Greetings, and welcome to Anika's Fourth Quarter and Year-End 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Namaroff, Vice President, Investor Relations, ESG and Corporate Communications. Thank you. You may begin.

Thank you very much and thank you. Good evening, everyone. Thank you for joining us for Anika's fourth quarter and year end conference call and webcast. Our Q4 earnings press release was issued after the close of the market today and is available on our Investor Relations website located at 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 Mike Levitz, Executive Vice President, Chief Financial Officer and Treasurer. Please take a moment and open the slide presentation and refer to Slide number2. 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 operation and performance. But when considered with GAAP financial measures, the reconciliation of GAAP measures, they provide an even more complete understanding of our business. A reconciliation of adjusted non-GAAP financial results to the most comparable GAAP measurements are available at the end of the presentation slide deck and our fourth quarter year end 2022 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. I want to start today's call with a high level overview of where we are and why we're so excited about the value creation potential of our business. Over the last three years, we have expanded our addressable market from $1 billion to $8 billion plus. We've attracted leading industry talent and we've developed and are now introducing into the market differentiated solutions in the largest and fastest growing segments of orthopedics. As we enter this next phase of execution with a strong balance sheet and expanded portfolio and an energized team, we are very excited about the path ahead. And just this last year alone, we made a number of strategic investments and our teams continued to execute well. X-Twist, our new cornerstone product in Sports Medicine, just moved into full market release at the beginning of this year. We've initiated the limited market release of our RevoMotion Reverse Shoulder Arthroplasty system. We completed significant development and filed multiple 510(k)s, the FDA for our hyaluronic acid based regenerative rotator cuff patch system. We have nearly completed enrollment for the Hyalofast cartilage repair Phase III pivotal trial and we are in the process of engaging with the FDA on Cingal our next generation OA pain therapy, following the exciting news last quarter that we met the endpoints of our Phase III clinical trial. 2023 is an inflection point for Anika, as we build towards our accelerated growth targets over the coming years. Now let me get into more specifics. As you can see on Slide 4, we delivered strong financial performance with revenue up 11% for the fourth quarter and 6% for the full year, even with sustained supply chain headwinds through the year. Anika…

Thank you, Cheryl. I will now walk you through our financial results for the fourth quarter of 2022. All comparisons will be against the same period of 2021. Please turn to Slide 9. Total revenue for the quarter was $39.6 million, an increase of 11%. Revenue in our largest product family, OA pain management increased 20% to $23.7 million, due primarily to favorable year-over-year ordering patterns from J&J Mitek, which had greater quarterly volatility last year and to a lesser extent due to continued year-over-year international growth. As a reminder, revenues in our OA pain management product family can vary significantly on a quarterly basis based on ordering patterns by our partners and distributors, both in the U.S. and internationally. However, that quarterly volatility generally stabilizes on an annual basis. Our joint preservation and restoration revenue in the quarter increased 8% to $14.3 million on improved elective procedure volumes with continued strong growth in Tactoset. Our non-orthopedic revenue declined to $1.5 million compared with $2.8 million on last time buys a certainly legacy products last year. Our gross margin in the fourth quarter was 61% and includes the impact of $1.6 million of non-cash acquisition related expenses from the 2020 acquisitions of Arthrosurface and Parcus Medical, as well as a product rationalization related reserve of approximately $600,000 associated with legacy non-orthopedic products we no longer expect to sell. Our adjusted gross margin, which excludes the non-cash acquisition related expenses and product rationalization charge was 66% in the fourth quarter, that's up 9 points from 57% last year. As we continue to successfully navigate the global staffing and supply chain challenges, the cost production inefficiencies and increased reserves in Q4 last year. From a spending standpoint, our research and development and SG&A expenses together totaled $30.8 million in the fourth quarter,…

Thanks Mike. Please turn to Slide 12. I'd like to close by reiterating that 2023 is a real value inflection point for Anika. We are building a best-in-class portfolio as we continue launching exciting new products in high opportunity spaces and optimize our U.S. commercial reach and focus. With the key shoulder related product launches in 2023 of X-Twist and RevoMotion as well as the efforts supporting the planned 2024 launch of our HA-based regenerative rotator cuff patch system. We are diligently driving execution supporting the multi-year growth prospects within joint preservation and restoration. This year, we are also exploring the potential U.S. and Asian market opportunities for Cingal, as well as completing the clinical follow-up work for Hyalofast as we approach completing enrollment in our Phase III pivotal trial. We remain disciplined as we deploy our capital, further enhance our portfolio and deliver on our many growth opportunities. Anika continues to have a healthy balance sheet with a solid cash position and no debt and we remain laser focused on delivering our multi-year growth targets. Before I open up the call for questions, I'd like to take a moment to thank all of our employees for their hard work and dedication to Anika. We have a talented team supporting our efforts and we appreciate all that they do each day to advance our mission to serve our customers and their patients as we restore active living for people around the world. We look forward to providing updates on our progress in 2023. And with that, we'll open up the line for questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of George Sellars with Stephens. Please proceed with your question.

