Good evening, everyone, and welcome to Anika's Second Quarter 2022 Earnings Conference Call. I will now hand the call over to Mark Namaroff, Vice President of Investor Relations, ESG and Corporate Communications. Please go ahead.

Thank you, and good evening, everyone. Thank you for joining us for Anika's second quarter conference call and webcast. Our Q2 earnings press release was issued after the close of the market today 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 Mike Levitz, Executive Vice President, Chief Financial Officer and Treasurer. Please take a moment and open the slide presentation and refer to Slide number two. 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 results 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 second quarter 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 evening, everyone, and thanks for joining us. Please turn to Slide three. We're halfway through the year now, and we're making strong progress to meet our financial objectives for the full year as we execute on our transformational strategy even in the face of the continued macroeconomic challenges that the industry is working through. The second quarter top line was solid with 4% revenue growth, driven by 6% growth in OA Pain Management, while our Joint Preservation and Restoration business grew 2% as staffing shortages remained a headwind on certain elective orthopedic procedures across our industry. We continue to be laser focused on execution to accelerate growth in our Joint Preservation business. During the quarter, we experienced some distributor disruption, as can happen with a hybrid sales model that uses independent distributors. At the same time, we generated great excitement when we held our first in-person U.S. national sales meeting in Nashville just a few weeks ago with Anika's commercial team and our distributors. The combined hybrid sales organization is energized about the opportunities that our robust and growing product portfolio brings to our customers, and they feel we have the product mix we need to give us the right to win in both the ASC and hospital settings. Lastly, our new VP of U.S. Sales, Rob Delp, has been on board for a quarter now and has already led great work with the team to streamline our regions and bring the right mix to our hybrid sales force as we look to increase focus on the One Anika portfolio of joint preservation products. I'm pleased to say that during Q2, we continued to execute our strategy to expand our product portfolio in joint preservation, which, along with commercial execution, positions Anika for accelerated growth as we enter 2023. X-Twist, our new fixation system, received 510(k) clearance during the quarter, and we are on track for a limited market release in the second half of this year. The X-Twist Fixation System is a platform of sports medicine soft tissue suture anchors designed to be strong, easy to use and support healing for a broad range of soft tissue repair procedures. The system affords surgeons a variety of knotless and knotted soft tissue fixation options in a single anchor platform with the ability to support the surgeon's preferred combination of multiple sliding suture or tape configurations. The X-Twist system also deploys Anika's unique X-Spline drive technology, which provides for much easier anchor insertion relative to competitive systems. X-Twist will be a cornerstone product in our sports medicine portfolio, further establishing our presence in the ASC and hospital settings where procedures, including rotator cuff repair in the shoulder and Achilles tendon repair in the foot and ankle, are performed. During the quarter, we also continued to increase exposure to the Anika story and product portfolio within the orthopedic surgeon community at industry congresses and meetings and as our medical education activities increased. We have now trained 270 surgeons year-to-date in person on the safe and effective use of our products. This will continue to be a strategic focus area for Anika as we introduce new products to new and existing customers. Lastly, in joint preservation, I'm excited to say that Tactoset, our HA-enhanced bone void filler for insufficiency fractures and hardware augmentation, received the coveted ACE award for cutting-edge innovation from the American Orthopaedic Society of Sports Medicine last month. This award from such a prestigious sports medicine society provides independent external validation and underscores the innovation and value of using Tactoset for augmentation and our innovation regenerative platform more broadly. When augmented with Tactoset, the pull-out strength of suture anchors was shown to increase twofold in an osteoporotic bone model compared to suture anchor alone. Where there's often inferior bone quality that may complicate, for