ANIKA THERAPEUTICS, INC.
ANALYSIS OF
FINANCIAL
CONDITION AND
RESULTS OF
OPERATIONS
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 ended December 31, 2021 , or our 2021 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 the SEC , 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 2021 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, sports medicine soft tissue repair and bone preserving joint
technologies.
We have thirty years of global expertise developing, manufacturing and
commercializing products based on and/or enhanced with 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 a platform utilized in our regenerative solutions
portfolio.
In early 2020, we expanded our overall technology platform, product portfolio,
and significantly enhanced and accelerated our commercial infrastructure,
especially in the United States , through our strategic acquisitions of Parcus
Medical, a sports medicine and instrumentation solutions provider focused on
soft tissue repair, and 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 global joint
preservation market (which includes the faster growing sports medicine soft
tissue repair and extremities segments), advanced our commercial capabilities,
instituted systems and processes to support our transformation, 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
and their
patients;
19--------------------------------------------------------------------------------
? 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
sports medicine
soft tissue
repair
products;
? Leveraging our
global
commercial
expertise and
building out
our
capabilities to
drive growth
across the
portfolio, with
an intentional
and increased
focus on the
ambulatory
surgery centers
site of care in
the United
States ;
? Opportunity to
pursue
strategic
inorganic
growth
opportunities,
including
potential
partnerships
and smaller
acquisitions,
technology
licensing, and
leveraging our
strong
financial
foundation and
operational
capabilities;
and
? Energized and experienced team focused on strong values, talent, and culture.
COVID-19 Pandemic and Resulting Supply Chain and Staffing Challenges
InMarch 2020 , theWorld Health Organization declared the spread of the COVID-19 virus a 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, staffing shortages and supply chain disruptions, as well as the impact on timelines associated with certain clinical studies. Resurgence of COVID-19 as a result of emerging variants or other factors could result in additional staffing shortages or supply chain disruptions that could impact our business and operations. We have had some disruption in our ability to supply products to our customers due to supply chain disruptions and staffing shortages which has caused back orders or delays in certain shipments to our customers. The companies that produce our products, product components or otherwise support our manufacturing processes, the distribution centers where we manage our inventory, or the operations of our logistics and other service providers, including third parties that sterilize and store our products, are or could be disrupted, temporarily close or experience worker shortages for a sustained period of time. To date, we believe we have taken adequate precaution to mitigate the impact of the current disruption of key materials, components and parts to the extent possible and reasonable. We expect, however, the current supply chain disruption with certain key suppliers to continue, which could have a material adverse effect on our operations. For additional information on the impact of supply chain disruption related to the COVID-19 pandemic on our manufacturing operations, please refer to the section captioned "Part II, Item 1A. Risk Factors. Our commercial day-to-day operations have been impacted due to the worldwide cancellations and/or delays of elective procedures and restrictions on travel for both our employees and our clinician customers, 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 or other challenges associated with infections, staffing shortages, volatility in elective surgical procedures or supply chain disruptions due to COVID-19 and its current or new variants in certain jurisdictions. In particular, supply constraints that have continued into 2022 that we have partially been able to mitigate to date have impacted and could be expected to impact our ability to produce and supply our products. The impact of these challenges is currently unknown but could be significant. Products OA Pain Management
Our OA Pain Management product family consists of:
? Monovisc and Orthovisc, our single- and multi-injection, HA-based
viscosupplement product offerings indicated to provide pain relief from
OA conditions solely for use in the knee. Our OA Pain Management
products are generally administered to patients in an office setting. In
DePuy Synthes Mitek Sports Medicine, or "Mitek", part of the Johnson &
Johnson Medical Companies. In December 2011 , we entered into a
fifteen-year licensing agreement with Mitek to exclusively market
Monovisc in the United States through December 2026 . In December 2003 ,we entered into a ten-year licensing agreement with Mitek to exclusively
market Orthovisc in
additional five-year terms in 2007, 2012, 2017 and most recently in
August 2022 . The current agreement expires on December 20, 2028 unlessextended at the option of Mitek. The Monovisc and Orthovisc products
have been the market leaders, based on combined overall revenue in the
viscosupplement market, since 2018. Internationally, we market our OA
Pain Management products directly through a worldwide network of
commercial distributors.
? Cingal, our novel, third-generation, single-injection OA Pain Management
product consisting of our proprietary cross-linked HA material combined
with a fast-acting steroid. Cingal is designed to provide both short-
and long-term pain relief. Cingal is CE Mark approved and for several
years has been sold outside the United States directly in over 35
countries through our network of distributors. In the United States ,
Cingal is a pipeline product currently in clinical development and is
not available for commercial sale.
