ANIKA THERAPEUTICS, INC. You should read the following discussion in conjunction with our financial statements and related notes appearing elsewhere in this report and our audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , or our 2020 Form 10-K. In addition to historical information, this report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning our business, consolidated financial condition, and results of operations.The Securities and Exchange Commission , or theSEC , encourages companies to disclose forward-looking statements so that investors can better understand a company's prospects and make informed investment decisions. Forward-looking statements are subject to risks and uncertainties, many of which are outside our control, which could cause actual results to differ materially from these statements. Therefore, you should not rely on any of these forward-looking statements. Forward-looking statements can be identified by such words as "will," "likely," "may," "believe," "expect," "anticipate," "intend," "seek," "designed," "develop," "would," "future," "can," "could," "estimate," "potential," and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters. All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, operations, costs, plans, and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements regarding the effect of COVID-19 and related impacts on our business, operations, and financial results, expected future operating results, expectations regarding the timing and receipt of regulatory results, anticipated levels of capital expenditures, and expectations of the effect on our financial condition of claims, litigation, and governmental and regulatory proceedings. Please also refer to those factors described in "Part I, Item 1A. Risk Factors" of our 2020 Form 10-K for important factors that we believe could cause actual results to differ materially from those in our forward-looking statements. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. 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 osteoarthritis, or OA, pain management, regenerative solutions, soft tissue repair and bone preserving joint technologies. We have over thirty years of global expertise developing, manufacturing and commercializing products based on our hyaluronic acid, or 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 the platform for our regenerative solutions portfolio. In early 2020, we expanded our overall technology platform and significantly enhanced our commercial infrastructure, especially inthe United States , through our strategic acquisitions ofParcus Medical, LLC , or Parcus Medical, a sports medicine implant and instrumentation solutions provider focused on sports medicine and soft tissue repair, andArthrosurface, Inc. , or Arthrosurface, a company specializing in bone preserving partial and total joint replacement solutions. Through these acquisitions, we have transformed our company. We expanded our addressable market from the over$1 billion global OA pain management market to the over$8 billion joint preservation market (which includes the faster growing sports medicine and extremities segments), improved our commercial capabilities, and expanded our product pipeline and research and development expertise in our target markets.
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:
? 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;
? Robust network of stakeholders in our target markets to identify
evolving unmet patient treatment needs;
? Prioritized investment in differentiated pipeline of regenerative
solutions, bone preserving implants and soft tissue solutions;
? Leveraging global commercial expertise to drive growth across the
portfolio;
? Opportunity to pursue strategic inorganic growth opportunities,
including potential partnerships and tuck-in acquisitions,leveraging
our strong financial foundation and operational capabilities; and
? Energized and experienced team focused on strong values, talent, and
culture.
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Key Developments during the Three Months Ended
? We completed the launch activities for WristMotion Total Wrist
Arthroplasty System. The product is a modular joint preservation
system that replaces both the radial and carpal sides of the wrist
joint for patients suffering from rheumatoid arthritis,
osteoarthritis, or post-traumatic arthritis.
? We received 510(k) clearance for Tactoset Injectable Bone Substitute
for hardware augmentation. This product is indicated for filling bone
voids or defects of the skeletal system (i.e. extremities and pelvis)
that are not intrinsic to the stability of bony structure.
COVID-19 Pandemic
In March 2020 , the World Health Organization declared the spread of the COVID-19
virus a global pandemic. This pandemic has caused an economic downturn on a
global scale, as well as significant volatility in the financial markets. There
has been significant volatility in our results on a quarterly basis due to the
worldwide cancellation or delay of elective procedures, as well as the impact on
timelines associated with certain clinical studies. While elective procedure
volume had a limited recovery after the initial pandemic impacts seen in the
early parts of second quarter of 2020 due to the easing of COVID-19 related
restrictions in certain jurisdictions, areas of the United States and other
countries have recently seen, and continue to see, fluctuating infection rates
increasing as the result of emerging variants of COVID-19.Continuing
fluctuations in infection rates in the United States and other countries make
future results difficult to predict despite recent advances in the vaccination
rates of certain parts of the population. In this time of uncertainty as a
result of the COVID-19 pandemic, we have taken many precautions to provide a
safe work environment for our employees and customers, including the
establishment and implementation of a work from home policy, where possible.