example, a rotator cuff repair procedure and negatively impact outcomes, a higher suture anchor pull-out strength can help surgeons feel more confident in their soft tissue repairs. Also during the quarter, we achieved a significant clinical trial milestone with the last patient in the Cingal pilot trial completing their final follow-up. As a reminder, Cingal is our combination viscosupplement and steroid injectable for both short and long-term OA pain relief sold in over 30 countries outside the U.S. today. Anika embarked on this pilot study to help provide the necessary information to adequately design a Phase III pivotal trial. Our clinical team is analyzing the data, and we plan to do a data readout in the fall. Now please turn to Slide four for an update on our new product pipeline. Our differentiated product portfolio continues to expand with new product launches planned for the remainder of the year and exciting products in development that include expansion of our regenerative platform that builds on Anika's established technology and which gives Anika the right to win in joint preservation that will result in revenue acceleration that has significant value creation runway. I've already highlighted the progress we're making with Tactoset in the regenerative space on past calls, but I'd like to mention that the continued expansion of the Tactoset franchise will enable us to increase the addressable market to well beyond $100 million by creating a new market for hardware augmentation and expanding our existing insufficiency fracture Tactoset franchise with new products. New indications and additions to the Tactoset portfolio are now in development. For our growing shoulder portfolio, you'll recall we previously discussed three shoulder product imperatives that are driving our NPD focus with new products for sports medicine soft tissue fixation, bone preserving implants, and regenerative rotator cuff repair. In sports medicine, the X-Twist Fixation System received 510(k) clearance in Q2, as I mentioned earlier, and we're on track for a limited market release this year. Our regenerative rotator cuff repair system is also on track for 510(k) submissions later this year. This system will further build and establish Anika's shoulder portfolio, which, as an innovative and winning offering in the ASC, will drive the growth we are so excited about into next year and beyond. Rotator cuff repair procedures represent one of the highest volume soft tissue procedures in the ASC setting, allowing us to access even more of this exciting market. The X-Twist suture anchor offering, in combination with the recently launched Tactoset indication for augmenting suture anchor fixation, new shoulder implants, and the rotator cuff repair system are all positioned to build strength and synergy in our joint preservation portfolio, providing additional growth opportunities in the over $1 billion shoulder market in the U.S. We also continue to be excited about our longer-term opportunities to bring our Hyalofast single-stage cartilage repair solution and Cingal for short- and long-term knee OA pain relief to the U.S. with the timeline consistent with what we've stated previously. This quarter, we made progress on both of these clinical development projects, completing the last patient follow-up in the Cingal trial and with continued enrollment in the Hyalofast trial. Please turn to Slide five. We're executing on our strategy to accelerate growth beyond 2022. We have five key areas of focus for Anika this year, and I'm pleased to say that we're hitting our key 2022 milestones. First, we continue our U.S. market leadership position in the HA-based OA pain management market with MONOVISC and ORTHOVISC generating cash flow for investment to grow. We've made significant progress to strengthen our commercial organization to grow our sports medicine soft tissue repair, bone preserving joint technologies, and regenerative products on the market with an increasing focus on the ASC setting. Recently, we streamlined our U.S. territories as we continue to develop a deeper understanding of strengths and opportunities with our hybrid U.S. sales organization and to drive focus. We continue to advance our product portfolio this year with additional 510(k)s to be filed, new product introductions, and enhancements of our existing products targeting Tactoset expansion and shoulder solutions. We have accelerated our in-person medical education programs to train on the safe and effective use of our products and are increasing Anika's presence in the orthopedic community. Lastly, we'll report out on the Cingal pilot trial in the fall. Now I'll turn the call over to Mike for a review of our second quarter results, along with our outlook for 2022. And then I'll wrap things up, and we'll take questions.

