Anika Therapeutics, Inc.: Form 10-Q for the period ended Mar 31, 2025

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, 2024, or our 2024 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 future 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," 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 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 “Item 1A. Risk Factors” of our 2024 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 and regenerative solutions.

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 a platform utilized in our Regenerative Solutions portfolio.

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

In October 2024, we announced a strategic shift to focus on our OA Pain Management and our Regenerative Solutions businesses. This strategic decision involved the sale of Arthrosurface in October 2024 and the sale of Parcus Medical in March 2025.

As we look towards the future, our business is positioned to capture value within our target markets of OA Pain Management and Regenerative Solutions. We believe our future success will be driven by our:

• Over 30 years of experience in HA and HA-based regenerative solutions and early intervention orthopedics, combined with seasoned leadership with a strong financial foundation for future investment in meaningful solutions for our customers and their patients;
• Utilizing proprietary HA-based technology and manufacturing expertise to provide new and differentiated solutions in next generation OA pain management (e.g. Cingal) and regenerative (e.g. Integrity Implant System and Hyalofast) markets;
• Growth of the Integrity Implant System, our hyaluronic acid-based scaffold for rotator cuff and other tendon repairs, launched in 2024;
• Targeting to introduce key HA-based products into the US market upon FDA approval/clearance, such as Cingal and Hyalofast, and developing additional products that leverage our proprietary Hyaff regenerative platform;
• Robust network of stakeholders in our target markets to identify evolving unmet patient treatment needs;
• Global commercial expertise, which we will leverage to drive growth across our product portfolio, including continued international expansion;
• 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.

Products

OA Pain Management

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

Regenerative Solutions

Our Regenerative Solutions product family consists of: (a) our portfolio of orthopedic regenerative solutions products utilizing HA, including Integrity, our hyaluronic acid-based scaffold for rotator cuff repair and other tendon procedures, Tactoset, an HA-enhanced, flowable, injectable and settable bone void filler used to facilitate bone regeneration and augment hardware in poor quality bone, and Hyalofast, a hyaluronic acid scaffold for cartilage repair, sold outside of the United States in over 30 countries.

Results of Operations

Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024

(in thousands, except percentages)

Revenue

The following table presents revenue by product family for the three-month period ended March 31, 2025 and 2024 as follows:

(in thousands, except percentages)

Revenue for the three-month period ended March 31, 2025 was $26.2 million, a decrease of $2.9 million, or 10%, compared to the same period in 2024. The decrease in revenue was driven by lower sales activity with our OEM Channel partners, primarily J&J MedTech and the discontinuation of certain non-orthopedic products.

Revenue from our OEM Channel product family decreased by 23% for the three-month period ended March 31, 2025, as compared to the same period in 2024, due primarily to lower pricing on sales to J&J MedTech, and lower revenue from J&J MedTech due to lower end user sales in 2025.

Revenue from our Commercial Channel product family increased 18% for the three-month period ended March 31, 2025, as compared to the same period in 2024, primarily due to higher international sales on our OA Pain Management products and growing commercial adoption of our newest products, particularly Integrity, which offset lower sales of certain legacy products.

Gross Profit and Margin

Gross profit for the three-month period ended March 31, 2025 decreased $4.3 million to $14.7 million, representing a 56% gross margin for the period as compared to 65% in the prior year. The decrease in gross profit for the three-month period ended March 31, 2025, as compared to the same period in 2024, primarily resulted from lower revenue and higher manufacturing costs. Gross margin for the three-month period ended March 31, 2025 decreased compared to the same period of prior year due to larger percentage of international sales that generally have a lower average selling price, higher manufacturing costs and increase in inventory reserves and scrap.

Research and Development

Research and development expenses for the three-month period ended March 31, 2025 were $6.1 million, a decrease of $0.3 million as compared to the same period in 2024. The decrease was primarily related to reduced headcount and lower product development and regulatory costs.