While increasing vaccination rates and the loosening of restrictions, especially
in the United States , have resulted in a return to a more normalized business
environment, the pandemic continues to have an impact on our business in certain
jurisdictions and a resurgence of COVID-19 as a result of emerging variants or
other factors, as is currently occurring in certain jurisdictions, could result
in additional government lockdowns, quarantine requirements, or other
restrictions that could impact our business and operations. We may also have to
take further actions that we determine are in the best interests of our
employees or as required by federal, state, or local authorities. To date, we do
not anticipate disruption to our ability to supply products to our customers.
Our commercial day-to-day operations have been impacted due to the worldwide
cancellations and/or delays of elective procedures, and timelines associated
with certain clinical studies and research and development programs have been
delayed. While the impact has been limited to these items to date, we caution
that there continues to be a possibility for potential future implementation of
certain additional restrictions in certain jurisdictions. The impact of these
restrictions on our operations, if implemented, is currently unknown, but could
be significant.
Products
Joint Pain Management
Our Joint Pain Management product family consists of:
? Monovisc and Orthovisc, our single- and multi-injection, HA-based
viscosupplement offerings indicated to provide pain relief from OA
conditions. Our Joint Pain Management products are generally
administered to patients in an office setting. In
Monovisc and Orthovisc are marketed exclusively by DePuy Synthes Mitek
Sports Medicine, part of the Johnson & Johnson Medical Companies, orMitek, and have been the market leaders, based on combined overall
revenue in the viscosupplement market, since 2018. Internationally, we
market our Joint Pain Management products through a worldwide network of
commercial distributors.
? Cingal, our novel, third-generation, single-injection OA product
consisting of our proprietary cross-linked HA material combined with a
steroid, is designed to provide both short- and long-term pain relief.
Cingal is CE Mark approved and has been sold outside the United States
in over 35 countries through our network of distributors for several
years. In
clinical trial and is not available for commercial sale.
? Hyvisc, our high molecular weight injectable HA veterinary product for
the treatment of joint dysfunction in horses due to non-infectious
synovitis associated with equine OA. Hyvisc is distributed by Boehringer
Ingelheim Vetmedica, Inc. , inthe United States .
Joint Preservation and Restoration
Our Joint Preservation and Restoration product family consists of:
? Bone Preserving Joint Technologies. Our portfolio of more than 150 bone
preserving joint technologies, including partial joint replacement,
joint resurfacing, and minimally invasive and bone sparing implants, is
designed to treat upper and lower extremity orthopedic conditions as
well as knee and hip conditions caused by trauma, injury and arthritic
disease. These products span multiple joints including the shoulder,
foot/ankle, wrist, knee and hip and are generally intended to mimic a
patient's natural anatomy to the extent feasible. These products are
often used to treat patients with OA progression beyond where our Joint
Pain Management products can allow the patients to retain an active
lifestyle, when early surgical intervention becomes preferable. We
commercialize these products in the United States by selling to
hospitals and surgery centers through an independent network of sales
representatives and distributors, and utilize our distributor network
for sales in certain international markets.
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? Soft Tissue Repair. Our line of soft tissue repair solutions is used by
surgeons to repair and reconstruct damaged ligaments and tendons
resulting from sports injuries, trauma and disease. These more
traditional sports medicine solutions include screws, sutures, sutureanchors, and other surgical systems that facilitate surgical procedures
on the shoulder, knee, hip, upper and lower extremities, and other soft
tissues. We commercialize these products in the United States by selling
to hospitals and surgery centers through an independent network of sales
representatives and distributors, and utilize our distributor network
for sales in over 60 international markets.
