Good evening, ladies and gentlemen, and welcome to Anika's Fourth Quarter and Year End Earnings Conference Call. As a reminder, today's call is being recorded. I will now turn the call over to Mark Namaroff, Vice President, Investor Relations, ESG and Corporate Communications. Please proceed..

Thank you, Sarah. Good evening everyone and thank you for joining us for Anika's fourth quarter and year end conference call and webcast.

Our fourth quarter 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 to open up 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 by the Securities Exchange Act of 1934.

These statements are based on our current beliefs and expectations including statements with respect to the impact of the COVID, COVID pandemic on Anika, 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 included – includes 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.

We believe that non-GAAP financial measures provide an additional way of viewing aspects of our operations 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 available presentation slide deck and in our fourth quarter and year end 2021 press release.

Lastly, please note that we have changed the descriptions of two of our three product family categories to better describe those products and the markets we serve. Our joint pain management category is now being referred to as osteoarthritis or OA pain management. And our other category is now referred to as non-orthopedic.

There are no changes to the products within each of those categories. The description of Joint Preservation and Restoration remains unchanged. 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. If you could turn to Slide 3, I'll plan to review some highlights from the fourth quarter and the full year, and then Mike will go into the financial details and review our outlook for 2022.

2021 was a significant step forward for Anika on our journey to expand our presence in the $8 billion joint preservation market.

With hard work and focus on our strategic imperatives, we had a successful year on all fronts and made significant progress on our operational transformation to establish the foundation for our multi-year growth strategy despite the 2021 COVID curve falls.

Our industry has certainly been experiencing volatile times, especially those companies and sectors that serve elective procedures with COVID bringing a set of dynamics, including clinical procedure disruptions with state and regional elective surgery shutdowns, staffing shortages and patients testing positive before a scheduled surgery and company disruptions including supply chain issues and employees contracting COVID are being quarantined due to close contact with others who did.

Differentially for Anika gaining access to new customers and facilities through new product approval committees and contracting also remain unpredictable due to COVID. Clearly, this was a tough year and the ebb and flow of COVID is still with us.

That said Anika has been managing through this uncertainty well and staying true to our transformation strategy with a stable business and a strong balance sheet.

We remain focused on the large and growing addressable market in front of us leveraging our core strengths and joint preservation to drive accelerated revenue and profitability in the years to come.

We entered the year with a few key objectives to execute on our commercial strategy to add the people, processes and systems we needed to scale the business and to achieve our key new product development milestones all while continuing to manage the business through the unpredictability of COVID.

Despite the challenges throughout the year, we ended 2021 with revenue growth of 10% in the fourth quarter, 13% for the year exceeding previous expectations.

While heavily impacted by the Delta variant in the fourth quarter, our full year growth was strong and driven by our Joint Preservation and Restoration business, which was 23% higher than 2020 demonstrating significant growth in the high opportunity spaces where we've been making investments in commercial execution and new product launches.

I'll speak more to that in a minute. OA pain management ended the year up 8% as both our U.S. and international visco businesses demonstrated growth compared with the COVID impacted results in 2020. This year we continue to expect to see a leveling of the playing field around pricing and reimbursement practices in the U.S. with our visco business.

Our non-orthopedic revenues posted 20% growth in 2021 compared with 2020, mainly due to non-recurring last time buys for certain legacy products and order timing. We do not expect this level of revenue in the non-orthopedic category in 2022, which Mike will describe in more detail in his section.

2021 was a productive continuation of our transformation strategy and allowed us to execute on some key areas associated with our product portfolio expansion and commercial execution.

On that note, I'm pleased to report that just after our last call in the November, we completed enrollment of the single pilot study that will provide us with data by this fall.

Also in Q4, we launched our formal ESG initiative through the completion of an in-depth Materiality Assessment, which will be used to prioritize key environmental, social and governance issues that are the most critical to our stakeholders.

This is the first step in our multi-year ESG journey as Anika evolves with a focus on human capital, sustainability and governance best practices. In October, we launched Tactoset for augmentation, expanding its capability beyond treating insufficiency fractures to now also be used for the augmentation of hardware and support of bone fragments.

This new indication is a true innovation that addresses a real unmet need in sports medicine today by allowing surgeons to use Tactoset as an adjunct to suture anchor fixation when performing soft tissue repairs.

Surgeons are excited about Tactoset in this new adjunctive indication because it's been shown to increase the pullout strength of a suture anchor by twofold, providing for secure fixation for surgeries that include rotator cuff repairs.

