Anika Therapeutics
Anika Therapeutics, Inc. (Form: 10-Q, Received: 07/28/2017 16:09:20)

 

 
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

 

 

Commission File Number 000-21326

 

Anika Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Massachusetts 04-3145961
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)  
   
32 Wiggins Avenue, Bedford, Massachusetts 01730
(Address of Principal Executive Offices) (Zip Code)

 

(781) 457-9000

(Registrant’s Telephone Number, Including Area Code)

 

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x Accelerated filer  o

Non-accelerated filer  o

(Do not check if a smaller

reporting company)

Smaller reporting

company  o

Emerging growth

company  o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  x

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of July 20, 2017 there were 14,658,440 outstanding shares of Common Stock, par value $.01 per share.

 

 
 

 

 
 

 

ANIKA THERAPEUTICS, INC.

TABLE OF CONTENTS

 

 

 

      Page
       
Part I Financial Information  
  Item 1. Financial Statements (unaudited): 3
    Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016  3
    Condensed Consolidated Statements of Operations and Comprehensive Income for the three- and six-month periods ended June 30, 2017 and 2016 4
    Condensed Consolidated Statements of Cash Flows for the six-month period ended June 30, 2017 and 2016 5
    Notes to Condensed Consolidated Financial Statements 6
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
  Item 4. Controls and Procedures 19
Part II Other Information  
  Item 1. Legal Proceedings 19
  Item 1A. Risk Factors 19
  Item 6. Exhibits 20
Signatures 21

 

 

 

 

 

References in this Quarterly Report on Form 10-Q to “we,” “us,” “our,” “our company,” and other similar references refer to Anika Therapeutics, Inc. and its subsidiaries unless the context otherwise indicates.

 

ANIKA, ANIKA THERAPEUTICS, CINGAL, HYAFF, MONOVISC, and ORTHOVISC are our registered trademarks. This Quarterly Report on Form 10-Q also contains registered marks, trademarks, and trade names that are the property of other companies and licensed to us.

 

 
 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Anika Therapeutics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share data and per share data)

(unaudited)

         

ASSETS   June 30,
2017
  December 31,
2016
Current assets:                
Cash and cash equivalents     117,874       104,261  
Investments     25,000       20,500  
Accounts receivable, net of reserves of $210 and $194 at June 30, 2017 and December 31, 2016, respectively     30,450       27,598  
Inventories, net     17,584       15,983  
Prepaid expenses and other current assets     1,973       2,098  
Total current assets     192,881       170,440  
Property and equipment, net     52,272       52,296  
Long-term deposits and other     1,389       69  
Intangible assets, net     10,626       10,227  
Goodwill     7,836       7,214  
Total assets   $ 265,004     $ 240,246  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 5,465     $ 2,303  
Accrued expenses and other current liabilities     5,673       6,496  
Income taxes payable     2,303       -  
Total current liabilities     13,441       8,799  
Other long-term liabilities     422       2,126  
Deferred tax liability     7,003       6,548  
Commitments and contingencies (Note 12)     -          
Stockholders’ equity:                
Preferred stock, $.01 par value; 1,250 shares authorized, no shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively     -       -  
Common stock, $.01 par value; 60,000 shares authorized, 14,658 and 14,627 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively     146       146  
Additional paid-in-capital     65,171       61,735  
Accumulated other comprehensive loss     (5,736 )     (7,317 )
Retained earnings     184,557       168,209  
Total stockholders’ equity     244,138       222,773  
Total liabilities and stockholders’ equity   $ 265,004     $ 240,246  

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

  3  
 

 

Anika Therapeutics, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share data)

(unaudited)

                 

    Three Months Ended June 30,   Six Months Ended June 30,
    2017   2016   2017   2016
Product revenue   $ 28,340     $ 26,575     $ 51,721     $ 48,853  
Licensing, milestone and contract revenue     5,122       6       5,127       11  
Total revenue     33,462       26,581       56,848       48,864  
                                 
Operating expenses:                                
Cost of product revenue     6,315       6,065       12,398       11,490  
Research and development     4,449       2,792       8,679       4,951  
Selling, general and administrative     4,972       4,255       10,039       8,245  
Total operating expenses     15,736       13,112       31,116       24,686  
Income from operations     17,726       13,469       25,732       24,178  
Interest income, net     16       49       74       121  
Income before income taxes     17,742       13,518       25,806       24,299  
Provision for income taxes     6,373       4,903       8,944       8,789  
Net income   $ 11,369     $ 8,615     $ 16,862     $ 15,510  
                                 