? Regenerative Solutions. Our portfolio of orthopedic regenerative
solutions based on our proprietary technologies based on HA and Hyaff,which is a solid form of HA. These products include Tactoset Injectable
Bone Substitute, an HA-enhanced injectable bone repair therapy designed
to treat insufficiency fractures and for augmenting suture anchor
fixation that we commercialize only in
a biodegradable support for human bone marrow mesenchymal stem cells
used for cartilage regeneration and as an adjunct for microfracture
surgery. Hyalofast is CE Mark approved and currently available in
the United States , Hyalofast is a pipeline product under clinical trial and is not available for commercial sale. Other Our Other product family consists of legacy HA-based products that do not fit into one of our other primary product categories. These products include Hyalobarrier, an anti-adhesion barrier indicated for use after abdomino-pelvic surgeries, and Hyalomatrix, which is used for the treatment of complex wounds such as burns and ulcers, products used in connection with the treatment of ears, nose and throat disorders, and ophthalmic products, including injectable, high molecular weight HA products used as viscoelastic agents in ophthalmic surgical procedures such as cataract extraction and intraocular lens implantation. 21
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Results of Operations Three and Nine Months EndedSeptember 30, 2021 Compared to Three and Nine Months EndedSeptember 30, 2020 . Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change (in thousands, except percentages) (in thousands, except percentages) Revenue$ 39,536 $ 31,694 $ 7,842 25 %$ 111,973 $ 97,769 $ 14,204 15 % Cost of revenue 16,513 14,351 2,162 15 % 47,164 45,487 1,677 4 % Gross profit 23,023 17,343 5,680 33 % 64,809 52,282 12,527 24 % Gross margin 58 % 55 % 58 % 53 % Operating expenses: Research and development 7,673 5,217 2,456 47 % 21,327 15,799 5,528 35 % Selling, general and administrative 17,500 15,903 1,597 10 % 53,664 44,884 8,780 20 % Goodwill impairment - - - 18,144 (18,144 ) (100% ) Change in fair value of contingent consideration (3,450 ) 4,150 (7,600 ) (183 %) (21,920 ) (16,176 ) (5,744 ) 36 % Total operating expenses 21,723 25,270 (3,547 ) (14 %)
53,071 62,651 (9,580 ) (15% ) Income (loss) from operations 1,300 (7,927 ) 9,227
116 % 11,738 (10,369 ) 22,107 213 %
Interest and
other expense,
net (48 ) (228 ) (180 ) (79 %) (141 ) (118 ) 23 19 %
Income (loss)
before income
taxes 1,252 (8,155 ) 9,407 115 % 11,597 (10,487 ) 22,084 211 %
Provision for
(benefit from)
income taxes 694 (1,744 ) 2,438 140 % 1,670 (2,161 ) 3,831 177 %
Net income (loss) $ 558 $ (6,411 ) $ 6,969 109 % $ 9,927 $ (8,326 ) $ 18,253 219 %
Revenue
Revenue for the three-month period ended September 30, 2021 was $39.5 million ,
an increase of $7.9 million as compared to $31.7 million for the three-month
period ended September 30, 2020 . Revenue for the nine-month period ended
September 30, 2021 was $112.0 million , an increase of $14.2 million as compared
to $97.8 million for the nine-month period ended September 30, 2020 . For the
three- and nine-month periods ended September 30, 2021 , the increases in revenue
were primarily driven by partial recovery from the initial impact of the
COVID-19 pandemic on sales volumes and related strategic partner ordering
patterns. The increase for the nine-month period ended September 30, 2021 , was
also in part due to inclusion of full first quarter results of Parcus Medical
and Arthrosurface, which we acquired on January 24, 2020 and February 3, 2020 ,
respectively.
