Anika Therapeutics, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Anika Therapeutics is a global joint preservation company focused on osteoarthritis pain management, regenerative solutions, soft-tissue repair, and bone-preserving joint technologies. The company reports one operating segment. This filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020.
The results include a full quarter of contributions from the Parcus Medical and Arthrosurface acquisitions, which closed in January and February 2020, respectively. COVID-19 continued to affect elective procedure volumes and customer ordering patterns.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $34.3 million | $35.4 million | Down 3% |
| Gross profit | $21.0 million | $21.2 million | Down 1% |
| Gross margin | 61% | 60% | Up 1 percentage point |
| Income from operations | $1.3 million | $7.1 million | Down 82% |
| Net income | $2.8 million | $5.8 million | Down 51% |
| Diluted EPS | $0.20 | $0.40 | Down $0.20 |
| Adjusted EBITDA | $4.8 million | $9.5 million | Down $4.7 million |
| Cash used in operating activities | $(2.4) million | $1.0 million provided | Down $3.5 million |
Revenue by product family was $19.3 million for Joint Pain Management, $12.2 million for Joint Preservation and Restoration, and $2.8 million for Other products. Joint Pain Management revenue declined 24%, while Joint Preservation and Restoration revenue increased 55%, primarily reflecting the acquired businesses and organic growth.
At March 31, 2021, cash and cash equivalents were $94.6 million, compared with $95.8 million at December 31, 2020. Cash, cash equivalents, and investments totaled $94.6 million versus $98.3 million at year-end, and working capital was $126.5 million versus $140.5 million. The filing does not report outstanding borrowings or traditional debt; liabilities included $20.5 million of lease liabilities and $30.6 million of contingent acquisition consideration.
Total assets were $362.3 million and stockholders’ equity was $276.7 million at March 31, 2021. Capital expenditures were $0.4 million, and cash used in financing activities was $0.5 million, primarily for employee tax withholding related to equity awards.
Material changes versus the prior comparable period
- Revenue decreased $1.1 million, primarily because COVID-19 reduced elective procedures and affected Mitek ordering patterns. This was partly offset by a full quarter of Parcus Medical and Arthrosurface revenue.
- Gross margin improved to 61%, although acquisition-related inventory step-up and amortization increased cost of revenue by $4.1 million, or approximately 12 percentage points of margin.
- Research and development expense increased 5% to $6.4 million, and selling, general and administrative expense increased 26% to $18.2 million, reflecting the acquired businesses, expanded U.S. commercial capabilities, incentive compensation, higher stock-based compensation, and a fixed-asset impairment charge.
- Q1 2020 included an $18.1 million non-cash goodwill impairment charge and $4.2 million of acquisition-related expenses; neither item recurred in Q1 2021.
- The fair value of contingent consideration decreased by $4.8 million in Q1 2021, producing an operating benefit. The liability declined from $35.4 million at year-end 2020 to $30.6 million at March 31, 2021, primarily because certain milestones became less likely to be achieved.
- Income taxes produced a $1.6 million benefit in Q1 2021, resulting in a negative effective tax rate of 133.6%, compared with a $1.6 million provision and a 21.4% effective rate in Q1 2020. The 2021 benefit included a $1.7 million discrete tax benefit related to the contingent consideration fair-value change.
- Adjusted net income was $0.8 million and adjusted diluted EPS was $0.06 in Q1 2021, compared with $6.5 million and $0.45, respectively, in Q1 2020. These are non-GAAP measures and exclude specified acquisition, impairment, and contingent-consideration items.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal financial guidance. Management expects cash requirements to increase as operations expand and believes existing cash resources and operating capabilities are currently available to fund expected needs. Management stated that additional equity or debt financing, strategic alliances, or other funding could be required if existing resources and operating cash flows become insufficient.
- COVID-19 remains a significant uncertainty because changes in infection rates, government restrictions, elective procedure volumes, customer ordering, and clinical-study timelines could materially affect results. Management did not anticipate a current disruption to product supply but could not predict the future financial impact.
- On March 10, 2021, Anika identified inaccurate sterility records for certain supplier-sourced cannulas packaged with specific Hyalobarrier and Hyaloglide products sold outside the United States. The company was implementing a voluntary field action with distributors. Management did not expect a material impact based on information then available, but further regulatory or factual developments could change the outcome.
- Contingent acquisition consideration includes earn-out milestones totaling up to $100 million payable from 2020 through 2022. The remaining recorded liability was $30.6 million at March 31, 2021, and is subject to quarterly remeasurement using significant unobservable assumptions.
- The company faces risks relating to FDA, CE Mark, and other regulatory requirements, product recalls, clinical development, intellectual property, competition, dependence on key personnel, commercialization, and the ability to achieve expected benefits from acquisitions.
- The company reported no material changes to contractual obligations, market risks, or legal proceedings from its 2020 Form 10-K. Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
- Disclosure controls were assessed as effective. During the quarter, the company completed integration of the acquired businesses’ internal controls into its existing operations.
Most important facts for investors to verify
- Whether elective procedure volumes and Mitek ordering patterns recover sufficiently to reverse the 24% decline in Joint Pain Management revenue.
- Whether Parcus Medical and Arthrosurface achieve expected organic growth and become profitable; both businesses reported acquisition-period net losses in Q1 2021.
- The sustainability of earnings excluding the $4.8 million contingent-consideration benefit and the unusual $1.6 million tax benefit.
- The timing and amount of remaining acquisition earn-out payments, including the assumptions supporting the $30.6 million fair-value liability.
- The financial and regulatory consequences of the Hyalobarrier and Hyaloglide sterility-related field action.
- Whether operating cash flow returns to positive levels, given the $2.4 million use of cash in Q1 2021 and increased working-capital needs.
- The impact of acquisition-related inventory step-up and intangible-asset amortization on reported gross margin and future earnings.