Good evening, ladies and gentlemen, and welcome to Anika's Third Quarter 2023 Earnings Conference Call. All participants' will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today's event is being recorded. I'd now like to introduce Mark Namaroff, Vice President Investor Relations, ESG and Corporate Communications. Please proceed.

Thank you. Good afternoon, everyone and thank you for joining us for Anika's Third Quarter Conference Call and Webcast. Our Q3 earnings press release was issued after the close of the market today and then available on our Investor Relations website located at anika.com as our supplementary PowerPoint slides that will be used for the discussion today. With me on the call today are Dr. Cheryl Blanchard, President and Chief Executive Officer; and Mike Levitz, Executive Vice President, Chief Financial Officer and Treasurer. Please take a moment and open the slide presentation and refer to Slide number 2. Before we begin, please understand that certain statements made during the call today constitute forward-looking statements as defined in the Securities Exchange Act of 1934. These statements are based on our current beliefs and expectations and are subject to certain risks and uncertainties. The company's actual results could differ materially from any anticipated future results performance or achievements. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today. Please also see our most recent SEC filings for more information about risk factors that could affect our performance. In addition, during the call, we may refer to several adjusted or non-GAAP financial measures, which include adjusted gross margin, adjusted EBITDA, adjusted net income and adjusted earnings per share, which are used in addition to results presented in accordance with GAAP financial measures. We believe that non-GAAP measures provide an additional way of viewing aspects of our operational performance. But when considered with GAAP financial measures and the reconciliation of GAAP measures, they provide an even more complete understanding of our business. A reconciliation of these adjusted non-GAAP financial measures to the most comparable GAAP measurements are available at the end of the presentation slide deck and in our third quarter 2023 press release. And now, I'd like to turn the call over to our President and CEO, Dr. Cheryl Blanchard. Cheryl?

Thanks, Mark. Good afternoon, everyone and thanks for joining us. Please turn to Slide 3. We are pleased with our third quarter results, which underscore the strength of our strategy and reinforce our confidence in the powerful growth engine we've created. Following a period of purposeful investments to enable our transformation into the largest and highest opportunity areas of the joint preservation market, we are beginning to see the accelerated growth and momentum building across the business we've been working toward for some time. We delivered 14% growth in Joint Preservation and Restoration in the quarter and higher-than-expected growth in OA Pain Management, which has now grown 11% year-to-date. The acceleration in Joint Preservation and Restoration is being led by our newest products X-Twist and RevoMotion, which are gaining traction and generating a lot of interest in the markets we serve. The double-digit growth in the quarter positions us well for Q4 and as we head into 2024. The continued growth in our OA pain business follows a strong second quarter led by Monovisc growth globally and double-digit Cingal growth outside the US. Given the strong performance across our business, we are raising our revenue and EBITDA margin guidance for the year which Mike will go into in a minute. Our expanding Joint Preservation and Restoration portfolio has been key to our continued growth and we achieved a number of important milestones in the third quarter. Our RevoMotion reverse shoulder arthroplasty system had a very successful full market release in September at the OSET Annual Meeting in Boston attracting strong interest from surgeons. We also received the final 510(k) clearance from the FDA for our Integrity Implant System and we're on track for full launch in the first quarter of 2024. As a reminder, Integrity is our truly differentiated regenerative…

Thank you, Cheryl. Please turn to slide 7. I'll now walk you through our financial results for the third quarter of 2023. I'm pleased to report total revenue for the quarter grew to $41.5 million, exceeding our expectations driven by accelerated double-digit growth in Joint Preservation and Restoration and better than expected growth in OA Pain Management. Our results also reflected the lower non-orthopedic revenue we discussed in prior quarters following our planned exit from product lines that did not fit our profitability objectives. The lower non-orthopedic revenues reduced total company growth in the quarter by approximately three percentage points. Our Joint Preservation and Restoration revenue increased 14% in the third quarter to $13.5 million. This accelerated growth was driven by our recent product launches in the United States with X-Twist and RevoMotion and by strong international growth, some of which reflected favorable order timing. Through the first nine months of this year, Joint Preservation revenues have grown 10% compared to the same period of 2022, a nice acceleration from historic growth rates as we see the early benefit of our recently launched products in the United States as well as continued international growth. Revenue in our largest product family, OA Pain Management increased 2% to $24.9 million on increasing above market global customer demand offset by lower transfer units in the quarter on order timing following a high second quarter. Through the first nine months of the year, our OA Pain Management revenues have grown 11% compared to the same period of 2022 on rising global demand led by Monovisc in the United States and both Monovisc and Cingal outside the United States. As expected, our non-orthopedic revenue declined 22% to $3.1 million and is down 34% year-to-date reflecting the continued impact of our exit from legacy product lines…