? 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.
20--------------------------------------------------------------------------------
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 arthritic disease, acute
trauma and injury. These products span multiple joints including theshoulder, foot/ankle, wrist, knee and hip and are generally intended to
restore a patient's natural anatomy and movement. These products are
often used to treat patients with OA progression beyond where our OAPain Management products can allow the patients to retain an active
lifestyle when early surgical intervention becomes preferable.
? 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, acute trauma and disease. These more
traditional sports medicine solutions include screws, sutures, suture
anchors, grafts and other surgical systems that facilitate surgical
procedures on the shoulder, knee, hip, upper and lower extremities, and
other soft tissues.
? Regenerative Solutions. Our portfolio of orthopedic regenerative
solutions leveraging 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 hardware fixation,
such as suture anchors and Hyalofast, a biodegradable support for human
bone marrow mesenchymal stem cells used for cartilage regeneration and
as an adjunct for microfracture surgery. Tactoset cleared and
commercialized principally in
Mark approved and currently available outside the United States in over
35 countries within Europe , South America , Asia , and certain other
international markets. In the United States , Hyalofast is a product
under clinical trial studies and is not available for commercial sale.
We currently commercialize Bone Preserving Joint Technologies, Soft Tissue
Repair products, and Tactoset (from our Regenerative Solutions portfolio) in the
United States by selling to hospitals and ambulatory surgery centers, through an
independent network of sales representatives and distributors, and utilize our
distributor network for sales in certain international markets.
Non-Orthopedic
Our Non-Orthopedic product family consists of legacy HA-based products that are
marketed principally for non-orthopedic applications. These products include
Hyalobarrier, an anti-adhesion barrier indicated for use after abdomino-pelvic
surgeries, Hyalomatrix, used for the treatment of complex wounds such as burns
and ulcers, as well as products used in connection with the treatment of ears,
nose and throat disorders, and ophthalmic products, including injectable, high
molecular weight HA products such as Anikavisc and Nuvisc, used as viscoelastic
agents in ophthalmic surgical procedures such as cataract extraction and
intraocular lens implantation. These Non-Orthopedic products are sold through
commercial sales and marketing partners around the world.
21--------------------------------------------------------------------------------
Results of Operations Three and Nine Months EndedSeptember 30, 2022 Compared to Three and Nine Months EndedSeptember 30, 2021 Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 $ Inc/(Dec) % Inc/(Dec) 2022 2021 $ Inc/(Dec) % Inc/(Dec) (in thousands, except percentages) (in thousands, except percentages) Revenue$ 40,264 $ 39,536 $ 728 2 %$ 116,614 $ 111,973 $ 4,641 4 % Cost of revenue 17,485 16,513 972 6 % 47,169 47,164 5 0 % Gross Profit 22,779 23,023 (244 ) (1% ) 69,445 64,809 4,636 7 % Gross Margin 57 % 58 % 60 % 58 % Operating expenses: Research & development 7,301 7,673 (372 ) (5% ) 20,433 21,327 (894 ) (4% ) Selling, general & administrative 21,276 17,500 3,776 22 % 61,745 53,664 8,081 15 % Change in fair value of contingent consideration - (3,450 ) 3,450 (100% ) - (21,920 ) 21,920 (100% ) Total operating expenses 28,577 21,723 6,854 32 % 82,178 53,071 29,107 55 % (Loss) income from operations (5,797 ) 1,300 (7,097 ) (546% ) (12,733 ) 11,738 (24,471 ) (208% ) Interest and other income (expense), net 436 (48 ) 484 (1,008% ) 378 (141 ) 519 (368% ) (Loss) income before income taxes (5,361 ) 1,252 (6,613 ) (528% ) (12,355 ) 11,597 (23,952 ) (207% ) (Benefit from) provision for income taxes (1,187 ) 694 (1,881 ) (271% ) (2,404 ) 1,670 (4,074 ) (244% )
Net (loss) income
(848% )$ (9,951 ) $ 9,927 $ (19,878 ) (200% ) 22
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Revenue Revenue for the three-month period endedSeptember 30, 2022 was$40.3 million , an increase of$0.8 million as compared to$39.5 million for the three-month period endedSeptember 30, 2021 . Revenue for the nine-month period endedSeptember 30, 2022 was$116.6 million , an increase of$4.6 million as compared to$112.0 million for the nine-month period endedSeptember 30, 2021 .
