Aurora Spine Corporation (ASG) Earnings Call Transcript & Summary

Good day and welcome to Aurora Spine Reports Fourth Quarter and Fiscal Year 2022 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to hand the conference over to Adam Lowensteiner with Lytham Partners. Please go ahead.

Thank you, Betsy. Welcome, everyone. And thank you all for joining us today to review the financial results for Aurora Spine for the fourth quarter and fiscal year ended December 31, 2022. With us on the call representing the company today are Trent Northcutt, President and CEO of Aurora Spine; and Chad Clouse, CFO of Aurora Spine. Before we begin, I would like to remind everyone that statements made during the course of this call may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Act of 1934. These statements reflect current expectations concerning future events and results. Words such as expect, intend, believe, may, will, should, could, anticipate and similar expressions are words that are used to identify forward-looking statements, but their absence does not mean a statement is not forward-looking. These statements are not guarantees of future performance and are subject to risks and uncertainties and other important factors that could cause actual performance or achievements to be materially different from those projected. A full discussion of these risks, uncertainties and factors, you are encouraged to read Aurora Spine's documents on file with SEDAR, including those set forth in periodic reports filed under the forward-looking statements and Risk Factors section. Aurora Spine does not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. On this call, management may refer to EBITDAC, adjusted EBITDAC, adjusted net income, adjusted EPS, which are not measures of financial performance under generally accepted accounting principles, or GAAP. Management believes that these non-GAAP figures, in addition to other GAAP measures provide meaningful supplemental information regarding the company's operational performance. Investors should recognize that these non-GAAP figures might not be comparable to similarly titled measures of other companies. These measures should be considered in addition to, and not as a substitute for or superior to, any measure of performance prepared in accordance with GAAP. A reconciliation of non-GAAP measures to the most directly comparable GAAP measures in accordance with SEC Regulation G can be found in the company's earnings release. With that, I'd like to now turn the call over to Mr. Trent Northcutt, President and Chief Executive Officer of Aurora Spine. Trent, please proceed.