Thank you, Cheryl. Please turn to Slide six. I will now walk you through our financial results for the second quarter of 2022. Total revenue for the quarter was $39.7 million, an increase of 4% over the prior year. OA Pain Management revenues rose 6% to $25.7 million due primarily to growth internationally, due both to procedural rebound as well as favorable order timing. As a reminder, revenues in OA Pain Management can vary significantly on a quarterly basis based on ordering patterns by our partners and distributors in the United States and internationally, more so over the last couple of years. But that quarterly volatility generally stabilizes on an annual basis. Our Joint Preservation and Restoration revenue increased 2% from $11.9 million to $12.1 million as the business saw some recovery in procedure volume, but that recovery was limited in the period due to continued staffing shortages and other market dynamics. Our Non-Orthopedic revenue was down slightly to $1.8 million compared to $1.9 million last year. Our gross margin in the second quarter was 63% and includes the impact of $1.6 million of noncash acquisition-related expenses from the 2020 acquisitions of Arthrosurface and Parcus. Our adjusted gross margin, which excludes the acquisition-related expenses, was 67% in the second quarter, down from 70% last year due primarily to unfavorable revenue mix year-over-year as well as the impact of operational inefficiencies from staffing and supply chain challenges. From a spending standpoint, our research and development and SG&A expenses together totaled $28.2 million in the second quarter. That's up 12% from $25.3 million in the same period of 2021 as we continue investment in development of key products and expand our internal capabilities in support of our growth objectives. The growth in the quarter included increased sales related travel and medical education, which were largely curtailed last year as we emerged from restrictions on in-person activities. Spending in the quarter also included higher stock based compensation driven by the growth in personnel to support Anika's strategic transformation. Our net loss for the quarter was $2.8 million or $0.20 per share compared to net income of $6.5 million or $0.45 per share in the second quarter of last year. Our prior year results included a non-cash tax effected benefit of $9.8 million or $0.67 per share associated with the reduction in fair value of contingent consideration associated with our 2020 acquisitions. Our adjusted net loss was $1.6 million or $0.12 per share, down compared to adjusted net income of $1.4 million or $0.09 per diluted share in the prior year. And our adjusted EBITDA in the quarter was $4.4 million, down from $6.1 million in the second quarter of last year. The year-over-year decrease is primarily due to the lower adjusted gross margin in the quarter from unfavorable revenue mix and supply chain and staffing challenges and from our incremental investments to support our growth acceleration initiatives. Lastly, with regards to our cash flow and capital structure. We generated operating cash of $3.1 million for the quarter compared to $4.3 million in the second quarter of last year. And our capital expenditures in the quarter totaled $2 million, down from $2.3 million last year. Our balance sheet remains strong with $91.4 million in cash and no outstanding debt at the end of the second quarter. Please turn to Slide seven. Now I'd like to review our financial outlook for fiscal year 2022. We continue to expect full year 2022 total revenue growth toward the upper end of the guidance range of low to mid-single-digit percentage growth over 2021. As a reminder, we raised our outlook toward the upper end of the range last quarter based on the favorable performance in OA Pain Management and Non-Orthopedic revenues. In line with our previous guidance, we expect Joint Preservation and Restoration to be our fastest-growing product family with full year revenue growth in the mid-single to low double-digit percent range over last year. We continue to expect growth to accelerate in the second half of the year, weighted largely to the fourth quarter, reflecting normal seasonality, the expansion of our product portfolio, including the limited market release of X-Twist, and our focus on distributor optimization and overall sales execution. Our guidance range also reflects the ongoing risks we've mentioned previously associated with supply chain challenges, staffing shortages and other market dynamics. In OA Pain Management, we continue to expect low single digit percent growth over last year. We are encouraged by our first half performance in this more mature part of our business, and we expect lower revenues in the second half of the year due to the favorable order timing from our partners and distributors in the U.S. and internationally that occurred in the first half of the year. In our much smaller Non-Orthopedic product family, we continue to expect revenues to decrease approximately 20% as compared to last year, due primarily to higher results last year from last time buys of legacy products and order timing. With regard to gross margin, we continue to expect adjusted gross margin for the year to be in the low to mid-60% range, reflecting ongoing risks associated with supply chain and staffing challenges. With regard to spending, we are continuing to fund critical growth investments in research and development programs, including those Cheryl outlined earlier such as the key product launches supporting our accelerated growth. And at the same time, we are funding investments in our commercial transformation such as medical education, industry events building the Anika brand and product awareness and system and process enhancements. As a result of these targeted spending investments as well as the supply chain and staffing challenges impacting gross margin, we continue to expect full year adjusted EBITDA margin to be in the low to mid-single digits. In summary, in 2022, we are making the investments in new products and commercial execution to accelerate our growth in support of our multiyear targets of mid-teens revenue growth, 70% adjusted gross margin and 20% adjusted EBITDA margin. And at the same time, we're maintaining our strong financial position as our team remains laser focused on both our mission to restore active living and driving value creation for our stakeholders.