The following tables present product revenue by product family:
Three Months Ended September 30,
2022 2021 $ Inc/(Dec) % Inc/(Dec)
OA Pain Management$ 25,665 $ 26,153 $ (488 ) (2 %) Joint Preservation and Restoration 11,821 11,193 628 6 % Non-Orthopedic 2,778 2,190 588 27 %$ 40,264 $ 39,536 $ 728 2 % Nine Months Ended September 30, 2022 2021 $ Inc/(Dec) % Inc/(Dec) OA Pain Management$ 74,139 $ 69,790 $ 4,349 6 % Joint Preservation and Restoration 36,055 35,296 759 2 % Non-Orthopedic 6,420 6,887 (467 ) (7 )%$ 116,614 $ 111,973 $ 4,641 4 % 23
-------------------------------------------------------------------------------- For the three-month period endedSeptember 30, 2022 , the increase in revenue was mainly due to growth in Joint Preservation and Restoration revenues as hospitals and ASCs recover from the COVID 19 pandemic and higher Non-Orthopedic revenues from the sales of certain legacy products related to end-of-life purchases. This revenue increase was offset by lower US OA Pain Management revenue primarily related to ordering patterns from Mitek in the prior year. For the nine-month period endedSeptember 30, 2022 , the increase in revenue was mainly due an increase in OA Pain Management revenues from international viscosupplement distributors and Hyvisc equine product sales due to recovery from the COVID 19 pandemic as well as favorable ordering patterns, offset by lower US OA Pain Management sales to Mitek as a result of ordering patterns in the prior year. The increase in total revenue was also due to an increase in Joint Preservation and Restoration revenues as hospitals and ASCs performing more procedures as they recover from COVID 19 pandemic, which however remained limited due in part to constraints on staffing, offset by lower Non-Orthopedic revenue in part related to the timing of orders on legacy products. Gross Profit and Margin Gross profit for the three -and nine -month periods endedSeptember 30, 2022 decreased by$0.2 million and increased by$4.6 million , to$22.8 million and$69.4 million , respectively. The decrease in gross profit for the three-month period endedSeptember 30 2022 was related to a reserve of$2.6 million primarily associated with inventory for certain legacy Non-Orthopedic products that the Company no longer expects to sell. The increase in gross profit for the nine-month period endedSeptember 30, 2022 , as compared to the same period in 2021 was primarily due to increased revenue as well as the impact of inventory step-up charges associated with the acquisitions of Arthrosurface andParcus Medical in 2021. Gross margin for the three- and nine-month periods endedSeptember 30, 2022 was 57% and 60%, respectively. Gross margin for the three- and nine-month periods endedSeptember 30, 2021 was 58% for each period. The decrease in gross margin for the three-month period endedSeptember 30, 2022 was due primarily to product rationalization charges in the third quarter of 2022. The increase in gross margin for the nine-month period endedSeptember 30, 2022 was due primarily to the unfavorable impact of inventory step-up charges associated with the Arthrosurface and Parcus Medical in 2021. Research and Development Research and development expenses for the three- and nine-month periods endedSeptember 30, 2022 were$7.3 million and$20.4 million , a decrease of$0.4 million and$0.9 million , respectively as compared to the same period in 2021. The decreases for the three-month and nine-month periods endedSeptember 30, 2022 were primarily due to lower clinical trial spending, associated with the conclusion of our Cingal Phase III trial in 2022.
Selling, General and Administrative
Selling, general and administrative, or SG&A expenses for the three- and nine-month periods endedSeptember 30, 2022 were$21.3 million and$61.7 million representing an increase of$3.8 million and$8.0 million , respectively as compared to the same period in 2021. This increase in SG&A expense for the three-month and nine-month periods endedSeptember 30, 2022 , was primarily due to expansion of our commercial capabilities inthe United States and expanded marketing activities and other operational capabilities to support the growing business needs. Certain marketing and medical education activities also were more limited in 2021 due to the COVID-19 pandemic. The increase in SG&A expense was also due to higher stock-based compensation expense in 2022 driven by a change in headcount associated with the Company's strategic transformation that accelerated in 2020 and 2021.
