# Anika Therapeutics, Inc. (ANIK) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Anika Therapeutics, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/898437/000117184324001380/anik20231231_10k.htm
Accession: 0001171843-24-001380
Filing date: 2024-03-15
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/ANIK/
All MD&A years: /company/ANIK/mda/
Previous year: /company/ANIK/mda/fy2022/ (FY 2022)
Next year: /company/ANIK/mda/fy2024/ (FY 2024)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following section contains statements that are not statements of historical fact and are forward-looking statements within the meaning of the federal securities laws. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievement to differ materially from anticipated results, performance, or achievement, expressed or implied in such forward-looking statements. These statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties. We discuss many of these risks and uncertainties at the beginning of this Annual Report on Form 10-K and under the sections captioned “Business” and “Risk Factors.” The following discussion should also be read in conjunction with the consolidated financial statements and the Notes thereto appearing elsewhere in this Annual Report on Form 10-K. 

Management Overview

We are a global joint preservation company that creates and delivers meaningful advancements in early intervention orthopedic care. Based on our collaborations with clinicians to understand what they need most to treat their patients, we develop minimally invasive products that restore active living for people around the world. We are committed to leading in high opportunity spaces within orthopedics, including OA pain management, regenerative solutions, sports medicine and Arthrosurface joint solutions.

We have thirty years of global expertise developing, manufacturing and commercializing products based on our HA technology platform. HA is a naturally occurring polymer found throughout the body that is vital for proper joint health and tissue function. Our proprietary technologies for modifying the HA molecule allow product properties to be tailored specifically to multiple uses, including enabling longer residence time to support OA pain management and creating a solid form of HA called Hyaff, which is a platform utilized in our regenerative solutions portfolio.

In early 2020, we expanded our overall technology platform, product portfolio, and significantly expanded our commercial infrastructure, especially in the United States, through our strategic acquisitions of Parcus Medical, LLC, a sports medicine and instrumentation solutions provider, and Arthrosurface, Inc., a company specializing in bone preserving partial and total joint replacement solutions. These acquisitions augmented our HA-based OA pain management and regenerative products with a broad suite of products and capabilities focused on early intervention joint preservation primarily in upper and lower extremities such as shoulder, foot/ankle, knee and hand/wrist.

As we look towards the future, our business is positioned to capture value within our target market of joint preservation. We believe our success will be driven by our:

[[GREPCENT_TABLE]]
[["","\u25cf","Decades of experience in HA-based regenerative solutions and early intervention orthopedics combined under new seasoned leadership with a strong financial foundation for future investment in meaningful solutions for our customers and their patients;"],["","\u25cf","Utilizing HA-based technology and manufacturing expertise to provide new and differentiated solutions for the growing joint preservation and regenerative medicine markets;"]]
[[/GREPCENT_TABLE]]

40

[[GREPCENT_TABLE]]
[["","\u25cf","Introducing key HA-based products into the US market upon FDA approval/clearance, such as Cingal, Hyalofast and the Integrity Implant System, our arthroscopic patch system for rotator cuff repair;"],["","\u25cf","Robust network of stakeholders in our target markets to identify evolving unmet patient treatment needs;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Prioritized investment in differentiated pipeline of regenerative solutions, bone preserving implants and sports medicine products;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Global commercial expertise which we will leverage to drive growth across our product portfolio, including an intentional site of care focus on ambulatory surgical centers in the United States and continued international expansion;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Opportunity to pursue strategic inorganic growth opportunities, including potential partnerships and smaller acquisitions, technology licensing, and leveraging our strong financial foundation and operational capabilities;"],["","\u25cf","Pursuit of strategic inorganic growth opportunities, including potential partnerships and smaller acquisitions and technology licensing, by leveraging our strong financial foundation and operational capabilities; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Energized and experienced team focused on strong values, talent, and culture."]]
[[/GREPCENT_TABLE]]

For additional information regarding our business, please refer to “Item 1. Business” of this Annual Report on Form 10-K.

Key Developments during the Year Ended December 31, 2023

[[GREPCENT_TABLE]]
[["\u25cf","Strengthening Leadership Position in OA Pain Management"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Achieved record annual revenues of $101.9 million in OA Pain Management with single-injection Monovisc, multi-injection Orthovisc and Cingal outside the U.S.; Increasing leading U.S. market share position."],["","o","Cingal, Anika\u2019s next generation non-opioid single-injection HA-based osteoarthritis pain product, continued strong double-digit growth outside the U.S."],["","o","Awaiting FDA feedback on proposed non-clinical next steps regarding Cingal U.S. regulatory approval following a Type C meeting with the FDA in early 2023 and success in meeting its latest Phase III Pivotal primary endpoint in 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Advancing a Highly Differentiated Portfolio of HA-Based Regenerative Solutions"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Successfully completed over 100 cases with the Integrity Implant System, Anika\u2019s HA-based regenerative rotator cuff patch system, following the limited market release in late November 2023; on-track for full market release in mid-2024."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Fully enrolled Hyalofast, Anika\u2019s HA off-the-shelf single-stage cartilage repair product, Phase III clinical trial; modular PMA submission with break-through device designation commencing in 2024; final PMA module filing expected in 2025 with product launching by 2026."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Launched Key Products in Sports Medicine and Arthrosurface Joint Solutions"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","X-Twist Biocomposite Fixation System launched in the first quarter of 2024, compliments the PEEK version launched in early 2023."],["","o","RevoMotion Reverse Shoulder Arthroplasty System full market release in September 2023."]]
[[/GREPCENT_TABLE]]