Basic net income per share:                                
Net income   $ 0.78     $ 0.59     $ 1.16     $ 1.05  
Basic weighted average common shares outstanding     14,588       14,679       14,582       14,778  
Diluted net income per share:                                
Net income   $ 0.76     $ 0.57     $ 1.12     $ 1.02  
Diluted weighted average common shares outstanding     15,044       15,111       15,046       15,210  
                                 
Net income   $ 11,369     $ 8,615     $ 16,862     $ 15,510  
Other comprehensive income (loss):                                
Foreign currency translation adjustment     1,289       (536 )     1,581       238  
Comprehensive income   $ 12,658     $ 8,079     $ 18,443     $ 15,748  

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

  4  
 

 

Anika Therapeutics, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

    Six Months Ended June 30,
    2017   2016
Cash flows from operating activities:                
Net income   $ 16,862     $ 15,510  
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization     2,022       1,901  
Stock-based compensation expense     2,465       1,478  
Deferred income taxes     589       (252 )
Provision for doubtful accounts     (1 )     52  
Provision for inventory     287       181  
Changes in operating assets and liabilities:                
Accounts receivable     (2,449 )     (2,932 )
Inventories     (1,741 )     (2,438 )
Prepaid expenses, other current and long-term assets     (155 )     186  
Accounts payable     2,362       (4,252 )
Accrued expenses and other current liabilities     (182 )     446  
Income taxes     2,303       (3,169 )
Other long-term liabilities     (631 )     351  
Net cash provided by operating activities     21,731       7,062  
                 
Cash flows from investing activities:                
Proceeds from maturity of investments     20,000       27,750  
Purchase of investments     (24,500 )     (22,499 )
Purchase of property and equipment     (3,917 )     (9,869 )
Net cash used in investing activities     (8,417 )     (4,618 )
                 
Cash flows from financing activities:                
Repurchases of common stock     -       (25,000 )
Proceeds from exercise of equity awards     209       922  
Net cash provided by (used in) financing activities     209       (24,078 )
                 
Exchange rate impact on cash     90       52  
                 
Increase (decrease) in cash and cash equivalents     13,613       (21,582 )
Cash and cash equivalents at beginning of period     104,261       110,707  
Cash and cash equivalents at end of period   $ 117,874     $ 89,125  
Supplemental disclosure of cash flow information:                
Non-cash Investing Activities:                
Purchases of property and equipment included in accounts payable and accrued expenses   $ 1,193     $ 2,128  
Build-to-suit lease agreement   $ -     $ 482  

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

  5  
 

 

ANIKA THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share amounts or as otherwise noted)

( unaudited )

 

1.       Nature of Business

 

Anika Therapeutics, Inc. (the “Company”) is a global, integrated orthopedic medicines company committed to improving the lives of patients with degenerative orthopedic diseases and traumatic conditions with clinically meaningful therapies along the continuum of care, from palliative pain management to regenerative cartilage repair. The Company has over two decades of global expertise developing, manufacturing, and commercializing products based on the Company’s proprietary Hyaluronic Acid (“HA”) technology. The Company’s orthopedic medicine portfolio includes ORTHOVISC, MONOVISC, and CINGAL, which alleviate pain and restore joint function by replenishing depleted HA, and HYALOFAST, a solid HA-based scaffold to aid cartilage repair and regeneration.

 

The Company is subject to risks common to companies in the biotechnology and medical device industries including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, commercialization of existing and new products, and compliance with U.S. Food and Drug Administration (“FDA”) and foreign regulations and approval requirements, as well as the ability to grow the Company’s business through appropriate commercial strategies.

 

2.       Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and in accordance with accounting principles generally accepted in the United States (“US GAAP”). The financial statements include the accounts of Anika Therapeutics, Inc. and its subsidiaries. Inter-company transactions and balances have been eliminated. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to SEC rules and regulations relating to interim financial statements. The December 31, 2016 balances reported herein are derived from the audited consolidated financial statements. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the condensed consolidated financial position of the Company as of June 30, 2017, the results of its operations for the three- and six-month periods ended June 30, 2017 and 2016, and cash flows for the six-month periods ended June 30, 2017 and 2016.

 

The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company’s annual financial statements filed with its Annual Report on Form 10-K for the year ended December 31, 2016. The results of operations for the six-month periods ended June 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017. Certain prior period amounts have been reclassified to conform to the current period presentation. This change in classification does not materially affect previously reported cash flows from operations or from financing activities in the Condensed Consolidated Statement of Cash Flows, and had no effect on the previously reported Condensed Consolidated Statement of Operations and Comprehensive Income.