Thanks, Mike. Please turn to Slide 9 before we open up the call for Q&A. We're excited about the acceleration and growth of our Joint Preservation and Restoration portfolio, as our new products gain market traction and we see our strategy in action. We are also pleased with the expansion of our market-leading OA pain management products both in the U.S. and OUS. With the strength of our growing differentiated HA-based regenerative portfolio, as well as our value creation opportunities with Cingal and Hyalofast, Anika is very well positioned for and committed to continued top and bottom line growth in the years to come. Importantly, we have self-funded this transformation and continue to maintain a healthy balance sheet with a solid cash position with no debt. I'd like to take a moment to thank all of our employees for their continued hard work and dedication to supporting our efforts, as we build Anika into a leader in joint preservation and restoration. Together we're driving real momentum, as we work to achieve our mission of restoring active living for people around the world. And with that, we'll open up the line for questions.

Thank you. [Operator Instructions] Today's first question comes from Mike Petusky with Barrington Research. Please go ahead.

Hi. Good evening. Congratulations on some of this progress. I guess, Cheryl, I wanted to ask on the last quarter's call, you guys talked about maybe some disappointment around some distributors maybe not driving as hard to the hoop as you would like. I'm just curious sort of what's the status of sort of your distributor base relative to where it was 90 days ago. And could you just talk maybe in whatever level of detail you can about the investments you're planning on making and sort of the timing of all that? Thanks.

Absolutely. Thanks, Mike. I appreciate the question. Yes, we've done a lot of work around really understanding the hybrid model that we've chosen to deploy for obvious reasons. It addresses not signing up for the full fixed cost of a fully direct sales force for a business the size we are. At the same time, there are compromises that you make in doing that because you go to 1099 distributors that are not necessarily fully focused on you. I'll tell you what we do see is we have a very large number of distributors that are very focused on us, and they are growing the business very nicely as we would expect them to, and really driving those opportunities as we see the possibilities to do. What we have seen though are some other distributors that are really not taking advantage of getting these great products out. We know that the surgeons love them when they see them. And so we've taken the approach using some pretty careful data analytics to understand those situations and specific geographies to make sure that we kind of use a very focused approach to hiring some truly direct sales reps, and those folks are going to be focused on sports medicine and regenerative solutions so a portion of our portfolio. And again, I want to highlight that this is a limited move that we're making to really make sure that we take advantage of specific geographies, where we're just not seeing the kind of growth that we're seeing everywhere else. We started the hiring process and we see ourselves moving into next year before we're sort of fully up and running with that. I'm not going to speak to the specific numbers, but it is a very focused effort. And we feel like it's something we're really excited to be able to get that focus with sports med and regenerative solutions.

Will that change the number of like, I guess, I don't know if you call them sales managers, but essentially the folks that currently manage the distribution relationships is that does this strategy at all change those numbers as you sort of look out?

No, it doesn't. And the reason for that is those folks are managing across the distribution network, including the Arthrosurface Joint Solutions. And we have a lot going on with that with the recent product launch of RevoMotion. So we'll continue to work to drive the current hybrid sales force that we have, while we take this opportunity to have some very focused additions in driving those additional geographies in sports and regenerative solutions. And we are -- I will comment that, we're -- we've committed that we won't be -- we're really shifting our focus now in terms of the investments we are making to commercial execution. So we're not adding to OpEx by doing this.

I appreciate it, when you said that in the prepared remarks, but I think it's a good reminder for everyone. So I did want to ask real quick Cheryl on the Integrity patch obviously -- I know you guys are excited about all the new products, but essentially saying hey confident this could be standard of care. I mean, can you just talk about I guess why you have that confidence and is this the kind of product that could actually make a material impact as early as full year 2024? Thanks.