41

Products

OA Pain Management

Our OA Pain Management product family consists of Monovisc and Orthovisc, our injectable, HA-based OA Pain Management offerings that are indicated to provide pain relief from osteoarthritis conditions; and Cingal, our novel, next-generation, single-injection OA Pain Management product consisting of our proprietary cross-linked HA material combined with a fast-acting steroid. Cingal is our next generation fast-acting, long-lasting, non-opioid, clinically proven osteoarthritis pain product which is designed to provide both short- and long-term pain relief,  through at least six months.  It is currently sold outside the United States in over 35 countries.  In 2022, we completed a third Phase III clinical trial for Cingal, which achieved its primary endpoint. Cingal is currently not approved for commercial use in the United States. We have been actively engaging with the U.S. Food and Drug Administration, or the FDA, on next steps for U.S. regulatory approval.

Joint Preservation and Restoration

Our Joint Preservation and Restoration product family consists of: (a) our portfolio of orthopedic regenerative solutions products utilizing HA, including Integrity, our new arthroscopic regenerative patch system for rotator cuff repair and other tendon procedures, Tactoset products, and Hyalofast outside of the United States in over 30 countries; (b) our line of sports medicine solutions used to repair and reconstruct damaged ligaments and tendons due to sports injuries, trauma and disease; and (c) our Arthrosurface portfolio of bone preserving joint technologies, including partial joint replacement, joint resurfacing, and minimally invasive and bone sparing implants, designed to treat upper and lower extremity orthopedic conditions caused by trauma, injury and arthritic disease.

Non-Orthopedic

Our Non-Orthopedic product family consists of legacy HA-based products that are marketed principally for non-orthopedic applications, including our adhesion barrier product, advanced wound care products, our ear, nose and throat products, and our ophthalmic products. Non-Orthopedic also includes Hyvisc, our high molecular weight injectable HA veterinary product approved for the treatment of joint dysfunction in horses due to non-infectious synovitis associated with equine OA. Hyvisc was previously reported in the OA Pain Management product family but has been reclassified to the Non-Orthopedic product family beginning in 2023.

For additional information with respect to our products, including information related to how they are sold and new product development initiatives, please see the sections captioned “Products,” “Sales Channels,” and “Research and Development” contained within “Part I. Item I. Business” of this Annual Report on Form 10-K.

42

Results of Operations

Year ended December 31, 2023 compared to year ended December 31, 2022

Statement of Operations Detail

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022","","","$ Change","","","% Change"],["","","(in thousands, except percentages)"],["Revenue","","$","166,662","","","$","156,236","","","$","10,426","","","","7","%"],["Cost of revenue","","","63,574","","","","62,660","","","","914","","","","1","%"],["Gross profit","","","103,088","","","","93,576","","","","9,512","","","","10","%"],["Gross margin","","","62","%","","","60","%"],["Operating expenses:"],["Research & development","","","32,690","","","","28,182","","","","4,508","","","","16","%"],["Selling, general & administrative","","","95,847","","","","84,794","","","","11,053","","","","13","%"],["Impairment of intangible assets","","","62,190","","","","-","","","","62,190","","","","-"],["Total operating expenses","","","190,727","","","","112,976","","","","77,751","","","","69","%"],["Loss from operations","","","(87,639",")","","","(19,400",")","","","(68,239",")","","","352","%"],["Interest and other expense, net","","","2,312","","","","654","","","","1,658","","","","254","%"],["Loss before income taxes","","","(85,327",")","","","(18,746",")","","","(66,581",")","","","355","%"],["Benefit from income taxes","","","(2,660",")","","","(3,887",")","","","1,227","","","","(32","%)"],["Net loss","","$","(82,667",")","","$","(14,859",")","","$","(67,808",")","","","456","%"]]
[[/GREPCENT_TABLE]]

Revenue

The following table presents revenue by product family for fiscal years 2023 and 2022 (dollars in thousands): 

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2023","","","2022","","","$ Change","","","% Change"],["OA Pain Management","","$","101,927","","","$","91,984","","","$","9,943","","","","11","%"],["Joint Preservation and Restoration","","","54,879","","","","50,402","","","","4,477","","","","9","%"],["Non-Orthopedic","","","9,856","","","","13,850","","","","(3,994",")","","","(29","%)"],["","","$","166,662","","","$","156,236","","","$","10,426","","","","7","%"]]
[[/GREPCENT_TABLE]]

Revenue for the year ended December 31, 2023 was $166.7 million, an increase of $10.5 million, or 7%, compared to the prior year. The increase in revenue was driven by growing global commercial adoption of our products as well as our introduction of new products in recent years.

Revenue from our OA Pain Management product family increased 11% for the year ended December 31, 2023, as compared to prior year, due to a global sales growth of our Monovisc single injection pain product and favorable ordering patterns, as well as continued double-digit international growth of our Cingal next generation non-opioid single injection pain product. 

Revenue from our Joint Preservation and Restoration product family increased 9% for the year ended December 31, 2023, as compared to prior year, due to commercial adoption of our newest products, such as X-Twist, and higher international sales.

43

Revenue from our Non-Orthopedic product family decreased 29% for the year ended December 31, 2023, as compared to prior year, primarily due to lower sales to veterinary customers due to timing of ordering patterns and lower sales following last-time-buys in 2022 associated with termination of certain legacy distributor contracts. 