 

3.       Recent Accounting Pronouncements

 

Recently Issued

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers . ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB issued a one-year deferral of ASU 2014-09 making it effective for annual reporting periods beginning on or after December 15, 2017, while also providing for early adoption not to occur before the original effective date. The Company currently intends to adopt the new standard on a modified retrospective basis with the cumulative effect of the change reflected in retained earnings as of January 1, 2018 and to not restate prior periods. The Company has commenced work to assess the impact of the new revenue standard on its principal revenue streams. The Company has not made a determination as to the impact the adoption will have on its consolidated financial statements .

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 amends existing lease accounting requirements. The most significant change will result in the recognition of lease assets and lease liabilities by lessees for virtually all leases. The new guidance will also require significant additional disclosures about the amount, timing, and uncertainty of cash flows from leases. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Upon adoption, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted, and a number of optional practical expedients may be elected to simplify the impact of adoption. The Company is assessing ASU 2016-02 and the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.

 

  6  
 

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments (Topic 326) Credit Losses. ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. Under the new standard, entities holding financial assets and net investment in leases that are not accounted for at fair value through net income are to be presented at the net amount expected to be collected. An allowance for credit losses will be a valuation account that will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. ASU 2016-13 is effective as of January 1, 2020. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements or footnote disclosures.

 

In January 2017, the FASB issued ASU No. 2017-04,  Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment . ASU 2017-04 will simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Current guidance requires that companies compute the implied fair value of goodwill under Step 2 by performing procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. This standard will require companies to perform annual or interim goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This standard will be effective for annual periods beginning after December 15, 2019, including interim periods occurring after that date, and will be applied prospectively. Early adoption of this standard is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements or footnote disclosures .

 

Recently Adopted

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU 2016-09 is effective as of January 1, 2017. Since January 1, 2017, the Company has recognized excess tax benefits and tax deficiencies related to share-based payments in the Condensed Consolidated Statements of Operations and Comprehensive Income as a component of the provision for income taxes on a prospective basis. Such excess tax benefits and tax deficiencies were previously recorded in equity. The Company also began presenting tax-related cash flows resulting from share-based payments as operating activities in the Condensed Consolidated Statements of Cash Flows, and revised retrospectively prior periods to reflect this provision. Accordingly, the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2016 was revised by increasing net cash provided by operating activities by $0.4 million and by decreasing net cash used in financing activities by $0.4 million. Lastly, as of January 1, 2017, the Company elected to recognize forfeitures as they occur rather than estimate forfeitures each period on a modified retrospective basis. See Notes 6 and 14 for additional information regarding the impacts on the condensed consolidated financial statements.

 

4.       Investments

 

All of the Company’s investments are classified as available-for-sale and are carried at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income, net of related income taxes. The Company held bank certificates of deposit of $25.0 million and $20.5 million at June 30, 2017 and December 31, 2016, respectively. There were no unrealized gains or losses on the Company’s available-for-sale securities at June 30, 2017 or December 31, 2016.

 

5.       Fair Value Measurements

 

Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants based on assumptions that market participants would use in pricing an asset or liability. As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on the inputs used in measuring fair value, was established as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets or liabilities; (Level 2) significant other observable inputs that are observable either directly or indirectly; and (Level 3) significant unobservable inputs for which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company records its investments at fair value.

 

  7  
 

 

The Company’s investments are all classified within Level 2 of the fair value hierarchy. These investments classified within Level 2 of the fair value hierarchy are valued based on matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk.

 

The fair value hierarchy of the Company’s cash equivalents and investments at fair value is as follows:

 

        Fair Value Measurements at Reporting
Date Using
    June 30, 2017   Quoted Prices in
Active Markets
for Identical Assets 
 (Level 1)
  Significant Other
 Observable Inputs
 (Level 2)
  Significant
 Unobservable Inputs
 (Level 3)
Cash equivalents:                                
Money market funds   $ 66,244     $ -     $ 66,244     $ -  
                                 
Investments:                                
Bank certificates of deposit   $ 25,000     $ -     $ 25,000     $ -  

 

        Fair Value Measurements at Reporting
Date Using
    December 31, 2016   Quoted Prices in
Active Markets
for Identical Assets
 (Level 1)
  Significant Other
 Observable Inputs
 (Level 2)
  Significant
Unobservable Inputs 
 (Level 3)
Cash equivalents:                                
Money market funds   $ 68,352     $ -     $ 68,352     $ -  
Bank certificates of deposit     750       -       750       -  
Total cash equivalents   $ 69,102     $ -     $ 69,102     $ -  
                                 
Investments:                                
Bank certificates of deposit   $ 20,500     $ -     $ 20,500     $ -  