Yeah. I'll tell you the confidence comes from a number of things. We really put some significant energy toward ensuring that we were coming up with a product that addresses true unmet clinical needs. And one of the big pieces of feedback we heard from clinicians was the existing first-generation collagen patches that are in the market today, just don't provide the kind of strength or suture retention strength, especially when it gets wet which it does immediately intraoperatively. So we address that. We also hear that, there's obviously always a greater need for increasing the regenerative capacity. We've addressed that. There was also a lot of feedback around simplifying surgical technique and instrumentation and fixation to give the surgeon the ability to be efficient and confident in the repair. And so we've really come at it from all directions. We've done a number of labs with already a number of surgeons, and the labs have gone incredibly well and we're really feeling a pull from the surgeon community to get this into their practice. So that's really what our confidence is based on.

And Mike, I'll speak to the other part of your question around the impact in 2024 and we'll get more direction on 2024 on our normal schedule. But as Cheryl said, and I said we expect double-digit growth to be continuing here in 2024, and Integrity plays a real solid role in that. We're excited that that product remains on track to launch in the first quarter. We were very pleased to be able to get the clearance when we did so that we could get everything set to launch here in the first quarter. We're cognizant, it's a new product, and it's going to take a normal ramp that you would expect for a new product. But the team is very excited as Cheryl said, in her comments we really are seeing the pull from the surgeon community, and we're seeing it from our distributors. And so we're being very thoughtful about how we're going to roll that out, but we do expect it to be a meaningful driver of the double-digit growth next year.

Okay. And then Mike I guess just a last one for me for now. So your commentary on adjusted EBITDA, I think, I heard you say 6% to 8% this year and then some number higher than that range next year. Was that what you actually meant to say? Or did I not follow that right?

Yes, Mike, you have that correct. I said that, our expectation was low single-digit this year. We have raised it now with our progress to date to 6% to 8% is the range for this year, and we expect it to increase next year. We need to see -- as we go into next year we'll hopefully get that feedback from the FDA. We may have some things that we want to focus on here to drive Cingal. But even with all of the different things we're doing next year now that we are stabilizing the spending and driving the growth of the products that we have now launched, and are launching earlier in the year, we feel confident to say that we'll be expanding our EBITDA margin next year even as we drive the revenue growth.

One quick housekeeping, if you have it in front of you. Is there any chance you have the CapEx beyond this $0.7 million like $728,000? Do you by any chance have that exact figure?

The exact figure was $680,000.

$680,000. Perfect. Thanks, guys.

Thanks, Mike.

Thank you. And our next question comes from George Sellers with Stephens Inc. Please go ahead.

Hey, thanks for taking the question. Congrats on a good quarter.

Thanks, George.

Maybe to start with the Joint Preservation and Restoration segment in the quarter. Could you just give some additional details on the contribution from X-Twist? And you noted RevoMotion contributed as well in the quarter. Just curious how material that contribution is? And then as a follow-on to that for the raised guidance, how much of that is related to the launch of RevoMotion? Thank you.

Hi, George, this is Mike. So first -- the first part of your question around the contribution from X-Twist and RevoMotion that was the primary driver of the growth in the quarter. And I would say that that's what drove us to double-digit growth. We also saw really strong international revenues in joint preservation in the quarter. Now I will say that some of that is timing. We've talked about this in previous quarters. That part of our business is through distributors. And so sometimes you can get lumpy quarters. And so we had a strong first quarter and then a lower second quarter a strong third quarter here. And so that is a lumpy part of our business, but that is a nice growth part of our business for the full year. So that is what the primary driver of the growth was X-Twist and RevoMotion together. It's nice to -- now we've been on the market since the first quarter with X-Twist PEEK and are excited to see X-Twist Biocomposite coming on in the first part of next year. RevoMotion as we said moved into full market release in September and we're seeing growing momentum there. Can you remind me the second part of your question?

Yes. Just curious on the increase in the guidance how much of that is related to the full commercial launch of RevoMotion?