Effective January 1, 2023, we began to report revenue from product sales to veterinary customers within the Non-Orthopedic product family whereas such revenue had historically been reported within the OA Pain Management revenue product family for the prior period year ended December 31, 2022. Revenue from product sales to veterinary customers amounted to $4.2 million and $5.9 million for 2023 and 2022, respectively, with the 2022 revenue reclassified to Non-Orthopedic to conform to current presentation.

Gross Profit and Margin

Gross profit for the year ended December 31, 2023 was $103.1 million, or gross margin of 62%, as compared with $93.6 million, or gross margin of 60%, for the year ended December 31, 2022. The increase in gross profit for the year ended December 31, 2023, primarily resulted from higher revenue growth, improved manufacturing efficiency and lower product rationalization charges. This increase was partially offset by higher costs due to inflationary pressures for raw materials and freight charges.

Research and Development

Research and development expenses for the year ended December 31, 2023 were $32.7 million, an increase of $4.5 million, or 16%, as compared to the prior year, primarily due to increased costs to ensure compliance with growing regulatory requirements globally, such as EU MDR, as well as new product development associated with our research and development pipeline, led by Integrity, which received FDA clearance in August 2023 and was launched with first surgeries in rotator cuff repair and other tendon procedures in November 2023.

For additional information on our research and development activities, please see the section captioned “Part I. Item 1. Business—Research and Development” in this Annual Report on Form 10-K.

Selling, General and Administrative

Selling, general and administrative, or SG&A, expenses for the year ended December 31, 2023 were $95.9 million, an increase of $11.0 million, or 13%, as compared to the prior year. The increase in SG&A expenses for the year ended December 31, 2023 was primarily due to $13.0 million of non-recurring costs related to the Parcus Medical unitholder arbitration settlement, shareholder activism, discontinuation of a software development project and other non-recurring corporate costs. During the year, spending increased as we continued to expand our commercial capability in the United States, including increased marketing, medical education and other operational capabilities to support our business growth, as well as due to increased commissions resulting from sales growth.

Impairment of Intangible Assets

We assess our long-lived assets for impairment under certain circumstances, such as when events or changes in circumstances indicate there may be impairment. During the fourth quarter of 2023, we performed a quantitative assessment of intangible assets impairment related to the Parcus Medical and Arthrosurface reporting unit. The results of these impairment tests indicated that the estimated fair value of this reporting unit was less than its carrying value. Consequently, a non-cash impairment of intangible assets charge of $62.2 million was recorded in the quarter ended December 31, 2023. The decline in fair value was primarily due to lower growth expectations for future revenue and related cash flows related the Parcus Medical and Arthrosurface reporting unit.

Income Taxes

The benefit from income taxes was $2.7 million for the year ended December 31, 2023, resulting in an effective tax rate of 3.1%. The benefit from income taxes was $3.9 million for the year ended December 31, 2022, resulting in an effective tax rate of 20.7%. The decrease in our effective rate for the year ended December 31, 2023 as compared to the year ended December 31, 2022 is primarily due to a valuation allowance being recorded on U.S. deferred tax assets in 2023 offset somewhat by non-deductible stock-based compensation.

Net Loss

For the year ended December 31, 2023, the net loss was $82.7 million, or $5.64 per basic and diluted loss per share, compared to a net loss of $14.9 million, or $1.02 per basic and diluted share, for the prior year. The $67.8 million increase in the net loss was due to the $62.2 million pre-tax impairment charge on intangible assets recorded in the fourth quarter of 2023 and $13.0 million in pre-tax expenses associated with other non-recurring costs earlier in 2023.

44

Non-GAAP Financial Measures

We present certain information with respect to adjusted gross profit and adjusted gross margin, adjusted Earnings Before Interest, Tax, Depreciation and Amortization, or EBITDA, adjusted net income, adjusted diluted earnings per share or adjusted Earnings Per Share, or EPS, which are financial measures not based on any standardized methodology prescribed by accounting principles generally accepted in the United States, or GAAP, and is not necessarily comparable to similarly titled measures presented by other companies.

We have presented adjusted gross profit and adjusted gross margin, adjusted EBITDA, adjusted net income, adjusted EPS, because they are key measures used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business. We believe these financial measures help identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. We believe that the exclusion of these items in calculating these measures can provide a useful tool for period-to-period comparisons of our core operating performance. Accordingly, we believe that these measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects and allowing for greater transparency with respect to key financial metrics used by our management in their financial and operational decision-making. 

Adjusted Gross Profit and Adjusted Gross Margin

We define adjusted gross profit as our gross profit excluding amortization of certain acquired intangible assets, the impact of inventory fair-value step up associated with our recent acquisitions and certain product rationalization charges. The amortized assets contribute to revenue generation, and the amortization of such assets will likely continue in future periods until such assets are fully amortized. These assets include the fair value of certain identified assets acquired in acquisitions, including developed technology and acquired trade names. We define adjusted gross margin as adjusted gross profit divided by total revenue.

