo team remains focused on and excited about the range of opportunities that we have, and have the greatest confidence in our future. So with that, I want to thank you for your continued interest in Aziyo and have a great day. Thank you, everybody.

This concludes today's conference call. Thank you for your participation. You may now disconnect.