Okay. So we increased the guidance across the business. So the increase in the guidance on OA Pain Management which we increased over $3 million was driven by the performance year-to-date and the expectations in the United States led by Monovisc and international led by Monovisc, but mostly by Cingal where we continued to see double-digit growth. So that was the biggest driver of the increase, but we also raised the low end of our range in joint preservation now that those products are like RevoMotion now launched and on the market and we've retired risk associated with those new products. So we're seeing growing momentum for the X-Twist. And again we just launched the RevoMotion for market release here in September.

Yes. Okay. That's really helpful. Thank you for that color. And then maybe a question on the. Integrity patch system. How many of your current surgeon customers are already using a rotator cuff patch system obviously a different one, but how many are already using that device? And I guess I'm really trying to figure out what the cadence of that growth and revenue contribution might be in 2024?

Yes. George, it's a fairly significant number that are currently using some patch. I mean there is one patch that is the market leader and that's frankly primarily what anybody is using right now. In terms of our ramp, I mean, we are having very good meetings with surgeons right now who are very excited to get this into their practice. It's not uncommon for a product like this for surgeons who want to do a couple see how their patients do, wait a few months before they fully adopt it kind of learn go to some training and education make sure they're serving their patients well that they're very familiar with the system. So I think we're expecting to see adoption over the next year as we get this launched in Q1. But again, I think there's a real understanding that this product addresses some pretty significant unmet needs that they all have and they're very excited to get going with it.

Okay. That's really helpful. And Mike maybe one on OpEx. Clearly some good cost controls going on from your perspective. I'm curious as we look ahead is the third quarter a good sort of run rate going forward on both the SG&A line and also the R&D line? As you sort of maybe switch out some MDR-related costs for some direct sales rep costs?

Well, first I'd say yes we are pleased to be able to drive savings on the OpEx side and we are expecting our OpEx to stabilize here as we look into 2024 and that's what's going to drive the bottom line as we grow the business. In terms of the quarterly phasing, there were a couple of things in the third quarter that were not normal phasing within OpEx. One was we took a charge – there was no cash in the quarter but we took a charge for a software project that we discontinued and that was – that project had stalled and we have the opportunity to make other process improvements and system improvements to be able to drive some savings by making that decision. So that was in the quarter that was $4.5 million. And then the other thing in the quarter is we have been making some changes around the business. We had some forfeitures on the stock compensation side of about $400,000 in the quarter. And – so that was reflected in Q3. In terms of the specific quarterly phasing of R&D, that can be lumpy from a quarter-to-quarter basis just depending upon some of the works. We are pleased with how we've been wrapping up the MDR and having real success in getting through that process to date. So we expect that MDR is going to continue to be less of a part of our story from an investment standpoint because of the successes we've had so far in retiring that. But Integrity is not yet finished and not yet launched that's going to launch here in the first quarter. And so those kind of wrap-up costs and whatnot will continue through the end of the year and then we'll start to see that coming down next year. So I hope that's helpful directionally.

Yes. That's really helpful. Thank you all for the questions. I’ll hop in the queue.

Thank you. And our next question comes from Jim Sidoti with Sidoti & Company. Please go ahead. Hi, Jim, your line might be muted, sir. Mr. Sidoti, are you there?

Sorry about that. Can you hear me now?

We can. Hi, Jim.

Okay. Great. So I was just following up on that comments about the software charge. Is that primarily in SG&A?

Yes it is.

And can you just give us a little detail what was the software that you were developing that you stopped?

It was support software on the commercial side. And it was a multi-year project and the project had stalled. And we made the decision as we -- look we're constantly looking across the business at where we're allocating our resources and it made sense to not spend more money to pursue that because we found that we were able to drive operational process improvements and also use the systems that we already have in place to have a more cost-effective solution. And so that's why we made the decision this quarter to discontinue that software project.

Okay. And then the sales team can you give us some sense on how many folks you would expect to bring on and how quickly you think -- or how long it will take for them to ramp up?

Yes, Jim, I'll tell you we've already started hiring. This is very, very focused and targeted. It's really going to be to augment the hybrid sales force. It's going to be focused just on regenerative and sports and just in a few geographies where we're just not seeing the kind of performance that we're seeing everywhere else in the country. So, I think we'll be providing more updates on that as we go forward. But the process has begun and it will continue into next year.