The following tables present product revenue by product family:
Three Months Ended September 30,
2021 2020 $ change % change
(in thousands, except percentages)
Joint Pain Management $ 26,153 $ 18,439 $ 7,714 42 %
Joint Preservation and Restoration 11,193 11,715 (522 ) (4% )
Other 2,190 1,540 650 42 %
$ 39,536 $ 31,694 $ 7,842 25 %
Nine Months Ended September 30,
2021 2020 $ change % change
(in thousands, except percentages)
Joint Pain Management $ 69,790 $ 66,168 $ 3,622 6 %Joint Preservation and Restoration 35,296 26,233 9,063
35 %
Other 6,887 5,368 1,519 28 %
$ 111,973 $ 97,769 $ 14,204 15 %
Revenue from our Joint Pain Management product family increased 42% and 6% for
the three- and nine-month periods ended September 30, 2021 , respectively, as
compared to the same periods in 2020 due primarily to partial recovery from the
initial impact of the COVID-19 pandemic on sales volumes and related strategic
partner ordering patterns. In 2020, customer ordering patterns delayed a portion
of the initial impact of the COVID-19 pandemic on this product family from the
second quarter into the second half of 2020.
Revenue from our Joint Preservation and Restoration product family decreased 4%
for the three-month period ended September 30, 2021 as compared to the same
period in 2020, due primarily to the impact of the COVID-19 pandemic, including
rolling suspensions of elective procedures by hospitals in certain regions as
well as the limitations on access to customers during the period. For the
nine-month period ended September 30, 2021 , revenue from our Joint Preservation
and Restoration product family increased 35% as compared to the same period in
2020 due primarily to organic growth as the initial impact of the COVID-19
pandemic on elective procedures begins to lift in various worldwide
jurisdictions, especially in the United States during the first half of 2021, as
well as due to the inclusion of full quarter results from Parcus Medical and
Arthrosurface in the first quarter.
Revenue from our Other product family increased 42% for the three-month period
ended September 30, 2021 , as compared to the same period in 2020 primarily due
to timing of distributor sales. For the nine-month period ended September 30,
2021 revenue increased 28% as compared to the same period in 2020 primarily due
to timing of distributor sales as well as due to the sell through of legacy
wound care products during the first quarter.
Gross Profit and Margin
Gross profit for the three- and nine-month periods ended September 30, 2021
increased $5.7 million and $12.5 million to $23.0 million and $64.8 million ,
respectively, representing 58% of revenue for each of the periods. Gross profit
for the three- and nine-month periods ended September 30, 2020 was $17.3 million
and $52.3 million , respectively, or 55% and 53% of revenue for the periods,
respectively. The increase in gross profit for the three- and nine-month periods
ended September 30, 2021 , primarily resulted from increased revenue. The
increase for the nine-month period ended September 30, 2021 was partially offset
by product rationalization charges in the second quarter of 2021. Gross margins
include the impact of inventory step-up associated with the Arthrosurface and
Parcus Medical acquisitions, as well as acquisition-related amortization
expenses. These expenses together increased cost of revenue by $3.0 million , or
8 points of gross margin, and $10.9 million , or 10 points of gross margin, for
the three- and nine-month periods ended September 30, 2021 , respectively, as
compared to increased cost of revenue of $4.8 million , or 15 points of gross
margin, and $11.7 million , or 12 points of gross margin, respectively, for the
same periods in 2020.
Research and Development
Research and development expenses for the three- and nine-month periods ended
September 30, 2021 were $7.7 million and $21.3 million , representing an increase
of $2.5 million and $5.5 million , respectively, as compared to the same periods
in 2020. The increase in research and development expense for the three- and
nine-month periods ended September 30, 2021 was primarily due to product
development activities associated with the development of new product candidates
in our research and development pipeline, execution of the CINGAL Pilot study
and certain European post-market clinical studies. Research and development
activities were curtailed in the three- and nine-months ended September 30, 2020
due to cost optimization in the light of the early stages of the COVID-19
pandemic.