Hi. This is Harrison on for George. Good afternoon and congrats on the quarter and strong finish to the year. My first question is, just wanting to dig in on your 2023 guidance a little bit more. I know it's a little bit lighter than we were expecting. I was wondering if you could give us any more color on what it assumes from a macro standpoint in terms of staffing issues, supply chain challenges or any other headwinds that may persist in 2023? And also just how much general conservatism is baked into those numbers? Thanks.

Hi. Thank you, George. Harrison, excuse me, this is Mike. So I just want to make sure that you understand one element of it, which is the non-orthopedic revenues. That is an area where we have -- we're expecting a 35% decrease year-over-year because it's not driving value for us long term in terms of our growth strategy. So relative to the expectations, I think I want to make sure that you understand that and included in that now is the legacy veterinary product sales. Those had historically been recorded in OA pain management and now are being reflected in non-orthopedic. As it relates to our expectations for this year, I think this is the growth in OA pain management of 2% to 4%, is above market growth in this more mature market and also coming off of a very strong year internationally, which was in part related to timing as we called out last year. We just finished a year where we grew 9% and most of that came from international, which a lot of that was COVID recovery as well as distributor timing, it can be a lumpy part of our business. It also though international represents a significant growth opportunity for us. So we're very excited about it. There was some favorable timing in the year. As it relates to our joint preservation guidance, again, more than doubling the growth rate of that business and moving into the teams there. And so we're definitely reflecting our excitement in that business and what we've got here for guidance. But we're also reflecting the reality of the timing of our launch. We announced that we're moving into full market where move this this quarter into full market release of X-Twist. And a normal ramp doesn't happen overnight, because surgeons…

Got it. Yeah. That makes sense. And I wanted to follow-up on the veterinary products and what the quarterly cadence you're expecting from those products throughout 2023?

All right. Yeah. So we don't provide quarterly guidance generally and there are reasons for that. One of them being it can be pretty lumpy. Frankly, and as we said, as I said in my earlier remarks, you really need to look at things on an annual basis. It's a very small number. I mean, we've talked about last year, so it was about $5.9 million last year, but our guidance for non-orthopedic, which impacts all the elements in non-orthopedic, is down 35%. And so it's not a big -- non-orthopedic as a small part of our business. But what I think it reflects is, us focusing on the things that are really going to drive the most growth and us making decisions to place more priority there. And to really drive value from what we've got in the non-orthopedic segment.

Thank you. That's helpful and thanks again or congrats again on the strong quarter. Thanks.

Thank you.

[Operator Instructions] Our next question comes from the line of Jim Sidoti with Sidoti & Company. Please proceed with your question.

Hi. Good afternoon. Thanks for taking the question. A couple of questions on Cingal. The first one, has the release of the Phase III clinical data helped your business overseas? I know it's U.S. trial, but have you been able to use that to build some of the business outside the U.S?

Hi, Jim. Yeah. Thanks for the question. We will be using that data. It's obviously fairly knew that it's come out, but it is being incorporated into our marketing materials for use overseas. It's obviously very supportive of the strength of the product. We've got = what we think is unparalleled clinical data for especially the OA pain product, but the next generation of OA pain product because it really demonstrates superiority over both of the active ingredients in Cingal and placebo across all three of the clinical trials that we've run. So yes, we are using all of that data for use in our marketing efforts overseas.

And in general the OA business, the volatility was less in 2022 than it was in 2021. Do you think that trend continues in 2023 or do you go back to a more lumpy year, quarter-over-quarter?

Hi, Jim. This is Mike. That business can be lumpy, but one of the reasons that it is, it’s less so in the end user side than it is in the transfer units. Over half of our revenue comes from transfer sales with the corresponding remainder being related to royalties. On the transfer sales, that's entirely driven by how J&J Mitek manages their business within their buying group. And so it does become a bit challenging to predict that because it's really driven by their own internal decisions. That's why we generally say, focus more on the year than on the quarter because that quarterly volatility tends to offset itself. I think historically and at this Q2, it tends to be a stronger quarter than other quarters. But as I say, it really is unfortunately more impacted by decisions within J&J of how they manage their own operations.

And then on the other side of the business, it looks like the big launch will be the -- there were shoulder. What investments do you need to get that out to market other than the tooling Is there going to be an increase in salespeople or increase in surgeon training? How should we factor that into the expenses as for 2023?