Thanks Mike. Please turn to Slide eight, where I'll wrap up and then we'll take questions. We're pleased to be reporting out with a solid financial and operational quarter while still in the midst of a challenging macroeconomic environment. Our commercial focus is increasing, and our new product pipeline is on schedule as we remain excited to transform the business. The increased in-person engagement with customers at meetings and through training on the safe and effective use of our products continues to provide expanded access to our growing joint preservation portfolio as we live our mission to restore active living for people around the world. And finally, I can't end the call without thanking the Anika employees for their hard work and dedication as we continue our transformation. We're happy to take your questions now.

We'll take our first question from Jim Sidoti with Sidoti & Company. Please go ahead.

Good afternoon and thanks for taking the questions. On the current quarter, SG&A looks like it's up by about $2 million. Is that because of the increased travel or the increased stock based compensation or a combination of both?

Hi Jim, it's Mike. It's a combination of both of those things. As I mentioned, we're now seeing the medical education spending coming in. The travel is picking up now that we can resume in-person meetings, which is great news. We also had our in-person national sales meeting that occurred in July. Things are opening up, which is good news. We're starting to see that reflected in SG&A expense. The other thing you mentioned was the increased stock-based compensation. As you know, over the last few years, there's been a lot of transition in leadership, which involved putting different people in place to support the company's transformation. This quarter, there weren't any forfeitures or other major offsets to these costs. So, this is really a clean quarter to see those costs in the P&L, which is what's reflected in the increased SG&A.

So is it reasonable to assume SG&A stays at this level or maybe up slightly as the quarters progress?

Yes. I would expect SG&A will increase. As I said, when we look at the second half of the year, we are expecting acceleration in our joint preservation business. And as you know, that's our direct part of our business where commissions are part of that business where you wouldn't see that to the same extent in the OA Pain Management. And so as the sales are going up, you'll see the SG&A going up in part. So that as well as, like I say, things are opening up. We're really laser focused on getting ready for the acceleration coming into 2023 and beyond with these new products. And so yes, you will see an increase in spend there, consistent with the guidance that we've given. There's no change in guidance.

Okay. So your EBITDA goals long term include SG&A at or above the current level?

Absolutely. There is no change to our targets or trajectory or guidance in the quarter, yes. This is all as we expected.

And your long-term goal to double 2019 revenue, I think it's now sometime around 2024. Is that still in place?

Yes. Jim, the timing that we talked about towards our multiyear targets has not changed at all. So as we've said in the past, the company had laid out those goals in 2019, originally planning to double the revenue from 2019 by within five years to 2024. At the beginning of this year, we said we're about three to four quarters behind that. That hasn't changed at all. So we're right on track to where we expect it to be. This was a very solid quarter for us, right on par. And that's why we didn't make any changes to our guidance, and there's no change to our multiyear targets.

And so as things open up, is it reasonable that we expect the joint preservation business to start to accelerate over the next three or four quarters?

Hi Jim, this is Cheryl. Thanks for the question. Yes, we look at the second half of this year to certainly start to show some acceleration there on the joint preservation side primarily because we're continuing to look to see things opening up. Although they didn't open up as much relative to the early intervention in extremities space this quarter, but there's no doubt that things are starting to tick up. But we've also got increased training going on face-to-face. We see that, going forward, making a difference and increasing our sales execution and also a limited release of a new product here this year that's going to start to show up in the numbers, too.

That's the Tactoset product?

That is the X-Twist product.

The X-Twist, okay.

Yes. We did receive the additional information, go ahead.

No. No, I'm sorry, I interrupted you.

I was going to say, we did get that additional indication for Tactoset. So that, in combination with X-Twist, is something that we're really excited because those two products will be used together. There's good synergy there.

And despite the investments you made, you continue to generate cash. Are you happy with the portfolio now? Or do you think you'd use some of that cash to add to it over the next three or four quarters?

Yes, regarding our organic investments, you can see our new product development on the fourth slide of the presentation. As for inorganic investments, we have a strong balance sheet, which is a positive aspect given the current economic conditions. We are actively seeking tuck-in acquisitions that align well with our portfolio and could enhance our sales efforts. We will continue to pursue these opportunities when the financials and valuations align with our interests.

Right. That was it from me. Thank you.

Great. Thanks, Jim.