The following is a reconciliation of adjusted gross profit to gross profit for the years ended December 31, 2023 and 2022, respectively:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2023","","","2022"],["Gross profit","","$","103,088","","","$","93,576"],["Product rationalization charges","","","748","","","","3,199"],["Acquisition related intangible asset amortization","","","6,244","","","","6,240"],["Adjusted gross profit","","$","110,080","","","$","103,015"],["Adjusted gross margin","","","66","%","","","66","%"]]
[[/GREPCENT_TABLE]]

Adjusted gross profit for the year ended December 31, 2023 increased $7.1 million to $110.1 million representing 66% of revenue. Adjusted gross profit for the year ended December 31, 2022 was $103.0 million, or 66% of revenue. The increase in adjusted gross profit for the year ended December 31, 2023 as compared to 2022, primarily resulted from the growth of revenue. There was no change in adjusted gross margin for the year ended December 31, 2023 as compared to 2022, as the benefits of higher revenue and related production volumes were offset by increased supply chain costs due to inflationary pressures and a higher proportion of international sales in which product margins are generally lower.

Adjusted EBITDA

We present information below with respect to adjusted EBITDA, which we define as our net loss excluding interest and other income, net, income tax benefit, depreciation and amortization, stock-based compensation, product rationalization charges, and other non-recurring expenses.

Adjusted EBITDA is not prepared in accordance with U.S. GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with U.S. GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest U.S. GAAP equivalent. Some of these limitations are:

45

[[GREPCENT_TABLE]]
[["","\u2022","adjusted EBITDA excludes depreciation and amortization, and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future, the cash requirements for which are not reflected in adjusted EBITDA\u037e"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","we exclude stock-based compensation expense from adjusted EBITDA although (a) it has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our employee compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary and bonus expense included in operating expenses likely would be higher, which would affect our cash position\u037e"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","we exclude acquisition related expenses, including transaction costs and other related expenses, amortization and depreciation of acquired assets in recent acquisitions, and the impact of inventory fair-value step up on cost of goods sold\u037e"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","we exclude certain impairment charges, including impairment related to intangible assets, certain product rationalization charges\u037e"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","we exclude goodwill impairment charges and changes in the fair value of contingent consideration\u037e\u2019"],["","\u2022","we exclude certain other non-recurring costs, such as the arbitration settlement with Parcus Medical, costs associated with shareholder activism, and discontinuation of a software project;"],["","\u2022","the expenses and other items that we exclude in our calculation of adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from adjusted EBITDA when they report their operating results\u037e"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs\u037e"],["","\u2022","adjusted EBITDA does not reflect provision for (benefit from) income taxes or the cash requirements to pay taxes\u037e and"],["","\u2022","adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments."]]
[[/GREPCENT_TABLE]]

The following is a reconciliation of adjusted EBITDA to net loss for the years ended December 31, 2023 and 2022 respectively:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2023","","","2022"],["Net loss","","$","(82,667",")","","$","(14,859",")"],["Interest and other expense, net","","","(2,312",")","","","(654",")"],["Benefit from income taxes","","","(2,660",")","","","(3,887",")"],["Depreciation and amortization","","","7,069","","","","7,340"],["Stock-based compensation","","","15,243","","","","14,315"],["Product rationalization charges","","","748","","","","3,199"],["Arbitration settlement","","","3,250","","","","-"],["Acquisition related intangible asset amortization","","","7,148","","","","7,147"],["Impairment of intangible assets","","","62,190","","","","-"],["Discontinuation of software development project","","","4,473","","","","-"],["Costs of shareholder activism","","","3,033","","","","-"],["Adjusted EBITDA","","$","15,515","","","$","12,601"]]
[[/GREPCENT_TABLE]]

Adjusted EBITDA for year ended December 31, 2023 was $15.5 million, an increase of $2.9 million as compared to 2022. The increase in adjusted EBITDA was primarily due to an increase in revenue and adjusted gross profit as well as a slower ramp up of commercial spending in 2023 and overall spending control.

46

Adjusted Net Loss and Adjusted EPS

We present information below with respect to adjusted net loss and adjusted EPS. We define adjusted net loss as our net loss excluding amortization and depreciation of acquired assets, the impact of inventory fair-value step up on cost of revenue, changes in the fair value of contingent consideration, as well as certain impairment charges, including impairment related to IPR&D assets and non-cash product rationalization charges, each on a tax effected basis. Acquisition-related expenses are those that we would not have incurred except as a direct result of acquisition transactions. The amortized assets contribute to revenue generation and the amortization of such assets will recur in future periods until such assets are fully amortized. These assets include the estimated fair value of certain identified assets acquired in acquisitions, including in-process research and development, or IPR&D, developed technology, customer relationships and acquired trade names. We define adjusted EPS as U.S. GAAP diluted earnings per share excluding the above adjustments to net loss used in calculating adjusted net loss, each on a per share and tax effected basis.

The following is a reconciliation of adjusted net income to net loss for the years ended December 31, 2023 and 2022, respectively:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2023","","","2022"],["Net loss","","$","(82,667",")","","$","(14,859",")"],["Product rationalization charges, tax effected","","","725","","","","2,410"],["Arbitration settlement, tax effected","","","3,148","","","","-"],["Acquisition related intangible asset amortization, tax effected","","","6,926","","","","5,386"],["Impairment of intangible assets, tax effected","","","60,250","","","","-"],["Discontinuation of software development project, tax effected","","","4,333","","","","-"],["Costs of shareholder activism, tax effected","","","2,938","","","","-"],["Adjusted net loss","","$","(4,347",")","","$","(7,063",")"]]
[[/GREPCENT_TABLE]]