Selling, General and Administrative

Selling, general and administrative expenses for the three-month period ended March 31, 2025 were $12.9 million, a decrease of $2.2 million, as compared to the same period in 2024. This decrease for the three-month period ended March 31, 2025 was primarily due to reduced headcount, lower marketing expenses and other non-recurring corporate costs that occurred in 2024.

Loss from Continuing Operations

For the three-month period ended March 31, 2025, the loss from continuing operations was $4.0 million, compared to a loss from continuing operations of $2.0 million for the same period in 2024. The $2.0 million increase in the loss from continuing operations was due to lower revenue and higher manufacturing costs.

Income Taxes

The income tax expense was $0.1 million for the three-month period ended March 31, 2025, resulting in an effective tax rate of (2.3%). The income tax expense was immaterial for the three-month period ended March 31, 2024, resulting in an effective tax rate of (2.2%). The tax rates are consistent for the three-month period ended March 31, 2025, as compared to the same period in 2024, primarily due to a full valuation allowance being recorded against domestic deferred tax assets at March 31, 2024.

Non-GAAP Financial Measures

We present certain information with respect to 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 in the United States, or GAAP, and is not necessarily comparable to similarly titled measures presented by other companies.

We have presented 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 EBITDA

We present information below with respect to adjusted EBITDA, which we define as our net income (loss) excluding interest and other expense, net, income tax benefit, depreciation and amortization, stock-based compensation, and acquisition-related expenses.

Adjusted EBITDA is not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net (loss) income, which is the nearest 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 share-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 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 would be higher, which would affect our cash position;
• 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;

The following is a reconciliation of adjusted EBITDA, a non-GAAP metric, to net loss, the most directly comparable GAAP financial measure, for the three-month periods ended March 31, 2025 and 2024, respectively:

(in thousands)

Adjusted EBITDA in the three-month period ended March 31, 2025 decreased $2.6 million as compared with the same period in 2024. The decrease in adjusted EBITDA for the period was primarily due to a decrease in OEM Channel revenues and lower gross profit. .

Adjusted Net Income (Loss) and Adjusted EPS

We present information below with respect to adjusted net (loss) income and adjusted EPS. We define adjusted net (loss) income as our net (loss) income excluding amortization and depreciation of acquired assets, share-based compensation, and other non-recurring items, such as product rationalization charges, severance costs and costs of shareholder activism.. We define adjusted EPS as GAAP diluted earnings per share excluding the above adjustments to net (loss) income used in calculating adjusted net (loss) income, each on a per share and tax effected basis.

The following is a reconciliation of adjusted net loss, a non-GAAP metric, to net income (loss), the most directly comparable GAAP financial measure, for the three-month periods ended March 31, 2025 and 2024, respectively:

(in thousands)

24

The following is a reconciliation of adjusted diluted EPS, a non-GAAP metric, to diluted EPS, the most directly comparable GAAP financial measure, for the three-month periods ended March 31, 2025 and 2024, respectively:

Adjusted net income and adjusted diluted earnings per share in the three-month period ended March 31, 2025 decreased by $1.0 million and $0.19, respectively, as compared with the same period in 2024. The decrease for the period was primarily due to lower revenues and gross profit.

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 and cash equivalents aggregated $53.4 million and $55.6 million, and working capital totaled $84.6 million and $90.3 million, at March 31, 2025 and December 31, 2024, respectively.

On November 12, 2021, we entered into a Third Amendment to Credit Agreement with Bank of America N.A. as administrative agent, which amended our existing revolving line of credit agreement dated October 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 of March 31, 2025, and December 31, 2024, there were no outstanding borrowings, and we are in compliance with the terms of the credit facility.

Summary of Cash Flows (in thousands):

The following changes contributed to the net change in cash and cash equivalents in the three-month period ended March 31, 2025 as compared to the same period in 2024.

Operating Activities

Cash used in operating activities was $0.1 million for each of the three-month periods ended March 31, 2025 and 2024, respectively. We had a slightly higher net loss during the three-month period ended March 31, 2025 that caused an increase in cash used in operating activities in 2024 offset by lower stock-based compensation, depreciation and amortization and improved working capital.