When repairing a tendon and what is often poor quality bone, a strong biomechanical construct can help avoid a revision surgery and give the surgeon confidence in their result.

This syndication not only expands our addressable market, but it also allows us to define and build a new market where one doesn't currently exist further cementing our strategy in the ASC based sports medicine business. In fact, Tactoset continues to see significant revenue growth in the U.S. in the insufficiency fracture indication launched in 2019.

In early fall, we fully launched our WristMotion Total Wrist Arthroplasty system, a key advancement expanding our portfolio beyond our existing hemi wrist implant product and further adding to our hand and wrist product portfolio.

As a reminder, this new product restores natural wrist motion often called dart thrower's motion with improved biomechanics for arthritis patients and provides a motion preserving solution eliminating the need for joint fusion.

We're ramping up medical education and training on the safe and effective use of this product and are seeing great interests from the hand and wrist surgeons and we're gaining traction as we continue the rollout.

Lastly, on 2021 product development progress, in the third quarter, we also received 510(k) clearance for a reverse shoulder system, which is providing the basis for the continued expansion of our total shoulder portfolio as we develop solutions focused on the ASC delivery environment.

Tactoset, WristMotion and the continued focus on the shoulder and the ASC are all core to building out Anika's early intervention, minimally invasive and motion preserving brand and value proposition.

Our excitement for this transformation remains as we continue to build the joint preservation portfolio with our key growth catalysts including sports medicine soft tissue repair, our proprietary hyaluronic acid based regenerative portfolio and bone preserving joint solutions.

During the year, we also continue to strengthen our leadership team and our board of directors with the experienced leaders in the joint preservation and early intervention orthopedic space. Kevin Stone joined Anika early in the year as Vice President and General Manager of Sports Medicine.

He brings over 30 years of innovation R&D and manufacturing experience from Zimmer Biomet. Anne Nunes joined the Anika leadership team in Q4 as our Vice President of Operations, with over 20 years of orthopedic and biotech, senior operational and transformational leadership experience, most recently with Smith & Nephew.

In addition, Sheryl Conley joined Anika's Board of Directors with over 35 years of experience in orthopedics and healthcare. In January, we appointed Lisa Funiciello as VP of Human Resources. Lisa was most recently a Vice President at Fresenius and joins Anika with extensive leadership experience in human resources from both med tech and biotech.

The addition to these four senior leaders and industry veterans further enhances the strong team we've brought together and brings significant experience to Anika with people who know how to roll up their sleeves and execute on the implementation of our transformation and growth strategy.

In addition to our leadership teams, we continue to build out our operational effectiveness through the rollout of our global ERP system SAP across all Anika businesses, including the Parcus and Arthrosurface entities in the third quarter.

SAP gives us many of the tools needed to drive operational efficiency and effectiveness in support of our growth strategy and allows us to continue to scale the business.

Please turn to Slide 4, where I'd now like to provide an update on our new product development pipeline as we continue to invest in new products and innovate technologies that make Anika the right choice for the surgical center. As discussed during the year, we made significant progress on our new product development roadmap.

We're seeing great traction with our WristMotion Total Wrist System that we launched in the third quarter. In the fourth quarter, we launched the new indication for Tactoset, further expanding our proprietary HA-based regenerative franchise.

Tactoset is not only meaningful – not only a meaningful and growing product but is also an expanding franchise proving to provide significant clinical benefit across the joint preservation space. As such we continue to see additional joint preservation indications for the use of Tactoset that motivates further R&D investment.

Those indications are now in development with the start of a preclinical study this quarter and another one in the planning phase to start this year. We're also further expanding our shoulder offering with new products for soft tissue fixation, bone preserving implants, and rotator cuff repair.

The current shoulder products in development are scheduled for 510(k) submissions this year. As you may remember, from our 2021 Investor Day, we highlighted high opportunity spaces within the shoulder market already our largest concentration of business and joint preservation as a $1 billion market opportunity for Anika.

And we're assembling a product portfolio uniquely suited for the ASC setting, which I'll discuss more in a minute. In addition to the shoulder products, we're developing foot and ankle implants, which are also slated for 510(k) submission in 2022. Clinical study enrollment for our single-stage cartilage repair product, HYALOFAST, continues.

Unfortunately, COVID continues to have an impact on our progress on that study, but we remain focused on getting it enrolled, giving the excitement we see for this product in the over 30 countries where we sell it today.