 

6.       Equity Incentive Plan

 

The Company estimates the fair value of stock options and stock appreciation rights (“SARs”) using the Black-Scholes valuation model. Fair value of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) are measured by the grant-date price of the Company’s shares. The fair value of each stock option award during the six-month periods ended June 30, 2017 and 2016, respectively, was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

 

    Six Months Ended June 30,
    2017   2016
Risk free interest rate   1.65% - 1.78%   0.94% - 1.40%
Expected volatility   42.54% - 44.30%   49.47% - 51.61%
Expected life (years)     4       4.5  
Expected dividend yield     0.00%       0.00%  

 

The Company recorded $1.3 million and $0.7 million of share-based compensation expense for the three-month period ended June 30, 2017 and 2016, respectively, for equity compensation awards. The Company recorded $2.5 million and $1.5 million of share-based compensation expense for the six-month periods ended June 30, 2017 and 2016, respectively, for equity compensation awards. The Company presents the expenses related to share-based compensation awards in the same expense line items as cash compensation paid to each of its employees as follows:

 

    Three Months Ended June 30,   Six Months Ended June 30,
    2017   2016   2017   2016
Cost of product revenue   $ 102     $ 12     $ 199     $ 25  
Research and development     153       41       163       143  
Selling, general and administrative     1,029       608       2,103       1,310  
Total stock-based compensation expense   $ 1,284     $ 661     $ 2,465     $ 1,478  

 

  8  
 

 

On June 13, 2017, the Company’s shareholders approved the Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan (the “2017 Plan”). The 2017 Plan replaced the Anika Therapeutics, Inc. Second Amended and Restated 2003 Stock Option and Incentive Plan, as amended, (the “2003 Plan”), as the plan under which future grants to employees, directors, officers, and consultants will be made. The 2017 Plan was originally approved by the Company’s Board of Directors on March 31, 2017. The terms of the 2017 Plan provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, and performance awards that may be settled in cash, stock, or other property. Subject to adjustment for specified types of changes in our capitalization, no more than 1.2 million shares of common stock may be issued under the 2017 Plan.

 

During the three-month period ended June 30, 2017, a total of 2,500 stock options were granted under the 2017 Plan and a total of 3,000 stock options were granted under the 2003 Plan. During the six-month period ended June 30, 2017, a total of 2,500 stock options were granted under the 2017 Plan and a total of 0.4 million stock options were granted under the 2003 Plan. The stock options granted to employees become exercisable or vest ratably over a three-year period. In addition, the Company executed its annual grant of RSUs to non-employee directors, and these RSUs vest over a one-year period.

 

A portion of the stock options granted under the 2003 Plan during the six-month period ended June 30, 2017 contained certain performance criteria in addition to time-based vesting conditions. For performance-based awards with financial achievement targets, the Company recognizes expense using the graded vesting methodology based on the number of shares expected to vest. Compensation cost associated with performance grants is estimated using the Black-Scholes valuation method multiplied by the expected number of shares to be issued, which is adjusted based on the estimated probabilities of achieving the performance goals. Changes to the probability assessment and the estimated shares expected to vest will result in adjustments to the related share-based compensation expense that will be recorded in the period of the change. If the performance targets are not achieved, no compensation cost is recognized and any previously recognized compensation cost is reversed.

 

In connection with the adoption of ASU 2016-09, as of January 1, 2017, the Company elected to recognize forfeitures as they occur rather than estimate forfeitures each period, which was applied on a modified retrospective basis. Accordingly, the Company recognized a cumulative adjustment to retained earnings at the beginning of period ended June 30, 2017, resulting in a reduction of $0.5 million.

 

7.       Earnings Per Share (“EPS”)

 

Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period. Unvested restricted shares, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic earnings per share. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, SARs, RSAs, and RSUs using the treasury stock method.

 

The following table provides share information used in the calculation of the Company's basic and diluted earnings per share (in thousands):

 

    Three Months Ended June 30,   Six Months Ended June 30,
    2017   2016   2017   2016
Shares used in the calculation of basic earnings per share     14,588       14,679       14,582       14,778  
Effect of dilutive securities:                                
Stock options, SARs, and RSAs     456       432       464       432  
Diluted shares used in the calculation of earnings per share     15,044       15,111       15,046       15,210  

 

Equity awards of 0.7 million shares were outstanding for the three- and six-month periods ended June 30, 2017 and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive. Equity awards of 0.3 million shares were outstanding for the three- and six-month periods ended June 30, 2016 and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive. 