All right. And then if you look at the quarter you reported 14% growth for joint preservation and that's without any contribution from the new sales folks and you're very early in the launch cycle for Integrity and RevoMotion and X-Twist. So, is it fair to say that you -- I know you said double-digit growth, but that's a pretty general term. Would you be disappointed if joint preservation didn't accelerate from the 14%?

Jim, it's Mike. I'll take that question. We were very pleased given as you said how early we are with these new product launches to see that 14% growth number. And that growth was -- the double-digit nature of that growth was driven by the new products. That being said, we also benefited in the quarter from strong international sales and some of that is timing because of the lumpiness of that business. And so that's why -- that's reflected in our guidance for the year of 9% to 10% growth for the year in joint preservation. So, we'll give more clarity around the full year guidance in terms of specifics next year. But I think the key takeaway from our perspective is it's great to now have these products on the market. It's great to see the initial feedback that we're getting. It is still early but we're excited for what that can ramp and we do expect that to be double-digit growth here in 2024 in joint preservation.

Okay. All right. Thank you.

Thanks Jim.

Thank you. And our next question today is a follow-up from George Sellers. Please go ahead.

Thanks for the additional question. I'm just curious as we think about 2024 and nearing that breakeven net income point, how much of that margin improvement is related to positive mix associated with some of these new product launches versus just maintaining the cost controls that you mentioned earlier?

That's a great question. If you look at where we're trending right now, we hit breakeven this quarter. So, I think we've demonstrated that we have line of sight to doing that. I think we have a lot of exciting things happening in 2024 and we're expecting that revenue growth to be healthy as we said. I think, it's a good question. The new products are all within that higher gross margin level in line, with our multi-year targets. And so as those new products continue to ramp, that is very helpful to us from a mix perspective. I think that managing the cost side also matters too. So, I think it's just we're not that far frankly, from doing that right now. I think it's a combination of the growth. Having finished what we needed to finish in driving these new products, we can now manage the spending. And so I think it's within our control, to deliver on those results now that we've done the work that we did here in 2023. Q – George Sellers: Okay. Great. And thank you again, for taking the additional question.

Thanks, George.

Thank you. And our next question is a follow-up from Mike Petusky of Barrington Research. Please go ahead. Q – Mike Petusky: Thanks. Just a couple of quick ones. I guess sort of cool Mike, to see the cash balance go up and the free cash generated in the quarter. And I'm just wondering, as you sort of look out with seemingly a bunch of positive things that are converging here. I mean would your hope be that positive free cash is going to be sort of a regular part of the story going forward?

Well, first of all, I'll say, yes, we were very pleased with the growth in cash in the quarter. And I think it reflects the health of the business. In terms of specific cash guidance, I think what I want to say is a couple of things. I think, first of all, we talked about the improving profitability next year. That will definitely help on the cash side. Again, we're in a good solid place this year. If we didn't have the non-recurring charges, we had this year and the spend associated with that we're in a good place already and we believe we're improving next year from that. The other things that will impact cash next year, in part some of it depends upon Cingal and what that time line is going to be because we may need to make some investments to be able to support the manufacturing of that. Again, we'll need to see how that timeline comes out in our interactions with the FDA. But apart from CapEx, I think the guidance that we've already given would suggest that the cash flows should be moving in the right direction next year. But I just -- I feel more comfortable giving qualitative guidance at this point, as opposed to quantitative. But it's all moving in the right direction. Q – Mike Petusky: Great. And then just one more. Obviously, you're getting some questions on Integrity and how quickly that can ramp and I'm sure everybody is sort of curious about what was the actual -- the actual contribution of RevoMotion, X-Twist, et cetera in the quarter. Have you guys given any thought as you look at 2024, and how you guys are going to sort of report all that out and communicate to in some way trying to quantify or give greater detail on some of these new products since it seems to me, are so critical in terms of just the overall thesis here?

Yes, I appreciate the question. I mean, our business is still small enough, that -- we're obviously, reporting the way we are just to make sure that we provide valuable information that will trend. As we continue to grow, and as we see a lot of these products making contributions that we think are worthwhile reporting out, then we'll definitely consider that going forward Mike. Q – Mike Petusky: All right. Very good. Thanks, guys.

You’re welcome. Thank you.

Ladies and gentlemen this concludes today's question-and-answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful evening.