Selling, General and Administrative
Selling, general and administrative, or SG&A expenses, for the three- and nine-month periods endedSeptember 30, 2021 were$17.5 million and$53.7 million , an increase of$1.6 million and$8.8 million , respectively, as compared to the same periods in 2020. The increase in SG&A expenses for the three-month period endedSeptember 30, 2021 was primarily related to an increase in share-based compensation expense due largely to forfeitures of unvested shares during the comparable period and higher sales and marketing activities and events during 2021 which had been suspended in 2020 due to the impact of the COVID-19 pandemic. The increase in SG&A expenses for the nine-month period endedSeptember 30, 2021 was primarily related to full period expenses from Parcus Medical and Arthrosurface, increased spending to support our commercial capability inthe United States and expanded marketing activities, and a non-cash loss on disposal of fixed assets, partially offset by the absence of transaction costs incurred in 2020 related to acquisitions ofParcus and Arthrosurface. Certain activities were curtailed in the three- and nine-months endedSeptember 30, 2020 due to cost optimization in light of the early stages of the COVID-19 pandemic. Goodwill Impairment Charge We assess goodwill for impairment annually, as of end of November, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment.U.S. and other country government policy responses to the COVID-19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of domestic elective surgical procedures. As a result of these events, during the three-month period endedMarch 31, 2020 , we performed a quantitative assessment of goodwill impairment related to theParcus and Arthrosurface reporting unit as ofMarch 31, 2020 . The results of these interim impairment tests indicated that the estimated fair value of this reporting unit was less than its carrying value. Consequently, a non-cash goodwill impairment charge of$18.1 million was recorded in the three-month period endedMarch 31, 2020 . The decline in fair value was primarily due to a decrease in immediate term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures, which directly impacted theParcus and Arthrosurface reporting units. There were no goodwill impairment charges during the three- and nine-month period endedSeptember 30, 2021 . 22
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Contingent Consideration Fair Value Change
We recorded a$3.5 million and$21.9 million net benefit related to changes in the fair value of contingent consideration for the three- and nine-month periods endedSeptember 30, 2021 , respectively. We recorded a$4.2 million net expense and$16.2 million net benefit related to changes in the fair value of contingent consideration for the three- and nine-month periods endedSeptember 30, 2020 , respectively. The increase in net benefit in the three- and nine-month periods endedSeptember 30, 2021 compared to the same period in 2020 is due primarily to the decrease in the likelihood that certain contingent milestones would be achieved. Income Taxes For the three- and nine-month periods endedSeptember 30, 2021 , the provision for income taxes was$0.7 million and$1.7 million , resulting in effective tax rates of 55.1% and 14.3%, respectively. For the three- and nine-month periods endedSeptember 30, 2020 , due to losses in those periods, we incurred benefits from income taxes of$1.7 million and$2.2 million , resulting in effective tax rates of 21.4% and 20.6%, respectively. The net increase in the effective tax rate for the three-month period endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to stock option activity and an adjustment to the Foreign Derived Intangible Income (FDII) deduction expected for 2021. The year-to-date net tax benefit on the change in the fair value of the contingent consideration, in the amount of$1.1 million in 2021, resulted in a net decrease in the effective tax rate for the nine-month period endedSeptember 30, 2021 , as compared to the same period in 2020. 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 EPS, which are financial measures not based on any standardized methodology prescribed by accounting principles generally accepted inthe 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. In particular, 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 its 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 assets, the impact of inventory fair-value step up associated with our recent acquisitions and product rationalization charges. 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 fair value of certain identified assets acquired in acquisitions, including developed technology and acquired tradenames. 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 three- and nine-month periods ended