As I mentioned, earlier, we completed enrollment of the single pilot study, despite challenges with COVID as a reminder, the CINGAL 1901 pilot trial enrolled 231 subjects who were randomized to receive either a single injection of CINGAL, the steroid triamcinolone hexacetonide, or a saline placebo and subjects will be followed through 20 weeks for pain and function.

The last patient visit is scheduled to be completed in June of this year, and we expect to have data in the fall. Please turn to Slide 5. We've discussed that our transformational growth strategy has us focused on now an $8 billion TAM.

I want to take a minute to remind everyone that within that TAM we're focused on building out a number of high opportunity spaces in the shoulder and foot and ankle. While Tactoset, has been an exciting entry for Anika in the regenerative solution space with the U.S.

market size of around a 100 million plus the additional shoulder segments were focused on including the reverse shoulder, lateral row and rotator cuff, add up to a $1 billion market opportunity for Anika.

Continued investments in differentiated product development, targeted at the ASC and robust commercialization and commercial scale present even bigger, exciting growth prospects, and allow us to confidently penetrate within that $8 billion TAM that we're targeting over the next few years. Please turn now to Slide 6.

I'd like to put into context where we are with respect to our multi-year strategy. As we highlighted last quarter, we're still in the early innings and navigating through COVID dynamics.

That said the $8 billion market opportunity, our focus on high opportunity spaces within that market, the building strength of our product portfolio and the tailwinds from the movement of the procedures to the ASC setting, cause us to remain very excited about our multi-year strategic imperatives.

In fact, even in these early days, we're seeing great traction across our portfolio of new product launches in sports medicine, regenerative solutions, and bone preserving joint technologies.

In 2022, we are building the foundation for accelerated growth by continuing to invest in the business to drive scale and focusing on new product launches with training on their safe and effective use as COVID lifts. I'll go into a bit more detail on 2022 in a minute.

We expect to see the significant impact of our R&D pipeline with additional 510(k) product launches in revenue growth and profitability accelerating into 2023 to 2024 and beyond. Over the next few years, we'll continue to invest in Hyalofast and Cingal with ongoing clinical development to bring them to the U.S. market.

I would like to note that the multiyear COVID environment has had an impact on the timing of the financial objectives of our multiyear strategic imperatives, a topic Mike will discuss in more detail. As I've said before, 2024 is not the end game.

And we are truly just at the beginning of realizing the opportunity for Anika as we drive accelerated growth and profitability. Before I turn it over to Mike, I'd like to dig in deeper on what guideposts you should keep your eyes on in 2022, as we execute on our strategy. Please turn into Slide 7.

2022 is a year where we continue on our path toward delivering above market sustainable growth and profitability as we invest in and build our product portfolio to take advantage of the market shift to the ASC that wasn't Anika’s initial plans, but now further driven and accelerated by COVID.

The four areas of focus for Anika this year can be summarized as follows. First, we expect to continue our market leadership position in the HA based OA Pain Management market with Monovisc and Orthovisc generating cash flow for further investment.

Next, we're focused on establishing our commercial organization to provide our sports medicine, soft tissue repair, bone preserving joint technologies and regenerative products to the ASC. The ASC will require a specific value proposition to meet their needs and provide surgeons the access to our technology.

And Anika is uniquely positioned to deliver on that value proposition. Third, we'll continue to advance our pipeline with new products in 2022. And we have several new 510(k) clearances for you to keep your eye on targeting Tactoset expansion, multiple shoulder solutions and implants for the foot and ankle.

Lastly, we'll report out on the single pilot trials in the fall. We've been very pleased with the success of this product in the 30 plus countries, outside the United States, where it's sold today and look forward to next steps in the process to ultimately bring it to the United States market.

Let me wrap up by saying that 2022 will be an exciting and pivotal year for Anika and we will make significant progress with the right products in our bag and commercial infrastructure to drive growth into the future. Now I'll turn the call over to Mike for a review of our fourth quarter and full year of financial, along with our outlook for 2022.

And then I'll wrap things up and we'll take questions.

Mike?.

Thank you, Cheryl. Please turn to Slide 8. First, a brief housekeeping item. You will note that we have slightly revised the names of our product families, specifically our osteoarthritis or OA pain management product family was previously referred to as joint pain management. And our non-orthopedic family was previously referred to as other.

I will now walk you through our financial results for the fourth quarter of 2021. Total revenue for the quarter was $35.8 million, an increase of 10% from last year. The increase was due primarily to favorable year-over-year order timing in our OA Pain Management product family, where revenues rose 17% to $19.7 million in the quarter.