Investing Activities

Cash provided by investing activities was $1.7 million for the three-month period ended March 31, 2025, as compared to cash used in investing activities of $1.8 million for the same period in 2024. The change was primarily due to proceeds of $4.5 million from the sale of Parcus Medical offset by a $1.0 million increase in capital expenditures to support manufacturing operations at our Bedford facility.

Financing Activities

Cash used in financing activities was $5.4 million for the three-month period ended March 31, 2025, as compared to cash used in financing activities of $2.3 million for the same period in 2024. The increase in cash used in financing activities was primarily attributable to $4.0 million used to fund the share repurchase program that began in May 2024 and the utilization of cash for employee tax withholding in exchange for shares surrendered by equity award holders.

Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements in conformity with 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 2024 Form 10-K for the year ended December 31, 2024. 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 2024 Form 10-K for the fiscal year ended December 31, 2024 and is updated in the Notes to the condensed 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 2024 Form 10-K for the year ended December 31, 2024. There were no material changes to our contractual obligations reported in our 2024 Form 10-K during the three months ended March 31, 2025. For additional discussion, see Note 9 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.

Our market risks and the ways we manage them are summarized in the section captioned “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2024. There have been no material changes in the first three months of 2025 to our market risks or to our management of such risks.

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based upon that evaluation, the chief executive officer and chief financial officer have concluded as of March 31, 2025 that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. On an on-going basis, we review and document our disclosure controls and procedures, and our internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

(b) Changes in internal controls over financial reporting.

There were no material changes in our internal control over financial reporting during the quarter ended March 31, 2025, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

Except as set forth below, there have been no material changes to the risk factors described in the section captioned “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2024. In addition to the other information set forth in this report, you should carefully consider the factors discussed in the section captioned “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2024, which could materially affect our business, financial condition, or future results. The risks described in our Annual Report on Form 10-K and such subsequently filed Quarterly Report on Form 10-Q are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition, and/or operating results.

Significant political, trade, regulatory developments, and other circumstances beyond our control, could have a material adverse effect on our financial condition or results of operations.

Significant political, trade, or regulatory developments, such as those stemming from changes in the U.S. federal administration, are difficult to predict and may have a material adverse effect on us, as we both import materials and equipment necessary to manufacture our products in the U.S., and export materials and products from the U.S. Similarly, changes in U.S. federal policy that affect the geopolitical landscape could give rise to circumstances outside our control that could have negative impacts on our business operations. Changes to U.S. policy implemented by the U.S. Congress, the current administration or any new administration have impacted and may in the future impact, among other things, the U.S. and global economy, international trade relations, unemployment, immigration, healthcare, taxation, the U.S. regulatory environment, inflation and other areas. The United States has recently imposed blanket 10% tariffs on virtually all imports to the U.S. and has imposed or is considering imposing significantly higher so-called reciprocal tariffs applicable to imports from many countries. On April 9, 2025, the U.S. announced a temporary pause on its reciprocal tariffs applicable to many countries, while increasing the tariffs applicable to imports from China. The current administration has threatened to continue to broadly impose tariffs, which could lead to corresponding punitive actions by the countries with which the U.S. trades. Historically, tariffs have led to increased trade and political tensions. In response to tariffs, other countries have implemented retaliatory tariffs on U.S. goods. Political tensions as a result of trade policies could reduce trade volume, investment, technological exchange, and other economic activities between major international economies, resulting in a material adverse effect on global economic conditions and the stability of global financial markets. Any changes in political, trade, regulatory, and economic conditions, including U.S. trade policies, could have a material adverse effect on our financial condition or results of operations. Until we know what policy changes are made, whether those policy changes are challenged and subsequently upheld by the court system, the duration that those policy changes remain in effect, and how those changes impact our business and the business of our competitors over the long term, we will not know if, overall, we will benefit from them or be negatively affected by them.