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Gross profit $ 23,023 $ 17,343 $ 64,809 $ 52,282
Product rationalization charges - - 2,063 1,920
Acquisition related intangible asset
amortization 1,562 1,562 4,686 4,283
Acquisition related inventory step up 1,458 3,273 6,244 7,396
Adjusted gross profit $ 26,043 $ 22,178 $ 77,802 $ 65,881
Adjusted gross margin 66 % 70 % 69 % 67 %
Adjusted gross profit for the three- and nine-month periods ended September 30,
2021 increased $3.9 million and $11.9 million to $26.0 million and $77.8
million , respectively, representing 66% and 69% of revenue. Adjusted gross
profit for the three- and nine-month periods ended September 30, 2020 was $22.2
million and $65.9 million , respectively, or 70% and 67% of revenue for the
periods, respectively. This increase in adjusted gross profit for the
three-month period ended September 30, 2021 as compared with the same period in
2020, primarily resulted from organic growth of Joint Pain Management revenue as
COVID-19 pandemic related restrictions started lifting in various worldwide
jurisdictions, especially in the United States . The decrease in adjusted gross
margin for the three-month period ended September 30, 2021 as compared with the
same period in 2020, is due primarily to unfavorable revenue mix and lower
production volumes based on timing related to the COVID-19 pandemic.
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This increase in adjusted gross profit and adjusted gross margin for the
nine-month period ended September 30, 2021 as compared with the same period in
2020, primarily resulted from higher revenue due to the inclusion of full period
results from Parcus Medical and Arthrosurface in 2021 as we acquired these
businesses in early 2020 and organic growth of Joint Pain Management revenue as
COVID-19 pandemic related restrictions started lifting in various worldwide
jurisdictions, especially in the United States .
Adjusted EBITDA
We present information below with respect to adjusted EBITDA, which we define as
our net income (loss) excluding interest and other income, net, income tax
benefit (expense), depreciation and amortization, stock-based compensation,
product rationalization, and acquisition related expenses. In light of the
COVID-19 pandemic, we have also excluded the impacts of goodwill impairment
charges and changes in the fair value of contingent consideration associated
with our acquisition transactions in early 2020.
Adjusted EBITDA is not prepared in accordance with US GAAP, and should not be
considered in isolation of, or as an alternative to, measures prepared in
accordance with US GAAP. There are a number of limitations related to the use of
adjusted EBITDA rather than net income (loss), which is the nearest US GAAP
equivalent. Some of these limitations are:
? 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?
? 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 expense included in operating expenses likely would be
higher, which would affect our cash position?
? 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 revenue?
? we exclude certain impairment charges, including certain productrationalization charges as a result of managing our financial position in
light of our recent acquisitions, the impact of COVID-19 and changing
regulatory requirements?
? we exclude goodwill impairment charges and changes in the fair value of
contingent consideration?
? the expenses and other items that we exclude in our calculation ofadjusted 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?
? adjusted EBITDA does not reflect changes in, or cash requirements for,
working capital needs?
? adjusted EBITDA does not reflect provision for (benefit from) income
taxes or the cash requirements to pay taxes? and
? adjusted EBITDA does not reflect historical cash expenditures or future
requirements for capital expenditures or contractual commitments.
