Good morning, ladies and gentlemen, and welcome to Anika's Third Quarter Earnings Conference Call. [Operator Instructions]. I would like to remind everyone that this call is being recorded on Thursday, October 31, 2024. I will now turn the call over to Matt Hall, Director, Corporate Development and Investor Relations. Please proceed.

Thank you. Good morning, and thank you for joining us for Anika's third quarter 2024 conference call and webcast. I'm Matt Hall, Anika's Director of Corporate Development and Investor Relations. I joined Anika 2.5 years ago in Business Development and have recently taken over Investor Relations responsibilities from Mark, who exited the company earlier this quarter. I have spent more than 15 years in the healthcare and life sciences investment space, and I look forward to engaging with our investors and analysts on the call today. Our Q3 earnings press release was issued earlier this morning and is available on our Investor Relations website located at www.anika.com as are the 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 Steve Griffin, Executive Vice President, Chief Financial Officer and Treasurer. Please take a moment and open the slide presentation and refer to Slide 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 may include adjusted gross margin, adjusted EBITDA, adjusted net income and adjusted earnings per share, which are used in addition to the results presented in accordance with GAAP financial measures. We believe that non-GAAP measures provide an additional way of viewing aspects of our operations and 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 results to the most comparable GAAP measurements are available at the end of the presentation slide deck and our third quarter 2024 press release. And now I'd like to turn the call over to our President and CEO, Dr. Cheryl Blanchard. Cheryl?

Thanks, Matt, and good morning, everyone. Thanks for joining us. Please turn to Slide 3. Today marks an important day in the Anika story, and I'll start by providing an update on our ongoing strategic review that has been focused on driving the most optimal capital allocation structure. Earlier today, we announced a series of strategic updates, all of which culminate in a renewed focus that Anika will have going forward on our differentiated HA-based products that serve the approximate $4 billion market of OA pain management and Regenerative Solutions. I'll be speaking more to our updated strategy, but now I'll take a moment to discuss the details of today's actions. First, we announced the simultaneous signing and closing of the sale of Arthrosurface and our intent to sell Parcus Medical. Second, we announced a restructuring and rightsizing of our operating expenses to support our more narrowly defined target markets. And lastly, we announced plans to reclassify our revenue to give shareholders a clearer view of our value drivers. Let me take a moment to talk about Arthrosurface and Parcus Medical. These decisions are the result of our previously announced company-wide strategic review to drive the highest total return on invested capital. As part of our robust assessment of our products, pipeline and market opportunities and our experience operating these businesses in what has been a rapidly changing environment over the last few years. We concluded that the Arthrosurface and Parcus Medical portfolio of products would be better suited at another company. The expectations of these acquisitions have fallen short due to a number of factors, including unmet commercial synergies, higher costs and complexities due to the changing regulatory requirements and the capital-intensive investments needed to compete. At the same time, over the last four years, we've taken significant steps…

Thank you, Cheryl. Before I review the quarter, I'll briefly discuss the Arthrosurface transaction. Today, we signed and closed on the sale of Arthrosurface for an estimated $10 million, $7 million through a promissory note payable over 10 years and approximately $3 million subject to sales milestones and customary networking capital adjustments. In the coming weeks and months, our team and the buyer will manage the necessary processes to ensure a smooth handover. Additionally, we announced the planned divestiture of Parcus Medical. Further disclosure will be provided when required. Piper Sandler is managing this process. We announced a planned corporate restructuring to better align our resources following the exit of Arthrosurface and Parcus Medical and our renewed focus on HA products. In the third quarter, we recorded a onetime noncash impairment of Arthrosurface assets for approximately $27 million. We also expect to incur $3 million to $5 million for corporate restructuring activities in the coming quarters. Starting in the fourth quarter, we expect to move historical results of Arthrosurface and Parcus Medical into discontinued operations. As Cheryl mentioned, starting in the fourth quarter, we will classify our revenue into two new categories, our commercial channel and our OEM channel. I'll provide details, historic results and projections for these channels after discussing the third quarter results. My third quarter remarks are based on our historic sales categories, OA pain, joint preservation and non-orthopedic, consistent with our operations during the quarter. Now let's review the third quarter results. Please refer to Slide 5 of the presentation. Anika generated $38.8 million in total revenue in the third quarter, down $2.7 million from the same period in 2023. This decline was driven by lower revenue from our JNJ Medtech partner and softness in the Arthrosurface and Sports Medicine businesses, which we announced the sale…

Thanks, Steve. The results of our strategic review represent an important pivot for Anika. The sale of Arthrosurface and the planned divestiture of Parcus Medical mark a strategic shift towards our Regenerative Solutions and OA pain management products, including the commercialization of Hyalofast and Cingal in the U.S. First, we've ramped up Integrity in the U.S., achieving a 40% increase in new surgeries this quarter with over 20% of surgeons new to Anika. Second, we filed the first module of our 3-part PMA for Hyalofast in the U.S. on track for market launch by 2026. Third, we've made significant progress with Cingal by acquiring the Aristospan NDA, allowing us to start the necessary remaining studies for FDA. We've also updated our revenue classification for better visibility into our commercial and OEM channels, reflective of how we will manage our business and build value. And lastly, our updated margin guidance sets a new baseline for Anika. Our OA Pain Management business continues to show strong double-digit 20% plus EBITDA margins, and our investments in the commercial channel and R&D for Regenerative Solutions promise long-term shareholder value. Our team's successful execution on challenges and opportunities, the Integrity launch, global success of our HYAFF technology, upcoming Hyalofast launch and the potential of Cingal to redefine OA pain management in the U.S. all represent significant growth and value creation for our shareholders. And with that, we'll open up the line for questions. Operator, please proceed.