 

On February 26, 2016, the Company entered into an accelerated stock repurchase agreement with Morgan Stanley & Co. LLC (“Morgan Stanley”) pursuant to a Fixed Dollar Accelerated Share Repurchase Transaction (“ASR Agreement") to purchase $25.0 million of shares of its common stock. Pursuant to the terms of the ASR Agreement, the Company paid Morgan Stanley $25.0 million in cash and received delivery of 0.4 million shares of the Company’s common stock on February 29, 2016 based on a closing market price of $46.40 per share and the applicable contractual discount.

 

On August 26, 2016, the Company settled the approximately $7.5 million remaining under the ASR Agreement, which was recorded as an equity forward sale contract and was included in additional paid-in capital in stockholders' equity in the condensed consolidated balance sheets as it met the criteria for equity accounting. Pursuant to the terms of the ASR Agreement, the final number of shares and the average purchase price was determined at the end of the applicable purchase period, which was August 26, 2016. Based on the volume-weighted average price since the effective date of the ASR Agreement less the applicable contractual discount, Morgan Stanley delivered 0.1 million additional shares to the Company on August 31, 2016. In total, 0.5 million shares were repurchased under the ASR Agreement at an average repurchase price of $47.08 per share. These shares are held by the Company as authorized but unissued shares pursuant to Massachusetts law. The initial and final delivery of shares resulted in immediate reductions of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted net income per share.

 

  9  
 

 

8.       Inventories

 

Inventories consist of the following:

 

    June 30,
2017
  December 31,
2016
Raw materials   $ 6,287     $ 5,884  
Work-in-process     6,466       5,559  
Finished goods     4,831       4,540  
Total   $ 17,584     $ 15,983  

 

9.       Intangible Assets

 

Intangible assets as of June 30, 2017 and December 31, 2016 consist of the following:

 

            June 30, 2017   December 31, 2016
    Gross Value   Useful Life   Accumulated
Currency
Translation
Adjustment
  Accumulated
Amortization
  Net Book
Value
  Net Book Value
Developed technology   $ 17,100     15   $ (2,879 )   $ (7,251 )   $ 6,970     $ 6,842  
In-process research & development     4,406     Indefinite     (1,174 )     -       3,232       2,973  
Distributor relationships     4,700     5     (415 )     (4,285 )     -       -  
Patents     1,000     16     (172 )     (404 )     424       412  
Elevess trade name     1,000     9     -       (1,000 )     -       -  
Total   $ 28,206         $ (4,640 )   $ (12,940 )   $ 10,626     $ 10,227  

 

The aggregate amortization expense related to intangible assets was $0.2 million and $0.3 million for the three-month periods ended June 30, 2017 and 2016, respectively. The aggregate amortization expense related to intangible assets was $0.5 million and $0.6 million for the six-month periods ended June 30, 2017 and 2016, respectively.

 

10.      Goodwill

 

Through June 30, 2017, there have not been any events or changes in circumstances that indicate that the carrying value of goodwill may not be recoverable. Changes in the carrying value of goodwill were as follows:

 

    Six Months
Ended June 30,
2017
  Twelve Months
Ended December 31,
2016
Balance, beginning   $ 7,214     $ 7,482  
Effect of foreign currency adjustments     622       (268 )
Balance, ending   $ 7,836     $ 7,214  

 

  10  
 

 

11.       Accrued Expenses

 

Accrued expenses consist of the following:

 

    June 30,
2017
  December 31,
2016
Compensation and related expenses   $ 2,977     $ 3,089  
Facility construction costs     -       804  
Research grants     399       463  
Professional fees     1,015       802  
Clinical trial costs     659       227  
Deferred Rent     68       231  
Other     555       880  
Total   $ 5,673     $ 6,496  

 

12.       Commitments and Contingencies

 

In certain of its contracts, the Company warrants to its customers that the products it manufactures conform to the product specifications as in effect at the time of delivery of the specific product. The Company may also warrant that the products it manufactures do not infringe, violate, or breach any U.S. or international patent or intellectual property right, trade secret, or other proprietary information of any third party. On occasion, the Company contractually indemnifies its customers against any and all losses arising out of, or in any way connected with, any claim or claims of breach of its warranties or any actual or alleged defect in any product caused by the negligent acts or omissions of the Company. The Company maintains a products liability insurance policy that limits its exposure to these risks. Based on the Company’s historical activity, in combination with its liability insurance coverage, the Company believes the estimated fair value of these indemnification agreements is immaterial. The Company had no accrued warranties at June 30, 2017 or December 31, 2016 and has no history of claims paid.

 

The Company is also involved in various legal proceedings arising in the normal course of business. Although the outcomes of these legal proceedings are inherently difficult to predict, the Company does not expect the resolution of these legal proceedings to have a material adverse effect on its financial position, results of operations, or cash flow.