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The following is a reconciliation of adjusted EBITDA to net income (loss) for
the three- and nine-month periods ended
Nine Months Ended September
Three Months Ended September 30, 30,
2021 2020 2021 2020
(in thousands)
Net income (loss) $ 558 $ (6,411 ) $ 9,927 $ (8,326 )
Interest and other expense, net 48 228 141 118
Provision for (benefit) from income
taxes 694 (1,744 ) 1,670 (2,161 )
Depreciation and amortization 1,789 1,718 5,226 5,132
Stock-based compensation 2,863 1,920 7,919 3,953
Product rationalization charges - - 2,063 2,892
Acquisition related expenses - - - 4,157
Acquisition related intangible asset
amortization 1,787 1,760 5,361 4,831
Acquisition related inventory step up 1,458 3,273 6,244 7,396
Goodwill impairment - - - 18,144
Change in fair value of contingent
consideration (3,450 ) 4,150 (21,920 ) (16,176 )
Adjusted EBITDA $ 5,747 $ 4,894 $ 16,631 $ 19,960
Adjusted EBITDA for the three-month period ended September 30, 2021 , increased
$0.9 million as compared with the same periods in 2020. The increase in adjusted
EBITDA for the period was primarily due to higher revenues as COVID-19 pandemic
related restrictions started lifting in various worldwide jurisdictions,
especially in the United States , partially offset by an increase in operating
expenses primarily attributable to the increase in clinical trial activity. In
2020, customer ordering patterns delayed a portion of the initial impact of the
COVID-19 pandemic on this product family from the second quarter into the second
half of 2020.
Adjusted EBITDA for the nine-month period ended September 30, 2021 , decreased
$3.3 million as compared with the same period in 2020. The decrease in adjusted
EBITDA for the period was primarily due to an increase in operating expenses
primarily attributable to expansion of our commercial capability in the United
States , increase in clinical trial activity, as well as a non-cash impairment
charge related to fixed assets during the first quarter of 2021, partially
offset by an increase in revenue.
Adjusted Net Income and Adjusted EPS
We present information below with respect to adjusted net income and adjusted EPS. We define adjusted net income as our net income excluding acquisition-related expenses, amortization and depreciation of acquired assets, the impact of inventory fair-value step up on cost of revenue and the impacts of goodwill impairment charges and changes in the fair value of contingent consideration, as well as certain impairment charges, including product rationalization charges, on a tax effected basis. Acquisition related expenses are those that we would not have incurred except as a direct result of acquisition transactions. Acquisition related expenses consist of investment banking, legal, accounting, and other professional and related expenses. 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, developed technology, customer relationships and acquired tradenames. We define adjusted EPS as US GAAP diluted earnings (loss) per share excluding the above adjustments to net income used in calculating adjusted net income, each on a per share and tax effected basis.
The following is a reconciliation of adjusted net income to net income (loss)
for the three- and nine-month periods ended
Nine Months Ended September
Three Months Ended September 30, 30,
2021 2020 2021 2020
(in thousands)
Net income (loss) $ 558 $ (6,411 ) $ 9,927 $ (8,326 )
Product rationalization charges, tax
effected - - 1,590 2,377
Acquisition related expenses, tax
effected - - - 3,174
Acquisition related intangible asset
amortization, tax effected 1,146 1,340 3,898 3,688
Acquisition related inventory step up,
tax effected 935 2,492 4,626 5,646
Goodwill impairment, tax effected - - - 15,773
Change in fair value of contingent
consideration, tax effected (1,865 ) 3,336 (17,152 ) (13,873 )
Adjusted net income $ 774 $ 757 $ 2,889 $ 8,459
25-------------------------------------------------------------------------------- The following is a reconciliation of adjusted EPS to diluted earnings (loss) per share for the three- and nine-month periods endedSeptember 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Diluted earnings (loss) per share $ 0.04 $ (0.45 ) $ 0.68 $ (0.59 ) Product rationalization charges, tax effected - - 0.11 0.17 Acquisition related expenses per share, tax effected - - - 0.22 Acquisition related intangible asset amortization, tax effected 0.08 0.09 0.27 0.26 Acquisition related inventory step up, tax effected 0.06 0.18 0.32 0.40 Goodwill impairment, tax effected - - - 1.11 Change in fair of value contingent consideration, tax effected (0.13 ) 0.23 (1.18 ) (0.98 ) Adjusted EPS $ 0.05 $ 0.05 $ 0.20 $ 0.59 Adjusted net income in the three- month period endedSeptember 30, 2021 was unchanged from the same period in 2020 as the increase in gross profit was offset by an increase in operating expenses due to higher research and development expenses and increased marketing efforts. Adjusted net income for the period increased in 2021 due to higher revenues as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially inthe United States . This was offset by an increase in operating expenses primarily attributable to an increase in research and development expenses, sales and marketing expenses and share based compensation expenses. Adjusted net income in the nine-month period endedSeptember 30, 2021 , decreased$5.6 million as compared with the same period in 2020. The decrease in adjusted net income for the period was primarily due to an increase in selling and marketing expenses primarily attributable to increased cost to support our commercial capability inthe United States , an increase in research and development expenses, an increase in share-based compensation expense due to forfeitures of unvested shares during the comparable period, a non-cash impairment charge related to fixed assets in the first quarter of 2021 and an increase in tax expenses.