Revenues in our OA Pain Management product family can vary from quarter-to-quarter based on ordering patterns by our partners and distributors in the United States and internationally. And since 2020 quarterly ordering volatility has been exacerbated by the impact of COVID, but that generally stabilizes on an annual basis as we experienced in 2021.

Our Joint Preservation and Restoration revenue in the quarter rose 1% to $13.3 million as the direct and downstream impacts of the COVID variants continued to limit the number of elective procedures and our non-orthopedic revenue was $2.8 million in the fourth quarter, up 5%.

Our gross margin in the fourth quarter was 51% consistent with the same period last year, and includes the impact of $1.8 million of non-cash acquisition accounting related expenses from the 2020 acquisitions of Arthrosurface and Parcus along with $400,000 of product rationalization charges during the fourth quarter.

Excluding these charges adjusted gross margin was 57%, down from 67% in the same period last year. The decrease from last year is due primarily to lower production volume and increased reserves in the quarter amid greater staffing and supply chain challenges resulting from the COVID pandemic.

From a spending standpoint, our research and development and SG&A expenses together totaled $26.4 million in the fourth quarter, up from $22.8 million in the same period of last year.

As we continue to invest in key product development programs, expand medical education and build out the capabilities necessary to achieve our global commercial growth objectives.

During the fourth quarter we also recorded an expense of approximately $800,000 to increase the fair value of the contingent consideration liability associated with the acquisition of Parcus Medical to $4.3 million due to higher than expected net sales in 2021. We expect to pay this amount to Parcus shareholder in the first half of 2022.

Other than this 2021 net sales milestone, we do not expect any further milestones to be achieved under the Parcus Medical merger agreement. As a reminder, we have paid a total of $15 million to date in contingent consideration under the Arthrosurface merger agreement.

And as of year-end 2021 no additional contingent milestones were achieved and none remain associated with the acquisition of Arthrosurface. Our net loss for the quarter was $5.8 million or $0.40 per share compared to a net loss of $15.7 million or $1.10 per share in the fourth quarter of last year.

Our adjusted net loss was $3.2 million or $0.23 per share, down compared to adjusted net income of $1.7 million or $0.12 per diluted share in the prior year. We generated an adjusted EBITDA loss in the fourth quarter of $200,000 down from positive adjusted EBITDA of $4 million in the fourth quarter of last year.

The decrease was primarily due to lower adjusted gross margin and incremental investments in product development and commercial and support and capabilities to execute on our multi-year growth and business transformation initiatives.

Lastly, with regards to our cash flow and capital structure, we generated positive operating cash flows of $5 million for the quarter. Our balance sheet remains strong with $94.4 million in cash and investments at the end of 2021. Please turn to Slide 9.

I would now like to walk you through our full year results for 2021 as compared to the prior year and our most recent expectations.

For the full year Anika generated revenue of $147.8 million, an increase of 13% from the $130.5 million of revenue reported in 2020 above our guidance of 9% to 11% growth as we had a stronger than expected finish across our product lines.

By Product Family, joint preservation and restoration revenue was $48.6 million for the year, up 23% that's 12% organically, and above our most recent expectations as we had a stronger finish despite the COVID related volatility I described earlier.

Our OA Pain Management revenues finished up 8% at $89.5 million, also above our expectations reflecting both recovery from the initial COVID impact in 2020 as well as favorable order timing.

Our non-orthopedic revenues which represent less than 7% of our total revenues reached $9.7 million for the year above our expectations benefiting from last time buys of legacy products, as well as favorable order timing. For the full year our GAAP gross margin was 56% and our adjusted gross margin was 66%.

We finished below our 67% adjusted gross margin in the previous year due to the volume and other COVID related challenges in the fourth quarter that I described earlier. This also impacted our adjusted EBITDA margin, which finished in the low-teens at 11.1%, as we continued to fund investments, supporting our key growth initiatives.

For the year we delivered positive operating cash flows of $9 million and again ended the year with $94.4 million of cash on the balance sheet. Please turn to Slide 10. Now I would like to review our financial outlook for fiscal year 2022.

The emergence of the Omicron variant of COVID coming out of December on the heels of the Delta variant in the second half of last year is an unfortunate reminder of the volatility that we've experienced since 2020.

Given the outside COVID impact on elective procedures so far in early 2022, while we expect things to improve been are already seeing signs of that on a monthly basis. For purposes of guidance we are assuming that COVID and associated challenges do not go away but rather continue to be a headwind through 2022.