The following is a reconciliation of adjusted diluted loss per share to diluted loss per share for the years ended December 31, 2023 and 2022, respectively (in thousands, expect per share data):

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2023","","","2022"],["Diluted loss per share","","$","(5.64",")","","$","(1.02",")"],["Product rationalization charges, tax effected","","","0.05","","","","0.17"],["Arbitration settlement, tax effected","","","0.21","","","","-"],["Acquisition related intangible asset amortization, tax effected","","","0.47","","","","0.36"],["Impairment of intangible assets, tax effected","","","4.11","","","","-"],["Discontinuation of software development project, tax effected","","","0.30","","","","-"],["Costs of shareholder activism, tax effected","","","0.20","","","","-"],["Adjusted diluted loss per share","","$","(0.30",")","","$","(0.49",")"]]
[[/GREPCENT_TABLE]]

Adjusted net loss in 2023 was $4.3 million, a decrease of $2.7 million as compared to 2022. The decrease in adjusted net loss and adjusted diluted loss per share for the period was primarily due to higher revenues and improved operating performance during the year.

47

Results of Operations

Year ended December 31, 2022 compared to year ended December 31, 2021

Statement of Operations Detail

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","$ Change","","","% Change"],["","","(in thousands, except percentages)"],["Revenue","","$","156,236","","","$","147,794","","","$","8,442","","","","6","%"],["Cost of revenue","","","62,660","","","","64,851","","","","(2,191",")","","","(3","%)"],["Gross profit","","","93,576","","","","82,943","","","","10,633","","","","13","%"],["Gross margin","","","60","%","","","56","%"],["Operating expenses:"],["Research & development","","","28,182","","","","27,327","","","","855","","","","3","%"],["Selling, general & administrative","","","84,794","","","","74,096","","","","10,698","","","","14","%"],["Change in fair value of contingent consideration","","","-","","","","(21,095",")","","","21,095","","","","(100","%)"],["Total operating expenses","","","112,976","","","","80,328","","","","32,648","","","","41","%"],["(Loss) income from operations","","","(19,400",")","","","2,615","","","","(22,015",")","","","(842","%)"],["Interest and other expense, net","","","654","","","","(188",")","","","842","","","","(448","%)"],["(Loss) income before income taxes","","","(18,746",")","","","2,427","","","","(21,173",")","","","(872","%)"],["Benefit from income taxes","","","(3,887",")","","","(1,707",")","","","(2,180",")","","","128","%"],["Net (loss) income","","$","(14,859",")","","$","4,134","","","$","(18,993",")","","","(459","%)"]]
[[/GREPCENT_TABLE]]

Revenue

The following table presents product revenue by product family for fiscal years 2022 and 2021 (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2022","","","2021","","","$ Change","","","% Change"],["OA Pain Management","","$","91,984","","","$","85,084","","","$","6,900","","","","8","%"],["Joint Preservation and Restoration","","","50,402","","","","48,588","","","","1,814","","","","4","%"],["Non-Orthopedic","","","13,850","","","","14,122","","","","(272",")","","","(2","%)"],["","","$","156,236","","","$","147,794","","","$","8,442","","","","6","%"]]
[[/GREPCENT_TABLE]]

Revenue for the year ended December 31, 2022 was $156.2 million, an increase of $8.4 million, or 6%, compared to the prior year. The increase in revenue was driven by recovery outside the U.S. from the initial impact of the COVID-19 pandemic on sales volumes and related strategic partner ordering patterns, as well as from growing global commercial adoption of our products.

Revenue from our OA Pain Management product family increased 8% for the year ended December 31, 2022, as compared to prior year, due primarily to higher international sales on recovery from the initial impact of the COVID-19 pandemic, favorable ordering patterns and growth in adoption of our products globally. The increase was also a result of growth in Mitek revenues as well as higher veterinary sales on favorable order patterns and COVID-19 recovery.

Revenue from our Joint Preservation and Restoration product family increased 4% for the year ended December 31, 2022, as compared to prior year, due to improving elective procedure volumes and rapidly growing commercial adoption of our newest products.

48

Revenue from our Non-Orthopedic product family decreased 2% for the year ended December 31, 2022, as compared to prior year, primarily due to timing of distributor sales as well as last-time purchases of legacy products during 2021.

Effective January 1, 2023, we began to report revenue from product sales to veterinary customers within the Non-Orthopedic product family whereas such revenue had historically been reported within the OA Pain Management revenue product family for the prior period years ended December 31, 2022 and 2021. Revenue from product sales to veterinary customers amounted to $5.9 million and $4.4 million for 2022 and 2021, respectively, with the 2022 and 2021 revenue reclassified to Non-Orthopedic to conform to current presentation.

Gross Profit and Margin

Gross profit for the year ended December 31, 2022 was $93.6 million, or gross margin of 60%, as compared with $82.9 million, or gross margin of 56%, for the year ended December 31, 2021. The increase in gross profit for the year ended December 31, 2022, primarily resulted from higher revenue growth and the conclusion of the amortization of inventory step-up costs related to the 2020 Arthrosurface and Parcus Medical acquisitions. This increase was partially offset by higher product rationalization charges, as well as higher manufacturing-related costs. Gross margin includes acquisition-related amortization expenses and the impact of inventory step-up costs associated with the Arthrosurface and Parcus Medical acquisitions. These expenses together increased cost of revenue by $6.2 million, or 7 points of gross margin, for the year ended December 31, 2022, as compared to increased cost of revenue of $12.7 million, or 9 points of gross margin for the same periods in 2021. 