Thank you, Adam. I'd like to welcome everyone to the Aurora Spine's fourth quarter and fiscal 2022 financial results conference call. Earlier today, we issued a press release detailing our financial results. Hopefully, you've had a chance to review this press release. But if not, a copy can be found on our website at www.aurora-spine.com under the Investor Section or other financial websites. To lay out the agenda for today's call, let me first summarize a few key events of the quarter and the year. I'll then take a bit status to talk like each -- initiatives in products like ZIP and SiLO as well as our initiatives on the Spine division, including our DEXA product line. Chad will then give a recap to the financial results. We will conduct a Q&A session at the end. The key events in the fourth quarter and fiscal year 2022, I'm going to give you a market overview of the dynamics of the products and our clinical studies. Fiscal '22 was a great year for Aurora. We had several accomplishments, many of [indiscernible] well in the future at a high level, we reported record revenues with strong growth of 41% to $14.9 million. We received FDA clearance for our SiLO TFX, which was a tremendous event for our company and the SiLO franchise. By now having a metal implant with transfixing capabilities, we also advanced our DEXA technology with the FDA clearance of the DEXA-L. We also won an award for the Best New Product of the Year at this year's NASS event for the DEXA product. We also embarked on clinical studies with many of our products during 2022 into 2023. And it's important to have the data to share with the industry when selling our products. We received early positive results from our ZIP device, which has been building momentum as well. Looking into 2023, we believe that our proper track to continue revenue growth, while the fourth quarter was a bit slower than we anticipated as well as the first quarter of 2023 -- it took time to make some of these changes to prepare the company for a long-term, including adding some new personnel like Matt Goldstone, Aurora's new Chief Business Officer. Matt has hit the ground running and has quickly able to add new positions that have already opened up some key accounts for Aurora. He is highly focused on the big picture and is energized about our unique product offering and working diligently in building out our strategic sales organization. On a macro level, we continue to see momentum gaining in the minimally invasive surgery market, especially with regards to the reimbursement codings as insurances are embracing more procedures that can be done minimally invasive manner and have a patient recoup at home -- for quicker time frame. Aurora's products like the ZIP and the SiLO are very complementary to doctors and their patients and specially designed for minimally invasive procedures. I believe it is at this catalyst that while our products are able to gain traction and we've been receiving. In addition, our products offer alternative ways for doctors to treat patients with a little pain, the medications as possible, especially given opioid epidemic that has hit the United States in the recent decade. This too is a main tailwind for the med tech industry. While Q4 was a little bit on the quiet side, we've been very busy behind the scenes and preparing the SiLO TFX for commercialization. We received FDA clearance for the TFX only a few months ago, and it was a very important catalyst for Aurora as it is a major future growth opportunity within the SI joint market, which is still very early stage innings. Obtaining this clearance approves our IP franchise, but also demonstrates that we've created a new product that offers transfixing capabilities, which is something many doctors are desiring. We have already begun an alpha launch stage for this product with initial surgeries taking place during the first quarter of 2023. And so far, it has been a breakthrough product for doctors and patients. We are currently gearing up for the next phase of the product launch and preparing additional kits to gear up commercialization later this year. We'll definitely keep investors updated as things progress with the TFX as we believe this will be a contributor to our growth for several years to come. The ZIP Series continues to be a nice contributor to Aurora. During Q4, we were pleased to learn of the initial positive interim results from our clinical study using the ZIP, which was published in an abstract posted in the publication Pain and Therapy entitled, A Prospective, Observational, Open-Label, Non-Randomized, Multicenter Study Measuring Functional Outcomes in a Novel Interspinous/Interlaminar Fusion Device in Subjects with Low Pain: REFINE Study. The publication discussed the results of an interim 3-month analysis, which included 54 patients, of which 82% reported improvements as a result of the procedure, while 65% of the patients demonstrated clinical meaningful improvement in their pain and function. The publication also demonstrated that the use of the ZIP device was both effective and safe at a 3-month follow-up. The study remains active and enrollment is continuing with more follow-up data expected in the future and more patient data is completed. The study included results gathering 11 doctors and was conducted on behalf of Aurora Spine to determine the utility of using the interspinous fusion device as a fusion therapy for the treatment of lumbar stenosis. The treatment of lumbar stenosis is a large unmet treatment -- raises the gap between conservative measurements and invasive surgery procedures. This publication is an exciting validation of Aurora Spine's ability to provide safe and effective outcomes by utilizing the Aurora ZIP product line. We look forward to additional results set by to be published at a 12-month collection point and believe will continue to trend positively for our physicians and their patients. Last but not least, moving on to DEXA, we have -- invested heavily during 2022, building several surgical kits for the DEXA-C and we are in the midst of placing them to doctors as we speak. We started 2022 initially with 2 kits in the field, and we're able to ship another 2 early in September. To-date, we have 10 kits shipped out in the field working on shipping out the remaining 30 we have ordered. We were hoping to place these kits sooner, but did incur a minor manufacturing issue and required some easy fixes that have been rectified. We are working diligently to place these kits with doctors that will utilize the product as well as partnering with the appropriate hospitals that can accept new products. Getting the DEXA-C placed has been a bit challenging, but is a key priority amongst our sales team and now that we received IRB approval for a study using the DEXA-C, we are confident that we can place these kits into the field in the coming months. To summarize, I'm extremely proud of our team's performance and staying focused on building this company. We are well positioned to take -- advantage of the growth markets with several new proprietary products. We remain focused on penetrating these markets further this year through continuing training sessions and clinical trials. Looking to longer terms, we are well positioned for success especially we have the new products and more clinical studies proving out our technologies and to teaching of our doctors to use the Aurora products. We remain highly focused on the opportunities that are in front of us and continue to invest our growth in each of our major platforms, the ZIP, the SiLO and the DEXA technology. I will now turn the call over to Chad Clouse, Aurora Spine's CFO, who will review the financial results. Chad, please proceed.