Liquidity and Capital Resources
We require cash to fund our operating expenses 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. Historically we have generated positive cash flow from operations, which, together with our available cash, cash equivalents, investments, and debt, have met our cash requirements. Cash, cash equivalents, and investments aggregated$91.0 million and$98.3 million , and working capital totaled$137.0 million and$140.5 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. We are closely monitoring our liquidity and capital resources for any potential impact that the COVID-19 pandemic may have on our operations. Cash provided by operating activities was$3.9 million for the nine-month period endedSeptember 30, 2021 , as compared to cash provided by operating activities of$10.5 million for the same period in 2020. The change was primarily attributable to timing of collections, timing of certain state tax payments and change in contingent consideration and a decrease in cash outflows related to acquisition related expenses for the nine-month period endedSeptember 30, 2021 . InJuly 2021 , the Company paid contingent consideration in the amount of$10.0 million ,$2.8 million of which was classified within operating activities and the remaining$7.2 million was classified within financing activities. Cash used in investing activities was$1.9 million for the nine-month period endedSeptember 30, 2021 , as compared to cash used in investing activities of$88.1 million for the same period in 2020. The change was primarily due to the consideration paid for the acquisitions of Parcus Medical and Arthrosurface in the nine-month period endedSeptember 30, 2020 . Cash used in financing activities was$6.8 million for the nine-month period endedSeptember 30, 2021 , as compared to cash provided by financing activities of$24.3 million for the same period in 2020. The change was primarily due to a drawdown of$50.0 million from our existing credit facility in the nine-month period endedSeptember 30, 2020 and the portion of the contingent consideration payment related to financing activities, as described above, in the nine-month period endedSeptember 30, 2021 .
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with US GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We believe that our accounting policies for revenue recognition, accounts receivable and allowance for credit losses, goodwill, acquired in-process research and development, inventory and contingencies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. There have been no significant changes to the above critical accounting policies or in the underlying accounting assumptions and estimates used in such policies from those disclosed in our annual consolidated financial statements and accompanying notes included in our 2020 Form 10-K for the year endedDecember 31, 2020 . 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. 26
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Recent Accounting Pronouncements
A discussion of Recent Accounting Pronouncements is included in our 2020 Form 10-K and is updated in the Notes to the consolidated financial statements included in this report.
Contractual Obligations and Other Commercial Commitments
Our contractual obligations and other commercial commitments are summarized in the section captioned "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Contractual Obligations and Other Commercial Commitments" in our 2020 Form 10-K. There were no material changes to our contractual obligations reported in our 2020 Form 10-K during the nine months endedSeptember 30, 2021 . For additional discussion, see Note 9 to the consolidated financial statements included in this report. To the extent that funds generated from our operations, together with our existing capital resources, are insufficient to meet future requirements, we will be required to obtain additional funds through equity or debt financings, strategic alliances with corporate partners and others, or through other sources. No assurance can be given that any additional financing will be made available to us or will be available on acceptable terms should such a need arise.
Off-Balance Sheet Arrangements
We do not use special purpose entities or other off-balance sheet financing techniques that we believe have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, or capital resources.
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