In light of this, we currently expect full year 2022 revenue to grow in the low-to-mid single digit percentage range over 2021. Our faster growth continues to come from joint preservation and restoration where we expect full year 2022 revenue to grow in the mid-single digits to low-teams percent over last year.

This compares with 23% total growth and 12% of organic growth that we delivered in joint preservation and restoration in 2021. As we assume COVID and related challenges we'll continue to put pressure on elective procedure volumes through the rest of this year.

In OA Pain Management we expect low-single digit revenue growth over 2021, which is above market as our market leading products continue to gain adoption globally.

We expect our non-orthopedic revenues to decrease approximately 30% as compared to 2021 due to the higher than expected results in 2021 from last time buys of legacy products and favorable order time and the continued impact of product rationalization decisions we made in 2020 to exit legacy product lines that do not – that do not support our growth and profitability objectives.

With regards to gross margin, given the staffing and supply chain challenges we encountered in 2021 and continue to experience so far in early 2022, we expect adjusted gross margins for the year to be in the low-to-mid-60% range.

We remain focused on driving margin expansion on a multi-year basis, but we expect the headwinds in COVID and related challenges to continue to impact progress in the near-term. With regards to spending due to our focus on our multi-year growth strategy in 2022 we are continuing our targeted investments in key research and development programs.

According to the product pipeline that Cheryl walked you through earlier. As well as in commercial infrastructure and capabilities that support our transformation and will enable us to scale as we grow.

Overall, we expect operating expenses for 2022 to increase over 2021 as a percentage of revenue as we invest in support of our longer term growth and profitability targets.

We also expect expenditures for capital to increase in 2022 above historic depreciation as we invest to support the rollout of key new product introductions over the next 12 to 24 months.

Due to our assumptions of the direct and downstream impacts of COVID on our revenues and gross margins, as well as the targeted increase in spending, we now expect adjusted EBITDA margin for the year to be in the low-to-mid-single digits down from 11% in 2021.

I would now like to discuss the implications of the lingering impact of COVID and its downstream macro issues on our multi-year targets. As we've discussed in the second half of last year, the Delta variant had a significant impact on elective procedures and the Omicron variant has amplified that impact in early 2022.

While our hope is that the macro environment improves more quick as we've already been seeing over the last few weeks with the lifting of mask mandates, et cetera. Our guidance for 2022 assumes that COVID continues to impact our results throughout the year.

Given the now two years of COVID impacted the business and the near-term uncertainty associated with its impact in our markets are confidence in the timing of reaching our multi-year targets has changed and we no longer have direct line of sight to reaching our multi-year growth targets by 2024.

That said, while the timing is delayed we are not changing the targets themselves and are laser focused on driving execution as the market opportunity for our business remains significant.

In fact, we now believe COVID may be a tailwind to our strategy, given the acceleration of the transition of procedures to the ambulatory surgery center, a core target market for our early intervention products. We remain focused on driving the key product development and commercial infrastructure investments that support our growth plans.

We will update you on timing of our expectations for achieving our multi-year targets as we gain better visibility into the ongoing impact of COVID and related challenges over the coming quarters. Please turn to Slide 11.

In summary, our team is transforming Anika into a leader in joint preservation, one of the highest opportunity spaces in orthopedics.

We made significant headway in 2021, and we expect 2022 to be a foundational year as we execute on our exciting product pipeline of differentiated solutions in early intervention orthopedics and on our commercial strategy to deliver targeted value for the ASC.

While we expect COVID to continue through 2022, we are positioning the company so that as COVID lifts we deliver on our growth strategy and accelerate to our multi-year target of above market mid-teams revenue growth with increasing profitability and cash flows over the coming years.

We are very excited about the opportunities before us to achieve our mission and drive significant value creation for all of our stakeholders. I will now turn the call back over to Cheryl.

Cheryl?.

Thanks Mike. Well we expect to see some short-term fluctuations both positive and negative as we transform the business during COVID, Anika remains focused on executing our growth story.

We made meaningful progress this quarter on our new product development pipeline, commercial execution and adding the people, processes and systems to scale this business. And these efforts will drive real for all of our stakeholders into the future.

As always, I'd like to thank the Anika employees for their hard work as we continue our transformation. We're happy to take your questions now..

Thank you. [Operator Instructions] We'll take our first question from Chris Cooley with Stephens..