Thank you, Trent. The numbers highlighted in detail in the press release, let me focus my comments in a few areas and add some color where I can. Total revenue for the fourth quarter of 2022 were $3.61 million, an increase of 21.7% compared to the $2.96 million in the same quarter 1 year ago. The improvement in revenues in 2022 were due to more procedures conducted in ambulatorial surgical pain centers or ASCs that incorporated Aurora products like the ZIP and SiLO. In addition, due to increased marketing and development like the clinical studies, the company has experienced increases in ZIP sales in this quarter. Total revenues for fiscal 2022 were $14.88 million compared to $10.54 million for fiscal 2021, an increase of 41.1%, primarily due to increased activities at surgical centers, where patients stays are much in duration through the use of Aurora's ZIP and SiLO. Gross margin on total revenues were 50.6% for the fourth quarter of 2022 compared to 46.0% for Q4 in 2021. Gross margins on total revenues for the fiscal year were 52.5% compared to 45.8% for 2021. The year-over-year improvement in gross margin is attributable to the company's strategy of selling proprietary Aurora Spine products and into the market with improved pricing at the ASCs. As the company continues to focus on growing sales, of course margin has the capability of additional improvements depending on sales mix and shipping costs. Total operating expenses were $2.67 million for the fourth quarter of 2022 compared to $2.26 million for the fourth quarter of 2021. Total operating expenses for fiscal 2022 were $9.379 million, which includes $1 million of noncash expenses compared to $7.54 million, which includes $0.79 million of noncash expenses for fiscal year 2021. Operating expenses increased primarily due to the increase in the ZIP study. EBITDAC, a non-GAAP IFRS measure was a negative $0.36 million for the fourth quarter of 2022 compared to a negative $0.57 million in the fourth quarter of 2021. EBITDAC was negative $0.26 million for fiscal 2022 compared to a negative $1.76 million in fiscal 2021. EBITDAC improvements were due to higher revenue and gross margin levels. Net loss was $0.84 million for the fourth quarter of 2022 compared to the fourth quarter of 2021, which is a loss of $0.903 million. Basic and diluted loss income per share was negative $0.01 per share in the fourth quarter of 2022 and negative $0.01 per share in the fourth quarter of 2021. Net loss was $1.5 million for fiscal 2022 compared to a loss of $2.36 million for fiscal 2021. Basic and diluted net loss per share was $0.02 for fiscal 2022 and of a net loss of $0.04 for fiscal 2021. Turning to the balance sheet, the company ended the fourth quarter with approximately $425,000 in cash and cash equivalents, subsequent to the quarter. We received approximately $700,000 in proceeds from a conversion of warrants. Accounts receivable slightly decreased sequentially, but we have continued to work on our collection. Our inventories increased by $350,000 in the quarter as we started building out the SiLO TFX kits. We continue to monitor our expenses and have tight control of our costs. That concludes my comments. I will now turn it back to Trent.

Thank you, Chad. Before we open up the call for questions, I'd like to conclude that we continue to make improvements internally to make sure that we remain on track for continued revenue growth. We obviously have more work to do, but the company is in a very good position to capitalize on the IP improvements we've established in 2022. We were highly successful in creating new proprietary products, and now it's time to demonstrate that we can scale the company on the commercialization side of the business. I appreciate everyone's patience and believe that we are at the early stages of reaping the rewards of our efforts. So far, we are very pleased with the progress of these initiatives. I'm very excited about the remainder of the year and beyond. With that said, operator, we are ready for any questions.

The first question comes from Tom Fedichin with Microcap Connection.

Congratulations on a good quarter. A bit more curious about the cash on hand, you've got 400,000 showing. There was a warrant exercise, I believe, $700,000 that was posted. That wasn't included in these financials I'm guessing, given they were exercised in Q1. Could you confirm?

Yes, they were exercised in Q1.

Okay perfect.

Those 16 subsequent events, it notes the amount of warrants and the amount of money collected.

Perfect. Second question is on the SiLO TFX initial sales have taken place. Do you have any kits currently out in the field if so, how many?

We just have a few alpha kits out in the field, similar to what we did with the DEXA launch. Our goal is to get through this alpha phase with 3 key individual surgeons out in the field and then rollout the first 10 kits to take it out of the alpha phase into a beta phase. And then from those 10 kits, we'll make and additional kits, maybe 10 or more to decide how many we want to build out in regard to demand.

The next question comes from Lindsay Lee, a retail investor.

Congratulations on a strong quarter. I wanted to ask about the billing codes for SiLO TFX and what the current situation is?

The SiLO TFX still remains on the established billing codes similar to other SI systems at the market, which is CPT code 27279. We've been billing the product as such since its first implication earlier this year, and we'll continue to stay on that coding until -- unless we are notified otherwise. And the allograft system that was created in the previous years, that system has been moved to a new T-code for coding reimbursements. But so far, the reimbursements have been favorable, and we haven't seen any major changes on the allograft reimbursement dollar amounts. So with that, we're pleased.

[Operator Instructions] The next question is a follow-up from Tom Fedichin with Microcap Connection.

Would like to get some clarity on the DEXA-C. You've got 10 kits currently outstanding. You've got 40, I believe, built in total that could hit the market. How do you foresee this rolling out? Do you see getting up to 20 kits during Q2 or in all 40 out by Q3, Q4? Like what's the time line to get all 40 kits out?

I would like to get all the kits out before the year is over, of course, in rotating regularly within our network and then the expanding network that -- we are working to establish. We did enter into an IRB study with the DEXA-C so we know that we'll have a select group of doctors that will be part of that study. So each one of those doctors will have a few sets or a couple of sets, I should say, in their facility, including facilities if they go from a hospital over to a surgery center. We have to -- we're trying to maintain a price point with this technology and not just drop it into a standard category of cervical cages. We're trying to -- what we say is a premium for that product, and we're trying to maintain that line that the product is unique and different than what they've used in the past. So I think that we will get all the systems in circulation before the year is over. It's taken longer than I wanted it to, but we are working on it week in and week out.