 

13.       Leases

 

On October 9, 2015, Anika S.r.l. entered into a build-to-suit lease agreement with Consorzio Zona Industriale E Porto Fluviale di Padova (“ZIP”), as landlord, pursuant to which Anika S.r.l. leases a new European headquarters facility, consisting of approximately 33,000 square feet of general office, research and development, training, and warehousing space located in Padova, Italy. The lease has an initial term of fifteen years, which commenced on March 1, 2017. The lease will automatically renew for up to three additional six-year terms, subject to certain terms and conditions. The Company has the ability to withdraw from this lease subject to certain financial penalties after six years and with no penalties after the ninth year. Beginning on the commencement date, the lease provides for an initial yearly rent of approximately $0.3 million.

 

Construction of the new facility commenced during the first quarter of 2016. During the period of construction the Company was the deemed owner of the facility. Accordingly, the landlord's costs of constructing the facility were capitalized, as a non-cash transaction, offset by a corresponding facility lease obligation in the Company’s consolidated balance sheet. When the construction concluded on March 1, 2017, the Company removed the construction-in-process asset of $3.1 million and related liability from its condensed consolidated balance sheet. The Company commissioned ZIP for additional tenant improvements of $0.8 million, which are recorded within Long-term deposits and other on the condensed consolidated balance sheet and which will be amortized over the life of the lease. The lease is accounted for as an operating lease based on the Company’s assessment of the applicable accounting principles. 

 

14.       Income Taxes

 

Provisions for income taxes were $6.4 million and $8.9 million for the three- and six-month periods ended June 30, 2017, based on effective tax rates of 35.9% and 34.7%, respectively.  Provisions for income taxes were $4.9 million and $8.8 million for the three- and six-month periods ended June 30, 2016, based on effective tax rates of 36.3% and 36.2%, respectively. The increase in income taxes for the three- and six-month periods ended June 30, 2017 resulted from increased income before income taxes offset by a net decrease in the effective tax rate as compared to the same period in the prior year. The net decrease in the effective tax rate for the three- and six-month periods ended June 30, 2017, as compared to the same periods in 2016, was primarily due to the increase in the expected research and development and state investment tax credits.  In addition, the Company realized windfall tax benefits related to share-based payments in connection with the adoption of ASU 2016-09 during the period. The amount of excess tax benefits recognized as a discrete period income tax benefit was nominal and $0.3 million for the three- and six-month periods ended June 30, 2017, respectively, which decreased the effective tax rate for the interim period by 0.0% and 1.2%, respectively. Prior to the adoption of ASU 2016-09 excess tax benefits and deficiencies were previously recorded in equity. The amount of excess tax benefits recognized through additional paid-in-capital was $0.1 million and $0.4 million for the three- and six-month periods ended June 30, 2016, respectively.

 

  11  
 

 

The Company files income tax returns in the United States on a federal basis, in certain U.S. states, and in Italy. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. The Company’s 2014 filing has been audited by the IRS and closed. The Company’s 2012 filing has been audited by the Italian tax authorities and closed.

 

In connection with the preparation of the financial statements, the Company performed an analysis to ascertain if it was more likely than not that it would be able to utilize, in future periods, the net deferred tax assets associated with its net operating loss carry-forward. The Company has concluded that the positive evidence outweighs the negative evidence and, thus, that the deferred tax assets not otherwise subject to a valuation allowance are realizable on a “more likely than not” basis. As such, the Company did not record a valuation allowance at June 30, 2017 or December 31, 2016.

 

15.       Depuy Synthes Mitek Sports Medicine Monovisc Agreement

 

In December 2011, the Company entered into a fifteen-year licensing agreement with DePuy Synthes Mitek Sports Medicine, to exclusively market MONOVISC in the U.S. The Company fully recognized revenue for a milestone payment of $5.0 million as a result of MONOVISC achieving $100.0 million in U.S. end-user sales within a consecutive 12-month period ending in June 2017.

 

16.       Segment and Geographic Information

 

The Company has one reportable operating segment, for the purposes of assessing performance and determining the allocation of resources.