Research and Development

Research and development expenses for the year ended December 31, 2022 were $28.2 million, an increase of $0.9 million, or 3%, as compared to the prior year, primarily due to increased costs to ensure compliance with growing regulatory requirements globally as well as new product development associated with our research and development pipeline. Also included in research and development expenses are clinical costs. We completed a third Phase III clinical trial for Cingal in 2022, which achieved its primary endpoint, and made significant progress in completing enrollment in our Hyalofast clinical trial.

Selling, General and Administrative

Selling, general and administrative, or SG&A, expenses for the year ended December 31, 2022 were $84.8 million, an increase of $10.7 million, or 14%, as compared to the prior year. The increase in SG&A expenses for the year ended December 31, 2022 was primarily related to the expansion of our commercial capability in the United States, including increased marketing, medical education and other operational capabilities to support our growing business needs, as well as increased commissions on higher sales. The growth in SG&A expenses also reflects the increase in certain activities that were curtailed in the early stages of the COVID-19 pandemic, such as travel, as well as higher stock-based compensation expense driven by the growth in personnel to support Anika’s strategic transformation, and higher general corporate costs.

Contingent Consideration Fair Value Change

In the year ended December 31, 2021, we recorded a $21.1 million net benefit related to the change in fair value of our contingent consideration liabilities incurred associated with the acquisitions of Parcus Medical and Arthrosurface in 2020. The liability for contingent consideration is remeasured at each reporting period until the contingency is resolved. The decrease in fair value of the contingent consideration was due primarily to the decrease in the likelihood that certain contingent milestones would be achieved or because certain contingent milestones were not achieved. In July 2021, we made a regulatory milestone payment in connection with the Arthrosurface acquisition in the amount of $10.0 million upon obtaining a regulatory clearance for a reverse shoulder implant system. In September 2022, we made a milestone payment in connection with the Parcus Medical acquisition in the amount of $4.3 million.

Income Taxes

The benefit from income taxes was $3.9 million for the year ended December 31, 2022, resulting in an effective tax rate of 20.7%. The benefit from income taxes was $1.7 million for the year ended December 31, 2021, resulting in an effective tax rate of (70.4%). The increase in our effective rate for the year ended December 31, 2022 as compared to the year ended December 31, 2021 is primarily due to the change in fair value of contingent consideration and the release of the valuation allowance related to the net deferred tax assets in Italy during 2021.

49

Net Income (Loss)

For the year ended December 31, 2022, net loss was $14.9 million, or $1.02 per diluted share, compared to net income of $4.1 million, or $0.28 per diluted share, for the prior year. The decrease in net income and diluted earnings per share was primarily due to the net of tax benefit of $17.0 million recorded in 2021 related to the reduction in fair value of contingent consideration, as well as higher operating expenses in 2022 primarily driven by increased spending to expand our commercial capability and development of new products, partially offset by higher revenues and favorable gross profit in 2022.

Concentration of Risk

We have historically derived the majority of our revenue from a small number of customers, most of whom resell our products to end-users and are significantly larger companies than us. For the year ended December 31, 2023, Mitek accounted for 45% of revenue, as compared to 43% in prior year. While we believe that our expanded commercial infrastructure has been and will continue to diversify our revenue base, we expect to continue to be dependent on a small number of large customers, especially Mitek, for a sizeable portion of our revenues in the near-term future. The failure of these customers to purchase our products in the amounts they historically have or in amounts that we expect could materially impact our business.

In addition, if present and future customers terminate their purchasing arrangements with us, significantly reduce or delay their orders, or seek to renegotiate their agreements on terms less favorable to us, our business, financial condition, and results of operations will be adversely affected. If we accept terms less favorable than the terms of the current agreements, such renegotiations may have a material adverse effect on our business, financial condition, and/or results of operations. Furthermore, in any future negotiations we may be subject to the perceived or actual leverage that these customers may have given their relative size and importance to us. Any termination, change, reduction, or delay in orders could seriously harm our business, financial condition, and results of operations. Accordingly, unless and until we diversify and expand our customer base, our future success will significantly depend upon the timing and size of future purchases by our largest customers and the financial and operational success of these customers. The loss of any one of our major customers or the delay of significant orders from such customers, even if only temporary, could reduce or delay our recognition of revenues, harm our reputation in the industry, and reduce our ability to accurately predict cash flow, and, consequently, it could seriously harm our business, financial condition, and results of operations.

See Note 12, Revenue and Geographic Information; Geographic Information, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information regarding significant customers.

Liquidity and Capital Resources

We require cash to fund our operating activities and to make capital expenditures and other investments in the business. We expect that our requirements for cash to fund these uses will increase as our operations expand. We believe that our operating cash flows, cash currently on our balance sheet and availability under our credit facility will be sufficient to allow us to continue to invest in our existing business, to manage our capital structure on a short and long-term basis, and to meet our anticipated operating cash needs. Cash, cash equivalents, and investments aggregated $72.9 million and $86.3 million, and working capital totaled $132.2 million and $141.6 million, at December 31, 2023 and 2022, respectively.

We entered into a Third Amendment to Credit Agreement, on November 12, 2021, with Bank of America N.A. as administrative agent, which amended our existing revolving line of credit agreement dated October 24, 2017 and provides up to $75.0 million in the form of a senior revolving line of credit. Subject to certain conditions, we may request up to an additional $75.0 million for a maximum aggregate commitment of $150.0 million. As of December 31, 2023, and 2022, there were no outstanding borrowings, and we are in compliance with the terms of the credit facility.