We'll take our next question from Mike Petusky with Barrington Research. Please go ahead.

Hi. I didn't quite understand the details of the distributor disruption you mentioned. Could you explain that a bit more?

Sure. Hi Mike, it's Cheryl. Thanks for the question. Yes, as can happen with a hybrid sales force that uses independent distributors, as we've talked about, is the composition of our U.S. sales force, from time to time, you can see some distributor disruption. There's an advantage to that structure because you're not carrying the significant fixed cost that it would take. The disadvantage is that from time to time, you can see a little disruption. And we saw that from an acquisition by a major competitor of another competitor back in the 2020 timeframe. And that started to flow through this quarter. The good news is that we anticipated it. We saw it coming. We signed on new distributors, and we look to have them continuing to increase their productivity throughout the rest of this year.

Okay. I think Mike mentioned distributor optimization. To me, that suggests you might have streamlined some of the groups you're collaborating with. Can you clarify what that entails?

Sure. I mean, I think there's always opportunity again with a hybrid sales force like this to make sure that we have the right distributors, that they're focused on the right things, that they are able to represent the product lines that we have and that we're continuing to develop, especially as we launch new products. We're always sort of doing a gut check to ensure that we're optimizing our distribution network. We also mentioned that we had done some streamlining of our existing geographies. So there will be, as you see going forward, continued focus on commercial execution and ensuring that we have the right people driving that focus.

And can I ask just an updated figure or a rough figure on how many internal sales folks you have and then how many distributors you're currently using?

Yes. From our direct employee perspective, that hasn't changed materially. It's a little over 30. And from our independent distributors, it's still a number that's over 100.

Would you expect that number to be lower a year from now?

I would expect us to continue to again, to dig in, look at our new product portfolio and continue to optimize the construct of that organization.

I guess in terms of the Cingal readout, I mean, would you expect a sort of a release from you guys prior to next quarter's conference call, which I assume would be somewhere around November 1st or thereabouts? I mean, would you expect to have something on that before that conference call or with that conference call or more likely after?

I mean, we talked about having a readout in the fall. I would fully expect that we'll be talking about it on that next conference call.

So if what you see looks strong, are there conversations regarding partnering at pivotal? Or do you expect to handle that on your own?

So on the Cingal topic; first of all, we're really excited to get to that readout. That's been a significant investment that the company has made. We're excited to be where we are with that. And I think when we get to the point in the fall of talking about the readout; we'll be at a point where we can talk about sort of next steps with that. But we're excited to get to that point. We're excited that we're done with that trial and analyzing the data.

Okay. Last question for me. Mike, you alluded to most of sort of the pickup in joint preservation in Q4. And as I'm looking at sort of my model, it looks like you have an easy comp in Q3. I guess my question would be, if you're not going to see much before Q4, is that a result of the fact you guys are sort of working through the distributor issue? Or why with seemingly an easy comp in Q3 wouldn't you be able to move the needle on that business? Thanks.

We are definitely focused on a strong fourth quarter driven by a few key factors: the X-Twist launch or limited market release, ongoing traction within the sales force, and typical seasonality. It's important to note that in orthopedics, summertime can see a slowdown as people postpone elective procedures, which is why the fourth quarter tends to be strong across the industry. This aligns with the limited market release and the momentum we are experiencing. Factors contributing to sales growth include resuming in-person meetings, providing training on the safe and effective use of our products, and those initiatives take time to yield results. We expect growth in the third quarter and are excited about our trajectory. However, as you model this, it's worth noting that Rob is new here and has realigned territories. We have also experienced some distributor changes, and people are working to get up to speed. Our current efforts are focused on accelerating growth in 2023 and beyond as we work towards our multiyear targets. We do expect acceleration this year and are optimistic about our direction, particularly as we concentrate on the One Anika portfolio rather than individual components. We want to emphasize that normal seasonality is a key driver behind our current guidance.

Thanks a lot. Appreciate it.

Thanks, Mike.

This will conclude today's question-and-answer session. At this time, I'd like to turn the conference back to your presenters for any additional or closing remarks.

Thank you all very much for your attention and interest in Anika. We look forward to speaking next on our third quarter call in November. Have a great night, everybody.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.