 

Product revenue by product group is as follows:

 

    Three Months Ended June 30,   Six Months Ended June 30,
    2017   2016   2017   2016
Orthobiologics   $ 24,468     $ 23,304     $ 44,695     $ 42,891  
Surgical     1,335       1,433       2,631       2,751  
Dermal     453       582       878       963  
Other     2,084       1,256       3,517       2,248  
Product Revenue   $ 28,340     $ 26,575     $ 51,721     $ 48,853  

 

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Total revenue by geographic location and as a percentage of overall total revenue for the three- and six-month periods ended June 30, 2017 and 2016 are as follows:

 

    Three Months Ended June 30,
    2017   2016
    Total
Revenue
  Percentage of
Revenue
  Total
Revenue
  Percentage of
Revenue
Geographic Location:                                
United States   $ 27,447       82 %   $ 21,895       82 %
Europe     4,060       12 %     2,977       11 %
Other     1,955       6 %     1,709       7 %
Total Revenue   $ 33,462       100 %   $ 26,581       100 %

 

    Six Months Ended June 30,
    2017   2016
    Total
Revenue
  Percentage of
Revenue
  Total
Revenue
  Percentage of
Revenue
Geographic Location:                                
United States   $ 46,377       82 %   $ 39,906       82 %
Europe     6,889       12 %     5,542       11 %
Other     3,582       6 %     3,416       7 %
Total Revenue   $ 56,848       100 %   $ 48,864       100 %

 

 

 

 

 

 

 

 

 

 

 

  13  
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND 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. 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 ("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 those factors described in Part II, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016 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 Quarterly Report on Form 10-Q 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, integrated orthopedic medicines company committed to improving the lives of patients with degenerative orthopedic diseases and traumatic conditions with clinically meaningful therapies along the continuum of care, from palliative pain management to regenerative cartilage repair. We have over two decades of global expertise developing, manufacturing, and commercializing our products based on our proprietary hyaluronic acid (“HA”) technology. Our orthopedic medicine portfolio includes ORTHOVISC, MONOVISC, and CINGAL, which alleviate pain and restore joint function by replenishing depleted HA, and HYALOFAST, a solid HA-based scaffold to aid cartilage repair and regeneration.

 

Our therapeutic offerings consist of products in the following areas: Orthobiologics, Dermal, Surgical, and Other, which includes our ophthalmic and veterinary products. All of our products are based on HA, a naturally occurring, biocompatible polymer found throughout the body. Due to its unique biophysical and biochemical properties, HA plays an important role in a number of physiological functions such as the protection and lubrication of soft tissues and joints, the maintenance of the structural integrity of tissues, and the transport of molecules to and within cells.

 

Our proprietary technologies for modifying the HA molecule allow product properties to be tailored specifically to therapeutic use. Our patented technology chemically modifies HA to allow for longer residence time in the body. We also offer products made from HA based on two other technologies: HYAFF, which is a solid form of HA, and ACP gel, an autocross-linked polymer of HA. Our technologies are protected by an extensive portfolio of owned and licensed patents.

 

Since our inception in 1992, we have utilized a commercial partnership model for the distribution of our products to end-users. Our strong, worldwide network of distributors has historically provided, and continues to provide, a solid foundation for our revenue growth and territorial expansion. In 2015, we made the strategic decision to commercialize our next generation viscosupplementation product, CINGAL, in the United States ourselves, initially through the engagement of a contract sales organization. Ultimately, we intend to transition the direct sales function into our company as part of a broader buildout of our commercial capabilities. We believe that the combination of the direct and distribution commercial models will maximize the revenue potential from our current and future product portfolio.

 

We began a strategic project in 2015 to move the manufacturing of our HYAFF-based products, which were previously manufactured under an existing contract manufacturing agreement with a third party in Italy, to our Bedford, Massachusetts facility. Our main purposes behind this strategic move are to improve the efficiency of our manufacturing process and to enhance our research and development capabilities, with the aim of accelerating future product development. We expect to expend approximately $25.0 million on this project. Since project inception through June 30, 2017, we have expended approximately $22.5 million on the project, and we have completed key planned project milestones to date. We expect the project to be fully completed before the end of 2017.

 

  14  
 

 

Please see the section captioned “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Management Overview” in our Annual Report on Form 10-K for the year ended December 31, 2016, for a description of each of the above therapeutic areas, including the individual products.

 

Research and Development

 

Our research and development efforts primarily consist of the development of new medical applications for our HA-based technology, the management of clinical trials for certain product candidates, the preparation and processing of applications for regulatory approvals or clearances at all relevant stages of product development, and process development and scale-up manufacturing activities for our existing and new products. Our development focus includes products for tissue protection, repair, and regeneration. We anticipate that we will continue to commit significant resources to research and development, including clinical trials in the future.