Summary of Cash Flows (in thousands):

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[[/GREPCENT_TABLE]]

50

The following changes contributed to the net change in cash and cash equivalents from 2022 to 2023.

Operating Activities

Cash (used in) provided by operating activities was $(1.8) million, $4.4 million and $8.4 million for 2023, 2022 and 2021, respectively. The change in 2023 was primarily attributable to non-recurring expenses for the Parcus arbitration settlement and shareholder activism costs and an increase in inventories, primarily related to new product launches, partially offset by an increase in product sales.

For the foreseeable future, we expect to continue to invest in research and development for new products and clinical trials to support our growth strategy. These costs will be funded with a combination of cash on hand and cash expected to be generated from future operations.

Investing Activities

Cash used in investing activities was $5.4 million, $7.5 million and $3.1 million for 2023, 2022 and 2021, respectively. Most of the spend on investing activities was for capital investments in manufacturing operations to support growing product demand and instruments to support clinical cases. The change in 2023 was due to lower spending on software implementation.

Financing Activities

Cash used in financing activities was $6.3 million, $4.9 million and $6.8 million for 2023, 2022 and 2021, respectively. The change in 2023 was primarily due to $5.0 million used to fund an accelerated stock repurchase program completed during 2023. 

For a discussion of our liquidity and capital resources as of December 31, 2022, and our cash flow activities for the fiscal year ended December 31, 2022, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 16, 2023, which is incorporated by reference in this Report.

Contractual Obligations and Other Commercial Commitments 

The table below summarizes our non-cancelable operating leases, purchase commitments, and contractual obligations related to future periods which are not reflected in our consolidated balance sheet at December 31, 2023. Purchase commitments relate primarily to non-cancellable inventory commitments and capital expenditures entered in the normal course of business:

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[[/GREPCENT_TABLE]]

We also have purchase orders and commitments for materials and other day-to-day business requirements in which there are no material commitments greater than one year.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, which consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We monitor our estimates on an ongoing basis for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.

51

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout this section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Revenue Recognition – General

Pursuant to ASC 606, we recognize revenue when a customer obtains control of promised goods or services. The amount of revenue that is recorded reflects the consideration that we expect to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are capable of being distinct or distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation.

We generate sales principally through three types of customers: (i) commercial partnerships (ii) hospitals and ASCs, and (iii) distributors, referred to as distribution model.

For commercial partnership sales, we sell our products directly to these partners, who perform most of the downstream sales and marketing activities to customers and end-users. These arrangements may include the grant of certain licenses, performance of development services, and the supply of product. Our largest such customer, Mitek, represented 45% of total revenues for the year ended December 31, 2023. We recognize revenue from product sales when the customer obtains control of our product, which typically occurs upon shipment to the customer. Commercial partnership agreements may also include sales-based royalties and milestones. As we considered the license to be the predominant item to which the royalties relate for these agreements, sales-based royalties and milestones are only recognized when the later of the underlying sale occurs or the performance obligation to which some or all of the sales-based royalty has been satisfied (or partially satisfied). This is generally in the same period that our licensees complete their product sales in their territory, for which we are contractually entitled to a percentage-based royalty. We record royalty revenues based on estimated net sales of licensed products as reported to us by our commercial partners. The differences between actual and estimated royalty revenues have not been material and are typically adjusted in the following quarter when the actual amounts are known. Revenue from sales-based royalties is included in revenues in our consolidated statement of operations.

For sales to hospitals and ASCs, which generally pairs in-house sales representatives with local or regional distributors, the inventory is generally consigned so that products are available when needed for surgical procedures. No revenue is recognized upon the placement of inventory into consignment, as we retain the ability to control the inventory. Revenue is recognized typically as of the date of surgical implantation of the product.

For distributor sales, we sell our products to our distributors, generally outside the United States, who subsequently resell the products to sub-distributors and health care providers, among others. We recognize revenue from product sales when the distributor obtains control of our product, which typically occurs upon shipment to the distributor, in return for agreed-upon, fixed-price consideration. Performance obligations are generally settled quickly after purchase order acceptance; therefore, the value of unsatisfied performance obligations at the end of any reporting period is generally insignificant. We sell to a diversified base of distributors and, therefore, we believe there is no material concentration of credit risk.

Certain of our supply agreements contain terms that represent a promise to deliver product at the customer’s discretion that are considered distributor options. We assess if these options provide a material right to the licensee, and if so, they are accounted for as separate performance obligations. Our supply agreements do not provide options that are considered material rights.

Our payment terms are consistent with prevailing practice in the respective markets in which we do business. Most of our customers make payments based on contract terms, which are not affected by contingent events that could impact the transaction price. Payment terms fall within the one-year guidance for the practical expedient, which allows us to forgo adjustment of the contractual payment amount of consideration for the effects of a significant financing component.

Some of our distributor agreements have volume-based discounts with tiered pricing which are generally prospective in nature. These prospective discounts together with any free-of-charge sample units offered are evaluated as potential material rights. If the prospective discounts or free-of-charge sample units are considered material rights, these would be separate performance obligations and a portion of the sales transaction price is allocated to the material right. Revenue allocated to the material right is recognized when the additional goods are transferred to the customer or when the option expires. During 2023, the consideration allocated to material rights was not significant.