Okay. Can you speak to profitability for the company? Do you feel that's a second half story to look out for or do you think it comes sooner?

I think it's a second half of the year study second half of the year, because of the extra kits that we'll be going out with the TFX, we'll have more users getting a good price point on that product. We're getting favorable results. I think the clinical results so far have been very promising and I'm encouraged by that. And I think -- we already have a list of doctors and surgeons that want to use this product. So it's not a shortage of users. And I also, as I mentioned, with the DEXA-C, I think with the DEXA-C, we'll just start to get more approvals in different hospital settings around the country and more surgery centers around the country. And I think that, that will help contribute to a profitable months and quarters in the second half of the year.

The next question comes from Sergio [indiscernible] with Piper Research.

Congratulations on a great quarter it's much better than everybody expected. And my question about PRIA -- is your contract from, PRIA include all the devices, including the TFX?

It does PRIA covers all pre-authorizations for every one of our products. So there's no limitation on our side or on their side that I believe that as far as I help you with preauthorization for whichever procedures, the doctors performing, cervical fusion, lumbar fusion and SI joint fusion.

So wouldn't they be involved with remedying any coding problem?

Not necessarily remedying it, but they would work with the insurance carrier to point out that the system that's been created is part of the issued guidelines of each CPT code, because there's a description in each CPT code that's given and the doctor has to dictate what they just performed on that patient. So in the case of and SI joint fusion, they would say that -- they just perform surgery and that the technique that they used was the step, the step, the step. And each one of those steps could be part of that description for the CPT code reimbursement. And PRIA in advance of that would have already preauthorized that surgery or got a denial in case the insurance carrier denied the case they would then represent us to say, well we feel that this product does meet requirements and try to push it through and work directly with that insurance carrier from the PRIA representation. Yes. Yes, sorry.

[Operator Instructions] The next question comes from Tom Fedichin with Microcap Connection.

I'd like to know about breakeven. I know we discussed in the past, $1.2 million a month was the breakeven point, and we adjusted that due to inflationary cost to $1.3 million. Is that still accurate? I know this past quarter we did see an $800,000 loss of which $200,000 could be equated for the study with the ZIP? Now it was $600,000 loss and I think there was $300,000 in merchandise that was added, so I guess that would account for half of that. But I think the expense -- the loss was a little bit higher than I was anticipating. Could you dig into why that was and -- why the costs were a little bit higher?

Sure. The breakeven for us is right about $1.5 million to breakeven for us now.

Cost increase -- throughout the year in different areas, such as cadavers and travel costs and hotel costs and food costs. So that's -- we saw that continuously increase in almost every area that was different from the previous years and different from an increase. So we can blame it on the inflation, if you want, but just the cost of doing travel business definitely had gone up substantially, including cadaver costs like instead of it being a $1,500 cadaver costs, it's now a $3,000 cadaver cost or $3,500 cadaver cost. And those were costs that were not part of the factoring just a year prior so things like that was increased dramatically for us. And we're pushing on those to try to cut a corner where we can and try to cost save in areas so we can try to move that cost from a $1,500 breakeven down -- we're not doing a lot of R&D. I know it's going to be part of one of our questions is that if we can lower those costs internally, then bring it down from $1,500 down to -- sorry, $1,500 to $1,400 and then show more of a profitable number. And that's the number we're pushing towards.

The next question comes from Lindsay Lee, a retail investor.

I wanted to talk about the SiLO TSX and hear what you have to say about what that market looks like as far as outpatient surgery centers versus hospitals. Where do you think the revenue mix is going to be hospitals versus surgery centers?

Well, I think that we -- already have been selling more of our devices at surgery centers than in years past. That we saw a flip of that during COVID since the surgery centers opened back up for more elective surgeries than hospitals. We are always real top -- I won't say heavy, but we were just and mostly in hospitals and then that really started to expand out. So I think the TFX, because it is a lock-in and lock-out procedure and outpatient procedure -- we'll see a blend of it between hospitals and surgery centers. But if I were to guess, I would say it would be done more in an outpatient center this year. And I'll actually probably put out some stats on that towards the second half of the year just to kind of keep tracking what we're doing more of a hospital or surgery center my feeling is there will be more surgery center.

Okay. And in the pain management doctor market, is for SiLO TFX, is that a contested market between yourself and SI-Bone and other competitors or is that a pretty open market still?