Good evening and thanks so much for taking the question. If I may and I apologize for this at the outset may be a multi-part first question and then a more concise follow-up.

I really do appreciate all of the additional color you provided regarding what is assumed in terms of the expectations for the coming year 2022, which you guys have always talked about as being kind of still as part of the transformational phase.

But I was curious what specifically was assumed when we think about the HA market in terms of either just utilization their pricing dose regimen as you look ahead? And how that impacts your expectations into the 2022 year, I appreciate the COVID headwinds implicitly but just trying to think about maybe the broader category first and then I have a quick follow up?.

Great. Hi Chris. This is Mike. Thanks for your question. So specifically on the OA Pain Management and the HA franchise that is a mature market, we've viewed that market as growing about 1% and we've given guidance that we expect to grow above that in the low-to-mid-single digits. And I'm sorry excuse me, low-single digits growth for the year.

So we expect to grow faster than the market. We definitely believe there is a tailwind from the positive legislation that creates a level playing field in the United States for both the device companies and the – and the pharma companies. So we believe that to be a tailwind.

We expect that to go into effect in the middle of this year in terms of from an effective impact.

And that could be very positive, but as a reminder because we sell our products through a third-party, through Johnson and Johnson and Mitek we tend to be more cautious as it relates to what that can be because we really don't control the full value chain there.

And so we also recognize that, that market's not back to 100% as there's limit limits in terms of the ability of staffing to handle these procedures. We do expect COVID to impact that through the year. So we're very pleased with how we landed for 2021. We are very excited for how we see things going forward.

But there's – there's no headwinds from that, if anything, it's a tailwind from the new legislation. I would also say that a decent part of that business is outside the United States.

And we were helped out in 2021 by some favorable timing that can be a lumpy business a little bit, a little from the distributor standpoint, in terms of when they placed their orders. And also the timing of COVID in various markets can be different than what it was in the United States.

And so we, you notice we came in a bit higher than we expected to for 2021. But nonetheless, we expect that our international business will continue to grow very nicely in DHA franchise where we sell not only [indiscernible] (0:35:42) but also single, which continues to do very well. So that's what's behind our guidance. Again, we're early in the year.

We've seen Omicron impact our results early in the year. And so that's, what's reflective. We don't want to get ahead of guiding what's going to happen with COVID. We want to focus on those things within our control..

Thanks Mike. That's really helpful. And then just from my follow up, if I may. Can you help us just think about obviously with Parcus and Arthrosurface now fully integrated.

Help us think a little bit about seasonality this year in 2022 relative to 2121? And similarly with the step up in OpEx and also with the increased CapEx assumptions for the year; how should we think about cash flow? Thanks so much..

Yes. Chris this is Mike, since that was mostly a financial question I'll take that one and Cheryl, please jump in if I miss anything..

Sure..

With regards to seasonality, so it's interesting there's kind of the pre-COVID world and then there's the COVID world where nothing seems to be normal.

Historically the fourth quarter is always the strongest quarter in the joint preservation business that's different in our OA Pain Management business and in some cases, Q2, historically I think for Mitek at least has been the strongest quarter.

But over the last couple years with COVID, what we've seen is that there really is not the normal seasonality that we've seen in the past. We did see in the fourth quarter a significant jump in our joint preservation revenues compared to the third quarter which was good.

But as a reminder Q3 was really impacted by the Delta variant, which continued into the fourth quarter.

So as far as looking into 2022, we definitely have been impacted by COVID by Omicron specifically in January and that definitely impacted us both in terms of elective procedures and also just in terms of people being quarantined and impacted us from a staffing perspective as well in gross margin.

So, we think that Q1 is – historically it's not the strongest quarter in the year on a seasonal basis. And I would say with how COVID hit us, I would view that to be the same this year. But again, we're really trying with our guidance not to try and predict COVID, but really talk about what's going on in the business.

So I would expect things to strengthen through the year and this should be the more challenging quarter because of Omicron, hopefully things continue to improve as we've seen over the last month and the last few weeks. With regards to spending, there is a lot of product development going on right now. This is a key year.

2022 is a very exciting year for us with a number of key products. And so, there is going to be elevated spending in R&D associated with that. There is also clinical work that's going on that Cheryl described. I can't really call out seasonality by quarter because it really there is puts and takes as we kind of go through the year on spending.

But I will tell you that I think spending is going to start out probably on the stronger side just in terms of us driving through these key product development initiatives because we see a really nice opportunity in front of us, which is why I talked about CapEx being a bit elevated because we really want to plan for these product launches over the next 12 to 24 months.