[Operator Instructions] And your first question comes from Jim Sidoti from Sidoti & Co. Please go ahead.

Hi. Good morning. A lot of changes to digest here. So start out a quick one. The non-orthopedic revenue, will that be now part of the commercial channel going forward?

No, that's going to be -- that's a great question, Jim. No, that's going to be part of the OEM channel. It represents sort of a long-term agreement similar to that of our JNJ relationship. The non-orthopedic and JNJ will be the primary elements of the OEM channel.

Okay. So that's included in that $76 million to $78 million for 2024?

Correct.

Okay. And can you give us any guidance on gross margins in 2025?

Under a new restated basis, I mean, I probably will wait until we get through some of the work that's going to be required to separate out the Arthrosurface and Parcus before we do it. I think it's a little preliminary to do it because it's not something we've got prepared. We've given the EBITDA guidance. So I think that should help you get there.

Okay. You mentioned continued investments in the sales force for the commercial channel. I mean is that something that you wait until you get the products approved for? Or is that something you start right away?

Jim, thanks for the question. Yes, I would tell you that over time, even as we've been going through this strategic assessment and running these processes, we have been taking a very careful look at what we think the commercial channel needs to look like to continue to drive the 18% CAGR that we've seen happen historically. And many of those investments have been made for the time being. We will continue to make those investments largely focused on direct sales reps as we go further into next year, I mentioned that we'll have some additional kind of short-term product launches that are new shape sizes and configurations for Integrity. We've got some other stuff in the works that I'll give more detail on going forward and then Hyalofast coming. So as we continue to build those products, we will continue to build the direct sales profile of what that commercial channel looks like. And those things are incorporated in that future guidance that Steve provided.

Okay. But just so I'm clear now, the commercial channel, the primary products will be the Cingal international products, the Hyalofast and Integrity. Are those going to be the three primary products for that channel? Or what else is in that bucket?

Yes. It's all the OUS products, which is Monovis, Orthovis, Cingal, Hyalofast really are the main drivers for the OUS business that will be in that commercial channel. And in the U.S., it will be the entire regenerative channel. So that includes today Tactoset and Integrity and then the future product launches in the regen space.

Okay. And it sounds like you think you'll be able to get through this transition and still be able to at least be cash flow neutral. Is that right?

Yes. We haven't necessarily provided updated cash flow guidance. But for the full year, I'd expect to be relatively neutral. What I would say for now.

Okay. All right, that's it for me. Thank you.

Thank you, Jim.

And your next question comes from Mike Petusky from Barrington Research. Please go ahead.

Can you give sort of the -- sorry, if I missed this, the revenue associated with the divested Arthrosurface business.

We haven't necessarily broken out.

How much revenue does this -- all right.

Yes, but it's probably around $25 million, just north of that in terms of total annual revenue.

Okay. Understanding this was before your time, but do you guys by any chance have -- I know you paid $60 million cash. Do you have any idea what the earn-out that you all paid for that asset ended up being? I mean, did that end up being something like all in close to $80 million total, meaning $60 million plus $20 million? Or do you have that figure handy by any chance?

I do have the figure handy. I think it's around $77 million total.

Okay. Any chance you guys are willing to provide what the sort of project -- because you are projecting out EBITDA margins for '25 and beyond. I mean, can you give a sense of as a stand-alone that JNJ U.S. OA business, what the -- if it were segmented, what those margins are? I mean, can you at least confirm north of 20%, north of 25% as a stand-alone?

Sure. We can't necessarily break out that one customer, but we do -- I did provide some guidance here to think about how much of an investment we're making in our regenerative business. And I shared that, that investment is roughly $14 million. So when you do the math to kind of look at our guidance and then think about what the remainder of the business is, that's our OA Pain, Orthovis, Monovisc and Cingal, you end up in a position where it's strong 20-plus percent margins, and as I mentioned, highly cash generative. So it still represents an important element of the company. And I think Cheryl's remarks highlight it well, which is we'll continue to support our OEM customers, including JNJ because it's an important piece of the company. But really the growth element of the business is going to come from the commercial channel.

Okay. And I guess relative to the Parcus asset that's remaining to be sold, I mean, I should assume sort of something sort of like Arthrosurface, I mean, pretty modest relative to what you -- modest proceeds relative to what you paid for the asset. Is that fair?

Yes. We're literally just announcing it today. So we'll begin the process of having discussions publicly here, and we'll share more when we have time to share more.

Okay. And the -- just last question for me. The global headcount, 325 to 225, that sort of is all inclusive of Arthrosurface, Parcus, all of it.

Yes.

It is. It's Arthrosurface Parcus and some additional reductions that were made.

Okay. All right. That's all I've got. Thanks.

Thank you, Mike.

At this time, we have no other questions. Please proceed. Ladies and gentlemen, this concludes the conference. You may now disconnect your lines.