Contingent Consideration Fair Value Change
The fair value of contingent consideration as of
Income Taxes The benefit from income taxes was$1.2 million and$2.4 million for the three- and six-month periods endedSeptember 30, 2022 , resulting in effective tax rates of 22.1% and 19.5%, respectively. The provision for income taxes was$0.7 million and$1.7 million for the three- and nine-month periods endedSeptember 30, 2021 , based on effective tax rates of 55.4% and 14.4%, respectively. 24
-------------------------------------------------------------------------------- The decrease in the effective tax rate for the three-month period endedSeptember 30, 2022 , as compared to the same period in 2021, was primarily due to non-deductible stock-option activity during the three-month period endedSeptember 30, 2021 . The increase in the effective tax rate for the nine-month period endedSeptember 30, 2022 , as compared to the same period in 2021, was primarily due to the net tax benefit in 2021 on the change in the fair value of contingent consideration and non-deductible stock compensation in 2022. Net (Loss) Income For the three and nine-month periods ended September, 2022, net loss was$4.2 million and$10.0 million , or$0.29 per diluted share and$0.68 per diluted share, respectively, compared to net income of$0.6 million and$9.9 million , or$0.04 per diluted share and$0.68 per diluted share, for the same periods in prior year. The decrease in net income and diluted earnings per share was primarily due to the change in fair value of contingent consideration of$21.9 million for the nine-months endedSeptember 30, 2021 , as well as increased spending to expand our commercial capability inthe United States , partially offset by increased revenue. 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 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 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
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Gross Profit $ 22,779 $ 23,023 $ 69,445 $ 64,809
Product rationalization related charges 2,636 - 2,636 2,063
Acquisition related intangible asset
amortization 1,562 1,562 4,686 4,686
Acquisition related inventory step up - 1,458 - 6,244
Adjusted Gross Profit $ 26,977 $ 26,043 $ 76,767 $ 77,802
Adjusted Gross Margin 67 % 66 % 66 % 69 %
25-------------------------------------------------------------------------------- Adjusted gross profit for the three- and nine-month periods endedSeptember 30, 2022 increased by$1.0 million and decreased$1.0 million to$27.0 million and$76.8 million , respectively, representing adjusted gross margin of 67% and 66%. Adjusted gross profit for the three- and nine-month periods endedSeptember 30, 2021 was$26.0 million and$77.8 million , respectively, representing gross margin of 66% and 69%, respectively. The decrease in adjusted gross margin for the nine-month period endedSeptember 30, 2022 , was primarily due to higher manufacturing costs and production inefficiencies caused in part by supply chain and staffing challenges. 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 product rationalization 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 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? ? adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs? ? adjusted EBITDA does not reflect (benefit from) provision for 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. 26
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The following is a reconciliation of net income (loss) to adjusted EBITDA for
the three- and nine-month periods ended
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net (loss) income $ (4,175 ) $ 558 $ (9,951 ) $ 9,927
Interest and other expense, net (436 ) 48 (378 ) 141
(Benefit from) provision for income
taxes (1,187 ) 694 (2,404 ) 1,670
Depreciation and amortization 1,549 1,789 4,980 5,226
Share-based compensation 3,876 2,863 10,502 7,919
Product rationalization 2,636 - 2,636 2,063
Acquisition related intangible asset
amortization 1,787 1,787 5,361 5,361
Acquisition related inventory step up - 1,458 - 6,244
Change in fair value of contingent
consideration - (3,450 ) - (21,920 )
Adjusted EBITDA $ 4,050 $ 5,747 $ 10,746 $ 16,631
Adjusted EBITDA for the three-month period ended September 30, 2022 , decreased
by $1.6 million as compared with the same period in 2021. The decrease in
adjusted EBITDA for the period was primarily due to increased commercial
spending to support future growth as certain marketing and medical education
activities were more limited in 2021.
Adjusted EBITDA for the nine-month period ended September 30, 2022 , decreased
$5.9 million as compared with the same period in 2021. The decrease in adjusted
EBITDA for the period was primarily due to lower adjusted gross profit, from
higher manufacturing costs and production inefficiencies caused in part by
supply chain and staffing challenges, as well as an increase in operating
expenses primarily attributable to expansion of our commercial capability in the
United States .
Adjusted Net Income (Loss) and Adjusted EPS
We present information below with respect to adjusted net income (loss) and
adjusted EPS. We define adjusted net income (loss) as our net income (loss)
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.