With regards to cash flows, I think, that's really hard to guide. We were very pleased this past year to have another year of positive operating cash flows even in the midst of all these challenges with COVID and we expect that to continue in 2022, but I really can't guide on specific seasonality or specific timing of the cash flows, Chris..

Understood. And if I may squeeze maybe one another quickly and then I promise I'll get back in queue here, but just curious with the color earlier on the new WristMotion system there as well as with Tactoset for more so now for the augmentation there.

Help me think a little bit about the contribution to growth either in the second half of the year or the fourth quarter? And then how you see – I know you don't break out single products, but when we think about new products, their contribution to that total top-line guide. Thanks so much..

Hi, Chris. This is Cheryl. Nice to hear from you. I'll take that one. Typically, the year in which you launch a product isn't a big ramp year. You're just starting to get out in a limited release, starting to do training on the safe and effective use of the product. Those product launches happened in Q3 and Q4 of last year.

So, we've actually just started this year with our pretty significant efforts around training on their safe and effective use. I will tell you that one of the easiest ways and one of the best ways to get information out about new products is at larger congresses. Those are still either very hybrid or limited in attendance.

So it's a little bit tough for us right now to be terribly predictive about what the near-term ramp of those looks like. I think I would take you back to just sort of thinking about the multi-year strategy. These happen to be the most recent product launches.

We've got more product launches coming this year into next year and we really see the impact of those new product revenues as a percent of our top-line starting to hit in 2023, 2024 and beyond. And I would really think of it primarily that way.

That said, we'll be busy this year with those product launches, even with the Tactoset that we launched in 2019 really continuing to focus on training on their safe and effective use and continuing to get in front of our surgeon customers as COVID starts to loosen up, hopefully..

Super..

And I would just add to that. We're very pleased with how Tactoset has done so far. It doubled in revenue again this past year. And we learned a lot from the feedback from our customers. And that's what's led us to – I would really look at some additional efforts associated with that from a clinical standpoint that Cheryl described.

So the new products are already contributing. The total risk is already contributing, but – in fact that's part of what's driving the growth this year. I think one of the challenges that we're trying to manage through also is just access for new products and in new customers.

And so, I think, the sense that we get is that certain institutions may have limited access to new products in part really reflecting on COVID. And I don't want to say that's an excuse, but I think they've been calling it out as a reason why they haven't been able to do that. So as that lifts, that will definitely help us with these new products.

I think what we're seeing is a lot of encouraging signs and that's what's reflected in our guidance as we go into 2022..

Thank you both, Cheryl and….

The one other thing I would say is from a spending standpoint – sorry, you had asked earlier about that. I – so the MedEd is increasing, one of the things that we recognized last year is COVID changes the dynamics around getting in front of physicians. And that's really an important part of driving the growth of the business.

So you will see an elevated level of spend in making sure that as we have these new products that we educate in the safe and effective use of those new products. And so, there is elevated spend for that this year..

Thank you. And we'll move on now to Young Li with UBS. .

All right, great. Thank you so much for taking our questions.

I guess maybe to begin, I'm just kind of curious near-term, how much visibility do you have into some of these deferred or cancer procedures getting rebooked and when do you think you can recapture most of that?.

Yes, the visibility of when they get rebooked isn't something that we have direct line of sight to, but what I can tell you is we certainly saw in Q4 and specifically in January and we're starting to see it lighten a bit a lot of cancellations and sort of we're related to early on just cancellations of elective procedures by either states or regions, staffing issues at facilities causing things to be slower than the surgeons wanted them to be, surgeons getting sick, patients getting sick and testing positive, two days before their surgery.

So, there is certainly no question in anybody's mind there that there is pent-up demand that's going to have to flow through the system.

But I think the factor that we're trying to take into account relative to how we're thinking about our guidance for next year, is there is no doubt will be lingering dynamic mix related to COVID like staffing shortages, like the supply chain risks that we called out, those things aren't going to get fixed quickly.

And so, while I think, we're certainly seeing just a couple of months of good data showing that things have started to pick up here, more recently, I think, those lingering effects are definitely going to play through and have an impact for the rest of the year. And I think our guidance reflects that.

And Mike, I don't know if you want to add anything to that..

Yes, I think the only thing I would add is just to say that every month really is different. When we last reported out to you, we talked about October and that was looking like a good recovery in Delta, which it was, and then there was a pull-back in November, and then you saw, we exceeded our expectations in Q4 with a strong December.