We receive payments from our customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional. There was no deferred revenue as of December 31, 2023 and 2022, respectively.

52

Generally, customer contracts contain Free on Board, or FOB, or Ex-Works shipping point terms where the customer pays the shipping company directly for all shipping and handling costs. In those contracts in which we pay for the shipping and handling, the associated costs are generally recorded along with the product sale at the time of shipment in cost of revenue when control over the products has transferred to the customer. Value-add and other taxes we collected concurrently with revenue-producing activities are excluded from revenue. Our general product warranty does not extend beyond an assurance that the product or services delivered will be consistent with stated contractual specifications, which does not create a separate performance obligation. We recognize the incremental costs of obtaining contracts as an expense when incurred as the amortization period of the assets that we otherwise would have recognized is one year or less in accordance with the practical expedient in paragraph ASC 340-40-25-4. These costs are included in selling, general and administrative expenses.

Inventories

Inventories are primarily stated at the lower of standard cost and net realizable value, with approximate cost determined using the first-in, first-out method. Work-in-process and finished goods inventories include materials, labor, and manufacturing overhead. Manufacturing variances attributable to abnormally low production are expensed in the period incurred. Inventory costs associated with product candidates that have not yet received regulatory approval are capitalized if we believe there is probable future commercial use and future economic benefit.

Our policy is to write down inventory when conditions exist that suggest inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for our products and market conditions. We regularly evaluate the ability to realize the value of inventory based on a combination of factors including, but not limited to, historical usage rates, forecasted sales or usage, product end of life dates, and estimated current or future market values. Inventory needs and alternative usage avenues are explored within these processes to mitigate inventory exposure.

When recorded, inventory write-downs are intended to reduce the carrying value of inventory to its net realizable value. If actual demand for our products deteriorates, or if market conditions are less favorable than those projected, additional inventory write-downs may be required. Other long-term assets include inventory expected to remain on hand beyond one year.

Goodwill

Goodwill is the amount by which the purchase price of acquired net assets in a business combination exceeded the fair values of net identifiable assets on the date of acquisition. Goodwill is not amortized but is subject to impairment test annually or more frequently if events or changes in circumstances suggest that the carrying value of goodwill may not be recoverable, utilizing either the qualitative or quantitative method.

We test goodwill for impairment at the reporting unit level on an annual basis as of November 30 or more frequently if we believe indicators of impairment exist. We have two reporting units: the legacy Anika reporting unit and a reporting unit established in 2020 upon the acquisitions of Parcus Medical and Arthrosurface. The remaining goodwill as of December 31, 2023 pertains to the legacy Anika reporting unit, as the goodwill with respect to the Parcus Medical and Arthrosurface reporting unit was fully impaired in 2020.

We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. We used the quantitative method in 2023, we considered several factors, including the following:

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[["","\u25cf","the amount by which the fair value of the reporting unit exceeded its carrying value as of the date of the most recent quantitative impairment analysis, which indicated there would need to be substantial negative developments in the markets in which the reporting unit operates for there to be potential impairment\u037e"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the carrying value of the reporting unit as of the assessment date compared to their previously calculated fair value as of the date of the most recent quantitative impairment analysis\u037e"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the current forecasts as compared to the forecasts included in the most recent quantitative impairment analysis\u037e"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","public information from competitors and other industry information to determine if there were any significant adverse trends in our competitors' businesses\u037e"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","changes in the value of major U.S. stock indices that could suggest declines in overall market stability that could impact the valuation of our reporting unit\u037e"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","whether there had been any significant increases in the weighted-average cost of capital rates for the reporting unit, which could materially lower our prior valuation conclusions under a discounted cash flow approach."]]
[[/GREPCENT_TABLE]]

53

Significant assumptions utilized in the impairment analysis included valuation multiple with respect to revenue and weighted-average cost of capital. Based on sensitivity analysis performed on key assumptions at November 30, 2023, a 10% decrease in valuation multiples or a 10% increase in the weighted average cost of capital assumption would not have resulted in a fair value below the reporting unit’s carrying value. Accordingly, we determined it was not more likely than not that the fair value of the legacy Anika reporting unit is less than its carrying amount and thus goodwill was not impaired as of November 30, 2023.

Long-Lived Assets

Long-lived assets primarily include property and equipment and intangible assets with finite lives. Our intangible assets are comprised of purchased developed technologies, patents, trade names, customer relationships and distributor relationships. These intangible assets are carried at cost, net of accumulated amortization. Amortization is recorded on a straight-line basis over the intangible assets' useful lives, which range from approximately five to sixteen years. We review long-lived assets for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. During the year ended December 31, 2023, the Company determined that certain of its intangible assets related to its Arthrosurface and Parcus reporting unit were impaired mainly due to slower than expected revenue growth from product sales that have impacted cash flows with this reporting unit.  As a result, we recorded a $62.2 million charge to intangible assets related to its Arthrosurface and Parcus reporting units during the year ended December 31, 2023.

In determining the useful lives of intangible assets, we consider the expected use of the assets and the effects of obsolescence, demand, competition, anticipated technological advances, changes in surgical techniques, market influences and other economic factors. For technology-based intangible assets, we consider the expected life cycles of products, absent unforeseen technological advances, which incorporate the corresponding technology.

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements is included in Note 2 to the consolidated financial statements in this Annual Report on Form 10-K.