27-------------------------------------------------------------------------------- The following is a reconciliation of adjusted net income (loss) to net income (loss) for the three- and nine-month periods endedSeptember 30, 2022 and 2021, respectively: For the Three Months Ended For the Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Net (loss) income$ (4,175 ) $ 558$ (9,951 ) $ 9,927 Product rationalization, tax effected 2,056 - 1,947 1,590 Impairment on property and equipment; tax effected - - - - Acquisition related intangible asset amortization; tax effected 1,394 1,146 3,960 3,898 Acquisition related inventory step up, tax effected - 935 - 4,626 Change in fair value of contingent consideration, tax effected - (1,865 ) - (17,152 ) Adjusted net (loss) income$ (725 ) $ 774$ (4,044 ) $ 2,889
The following is a reconciliation of adjusted EPS to diluted earnings (loss) per
share for the three- and nine-month periods ended
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Diluted (loss) earnings per share (EPS)
0.14 - 0.13 0.11
Impairment on Property and Equipment - - -
Acquisition related intangible asset
amortization; tax effected 0.10 0.08 0.27 0.27
Acquisition related inventory step up,
tax effected - 0.06 - 0.32
Change in fair value of contingent
consideration, tax effected - (0.13 ) - (1.18 )
Adjusted diluted (loss) earnings per
share (EPS) $ (0.05 ) $ 0.05 $ (0.28 ) $ 0.20
Adjusted net (loss) income and adjusted diluted (loss) income per share in the
three-month period ended September 30, 2022 decreased by $1.5 million or $0.10 ,
respectively, as compared with the same period in 2021. The decrease for the
period was primarily due to increased commercial spending to support future
growth as certain marketing and medical education activities were more limited
in 2021.
Adjusted net (loss) income in and adjusted diluted (loss) income per share the
nine-month period ended September 30, 2022 , decreased $6.9 million or $0.48 , as
compared with the same period in 2021. The decrease in adjusted net income for
the period was primarily due to lower adjusted gross profit, from higher
manufacturing costs and production inefficiencies caused in part by supply chain
and staffing challenges due largely to the impact of the COVID-19 pandemic, as
well as an increase in selling and marketing expenses primarily attributable to
increased cost to support our commercial capability in the United States and an
increase in stock-based compensation expense driven by incremental headcount
associated with the Company's strategic transformation that accelerated in 2020
and 2021.
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 continue to generate cash from operating activities and believe that our operating cash flows, cash currently on our condensed consolidated 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$87.8 million and$94.4 million , and working capital totaled$141.4 million and$138.7 million , atSeptember 30, 2022 andDecember 31, 2021 , respectively. We are closely monitoring our liquidity and capital resources for any potential impact that the COVID-19 pandemic may have on our operations. 28 -------------------------------------------------------------------------------- OnNovember 12, 2021 , we entered into a Third Amendment to Credit Agreement withBank of America N.A . as administrative agent, which amended our existing revolving line of credit agreement datedOctober 24, 2017 which 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$150.0 million . As ofSeptember 30, 2022 , andDecember 31, 2021 , there were no outstanding borrowings, and we are in compliance with the terms of the credit facility. Nine Months Ended September 30, 2022 2021 Cash provided by (used in) Operating activities$ 3,928 $ 3,925 Investing activities (4,957 ) (1,878 ) Financing activities (5,519 ) (6,839 ) Effect of exchange rate changes on cash (61 ) (49 )
Net decrease in cash and cash equivalents
The following changes contributed to the net change in cash and cash equivalents in the nine-month period endedSeptember 30, 2022 as compared to the same period in 2021. Operating Activities Cash provided by operating activities was$3.9 million for nine-month period endedSeptember 30, 2022 was consistent with the same period in 2021, as the higher net loss was in part a result of higher non-cash stock compensation expense, and was offset by an improvement in working capital attributable to timing of collections and inventory purchases.
For the foreseeable future, we expect to continue to invest in research and development for new products and clinical studies as well as continued investment in our commercial infrastructure 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$5.0 million for the nine-month period endedSeptember 30, 2022 , as compared to cash used in investing activities of$1.9 million for the same period in 2021. The change was primarily due to an increase in capital expenditures to support commercial growth of the business in the nine-month period endedSeptember 30, 2022 and proceeds from maturities of investments that occurred in 2021. Financing Activities Cash used in financing activities was$5.5 million for the nine-month period endedSeptember 30, 2022 , as compared to cash used in financing activities of$6.8 million for the same period in 2021. The change was primarily attributable to lower contingent consideration payments in 2022 and lower stock option exercises in 2022. 29
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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 2021 Form 10-K for the year endedDecember 31, 2021 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.
Recent Accounting Pronouncements
A discussion of Recent Accounting Pronouncements is included in our 2021 Form
10-K for the fiscal year ended
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 2021 Form 10-K for the year endedDecember 31, 2021 . There were no material changes to our contractual obligations reported in our 2021 Form 10-K during the nine months endedSeptember 30, 2022 other than changes in operating leases reported in Note 8. For additional discussion, see Note 10 to the condensed 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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