And so, then things started to look up then Omicron hit. And I think anybody that's been following this, COVID, as soon as you think you're done, then it comes back again.

So, we had a challenging January because of Omicron and then February came back nicely and now we're going to see how March plays out, how much of the recovery in February was due to push outs from January into February and how is that going to play out. That's what we have to see.

So, we've tried to be very thoughtful in our guidance to just acknowledge the realities of COVID that really can be volatile. What we are seeing is a lot of positive feedback from surgeons, and customers and whatnot around the new product introductions that we've had and just where we're going in general.

But the elective procedures, it just is very choppy right now..

Okay, great. I appreciate the color. So, we do expect some good cadence of product updates for the year to use and invest the world. Lots of 510(k) products was wondering what are some of the plan for adding more reps or distributors and increasing some of the geographic footprint in the U.S.

ahead of some of these new product launches?.

Yes, it's a great question Young. We've actually talked a bit about where we think we're positioned relative to our current commercial team.

Let me just remind everybody that we have over 30 direct reps in the field that leverage over a hundred and ten ninety-nine distributors and hundreds of reps beyond that within those ten ninety-nine distributorships.

We have full geographic coverage in the United States right now, what you'll see us continuing to do is continue to optimize what it is we're doing.

We've got more and more focus on the ASC environment going forward, and really making sure that we are bringing a targeted value proposition to that ASC environment with our focus on the early intervention space and with our new products, especially with a focus on shoulder and foot and ankle, as you can see in our new product development pipeline.

So, we don't have current plans and we talked about this last year, we don't have current plans to add material numbers of people in the sales force. Again, we're adding talent constantly, but we don't have significant build plans for this year. We do have plans to be more and more focused on that ASC setting..

Okay, great. Thank you very much..

Thank you. Next, we'll take a question from Jim Sidoti with Sidoti & Company..

Hi, good afternoon. And thanks for taking the questions. I think what I'm hearing from you is revenue should improve every quarter throughout the year as new products come out and as COVID headwind subside. But if you are looking at the first quarter, and I know you're not thrilled about doing quarterly guidance.

I mean, should we assume about flat year-over-year for the first to start out the year or do you think you could be down?.

Yes, hi Jim. It's Mike. Yes, we don't generally give quarterly guidance. We guided for the full year that low- to mid-single-digit. One of the things to keep in mind for the first quarter specifically is that we had a sign significant amount of the last time buys in our non-orthopedic segment happened in the first quarter of last year.

So, we're going to have an unfavorable comp in the non-orthopedic segment. So that's definitely going to be working against us in the quarter. The other thing is, as I said, we're two months in and it's been a very volatile quarter so far with Omicron challenging us in January, coming back positive in February.

And what is March going to look like? And so short answer is, yes, it could be down year-over-year in part because of that unfavorable comp. Yes, I do believe that as I said earlier, I do believe that the first is probably going to be the most challenging of the year.

Just normal seasonality and then also the year-over-year comps and specifically Omicron. Hopefully, things do improve as we've been seeing, but it's really early days and we don't want to get ahead of ourselves in predicting COVID..

Right. And that non-orthopedic revenue, I believe, you said was about 7% of revenue.

So, if that's off 30% for the year, you are looking at about a $3 million head, does that sound right?.

That's right. That's right. Yes, I mean, if you recall, last year we had guided – so one of the things in that segment, those are – it's a small part of our business and there are legacy products.

There are some really great products in there, but there is also some that we decided back in 2020, didn't make sense to, especially with the MDR requirements in Europe, to spend more money on something that wasn't going to be growing and wasn't going to be adding to the bottom line.

And so, we saw an incremental revenue there in the first quarter of last year, and then there was also favorable timing last year. So, we had guided last year that we were going to be down in that segment 5% when we started the year and we ended up being up 20%.

So, yes, I mean, I think that getting back to a normalized level in that business, and then also just with some revenue coming off, because it wasn't revenue that was accretive. Yes, I think you could see a $2 million headwind there. I think that's the math around the 30% give or take..

Okay.

And then can you just remind me how much the milestone payment you'll have to make this year?.

Sure. We have a milestone payment that represents what we believe to be the last payment here under the Parcus and Arthrosurface agreements for $4.3 million to the Parcus to shareholders for earn out on the 2020 net sales milestone..

Okay. All right. Thank you..

Thank you, Jim..

Thank you. And that does conclude our question-and-answer session today and our conference call. Everybody may now disconnect..