Yeah. Let me start Jim on that and then Mike may have some comments to add. I mean for a product launch is as significant as a new implant system, there are a number of things. The first thing is right now with the limited release we are getting feedback around the instruments, the instrument trays and how they're deployed. I think you heard me talk about the fact that we're really excited about this streamlined two tray design. It's highly differentiated and drives a lot of efficiency. But with that, we want to make sure we really get it right. So we'll get that feedback. And then for full launch, we've really got to build enough instrument sets to get them out in the field. In parallel with that though, we will be talking about the system with surgeons. We will be doing training on safe and effective use so that they feel comfortable adapting it when instrument trays and implants are fully ready to be deployed towards the end of this year. So there will be expense dollars that we've got factored in relative to the training activities and on the instrument and inventory build. And Mike, I don't know if you have anything you want to add to that.

Yeah. The only thing I would add is just as I mentioned before, Jim, we do expect CapEx to be above depreciation this year. And last year, it was essentially in line with depreciation, but did include some of those instruments that so we could move into this limited release. We will be adding more instrument sets and we are encouraged by the strong demand and great feedback that Cheryl mentioned. So we do expect CapEx depreciation for the instrument sets. We also have investments in production capacity. A good amount of our CapEx also has to do with the legacy business and the need to make sure that we've got the production capacity for what we're seeing there as well. So a bit of a higher level of spending this year, but it's all in support of our multiyear growth targets.

Thank you. That's it for me.

Thanks, Jim.

Our next question comes from the line of Mike Petusky with Barrington Research. Please proceed with your question.

Hi. Good evening. Cheryl, you mentioned being laser focused on multiyear growth targets. Are you guys wanting to sort of define that because I'm not sure I completely understand that there is a target out there for a specific year? Thanks.

Mike, I'm happy to respond to that. So as I said in my remarks, a couple minutes ago, so the specific multiyear growth targets that we have are the same ones that we've been talking about, which are $230 million in revenue and 70% adjusted gross margin, both of those in 2025. And our EBITDA, adjusted EBITDA target of 20% which we expect in 2026 and that timing is impacted by the outsized EU MDR efforts related to the new regulatory regime.

Got it. I don't feel like we're tracking any of that, but okay. And also Mike, I guess I wanted to understand stock comp it's elevated. I'm just curious, is it going to stay at these levels going forward?

Yeah. So Mike, let me clarify. So one of the things that's happened over the last couple of years is, there's been a lot of management transition as you would expect in this type of transformation. And so one of the things that happens in the stock-based comp run rate is, as executives who have been around for a while leave you get their forfeitures, which artificially lowers stock based comp. And that was happening a lot more in the last couple of years. And so when you look at year-over-year comparisons, that's one of the things that you need to keep the mind. So no, we don't expect -- I mean, we've got the team to drive the growth in this business. And that the team that we've attracted is highly energized around doing that. We have had to spend some more money and stock-based comp in line with market compensation just to make sure that we have the right people to realize the significant opportunity in front of us.

And I just want to absolutely make sure I understand, the EBITDA guidance would suggest something like more than 50% down in terms of EBITDA in ‘23 versus ‘22, correct?

So when we guided for the year, when we started the year, we guided last year at mid-single digits. We came in at 8% and as we're guiding this year, we are guiding at the low-single digits because of the multiple product launches, increased general corporate spend and all the things that Sheryl and I just referred to. One of the things that we are when -- Cheryl says where -- the answer to your question, Cheryl says where laser focused on these targets. It's because we are -- these are very large market opportunities, very different than the market opportunities the company has historically had in its joint preservation business as you can see by the size of the X-Twist rotator cuff market, that RevoMotion, reverse shoulder market and then now as Cheryl described the new patch system and they were coming out with that we're really excited about. These are very big opportunities. The dollar amounts that we're spending are much smaller than you're seeing a lot of companies out there spending a lot of money to buy into this space. And we've decided that we are able to do it organically with a much smaller level of spend. So we -- as we've been saying, our capital allocation approach is to focus on investments in those things nearest to whom are organic opportunities to really drive this value and realize the opportunity in front of us and that's what's reflected in the guidance.

Right. But you are going to be down based on your guidance 50% plus?

Our guided EBITDA number for 2023 is lower than our guided EBITDA in 2022 and is purely a function of timing of these investments so that we can realize the value from them.

All right. Thank you.

In addition to the fact that there are increased costs associated with the legacy business. And so those are the things that we just have to factor in. I mean, we're not immune from the things you heard about from all the other companies out there of inflation and people costs and all these other things. And so that's reflected in there, but we also reiterated our multiyear targets because the opportunity is significant and the drop down to be able to leverage this spend we believe is very real intangible.

Okay. All right. Thank you. I appreciate it.

Thank you. There are no further questions in the queue. I'd like to hand the call back over to Cheryl Blanchard for closing remarks.

I'd like to thank everybody for joining us tonight. We look forward to reporting out on the year that we got ahead. We're reiterating that 2023 is a real value inflection point for Anika. We're building a best-in-class portfolio as we continue launching exciting new products in the high opportunity spaces we're in and as we optimize our commercial U.S. reach and focus. So thanks everybody for your time tonight. We appreciate your time.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.