  

Our second single-injection osteoarthritis product under development in the United States is CINGAL, which is composed of our proprietary cross-linked HA material combined with an approved steroid and is designed to provide both short- and long-term pain relief to patients. We completed an initial CINGAL phase III clinical trial, including the associated statistical analysis for 368 enrolled patients, during the fourth quarter of 2014 with data indicating that the product met all primary and secondary endpoints relative to the placebo set forth for the trial. During the first half of 2015, we completed a CINGAL retreatment study with 242 patients who had participated in the phase III clinical trial and reported safety data related to the retreatment study. This initial phase III clinical trial and the associated retreatment study supported the Health Canada and CE Mark approval of the product, and the commercial launch of the product in both Canada and the European Union occurred in the second quarter of 2016. In the United States, after discussions with the U.S. Food and Drug Administration (“FDA”) related to the regulatory pathway for CINGAL, we conducted a formal meeting with the FDA’s Office of Combination Products (“OCP”) to present and discuss our data in September 2015, and we submitted a formal request for designation with OCP a month later. In its response to our formal request for designation, OCP assigned the product to the FDA’s Center for Drug Evaluation and Research (“CDER”) as the lead agency center for premarket review and regulation. Since then, we have been in ongoing discussions with CDER to understand the requirements for submitting a New Drug Application (“NDA”) for CINGAL. We held a meeting with CDER in September 2016 to align on an approval framework and on submission requirements for this NDA for CINGAL, including the execution of an additional Phase III clinical trial to supplement our existing CINGAL pivotal study data. We submitted an Investigational New Drug Application (“IND”) in late 2016, and discussions with CDER indicated no objections to our clinical protocol design. As a result, we commenced work on this second Phase III clinical trial in the first quarter of 2017, and the first patient was treated in the second quarter of 2017. We expect to complete enrollment of this clinical trial by the end of 2017.

 

We have several research and development programs underway for new products, including for HYALOFAST (in the United States), an innovative product for cartilage tissue repair, HYALOBONE, a bone void filler, and other early stage regenerative medicine development programs. HYALOFAST received CE Mark approval in September 2009, and it is commercially available in Europe and certain international countries. During the first quarter of 2015, we submitted an Investigational Device Exemption (“IDE”) for HYALOFAST to the FDA, which was approved in July 2015. We commenced patient enrollment in a clinical trial in December 2015, and we are advancing site initiations and patient enrollment activities. In the second quarter of 2016, a supplement to the HYALOFAST IDE was approved to expand the inclusion criteria for the clinical study. The purpose of this supplement is to allow us to increase enrollment rates with the ultimate goal of decreasing the time needed to complete the clinical trial. In addition, we are currently proceeding with other research and development programs, one of which utilizes our proprietary HA technology to treat pain associated with common repetitive overuse injuries, such as lateral epicondylitis, also known as tennis elbow. We submitted a CE Mark application for this treatment during the first quarter of 2016 and received a CE Mark for the treatment of pain associated with tennis elbow in December 2016. Outside of the United States, this product will be marketed under the trade name ORTHOVISC-T. In the second quarter of 2016, we submitted an IDE to the FDA to conduct a phase III clinical trial for this treatment, which was approved by the FDA in June 2016. We also have other research and development programs underway focused on expanding the indications of our current products, including one program being conducted and funded by our U.S. MONOVISC distribution partner, DePuy Synthes Mitek Sports Medicine (“Mitek”), seeking to expand MONOVISC’s indication to include treatment of pain associated with osteoarthritis of the hip.

  

In June 2015, we entered into an agreement with the Institute for Applied Life Sciences at the University of Massachusetts Amherst to collaborate on research to develop a therapy for rheumatoid arthritis. The purpose of this research is to develop a novel modality for the treatment of rheumatoid arthritis and, if successful, it is expected to yield a potential product candidate that we could begin to move towards commercialization through additional pre-clinical studies as early as the second half of 2017.

 

  15  
 

 

Results of Operations

 

Three- and Six-Months Ended June 30, 2017 Compared to Three- and Six-Months Ended June 30, 2016

 

 

    Three Months Ended June 30,   Six Months Ended June 30,
    2017   2016   $ Inc/(Dec)   % Inc/(Dec)   2017   2016   $ Inc/(Dec)   % Inc/(Dec)
    (in thousands, except percentages)   (in thousands, except percentages)
Product revenue   $ 28,340     $ 26,575     $ 1,765       7 %   $ 51,721     $ 48,853     $ 2,868       6 %
Licensing, milestone and contract revenue     5,122       6       5,116       *       5,127       11       5,116       *  
Total revenue     33,462       26,581       6,881       26 %     56,848       48,864       7,984       16 %
                                                                 
Operating expenses:                                                                
Cost of product revenue     6,315       6,065       250       4 %     12,398       11,490       908       8 %
Research and development     4,449       2,792       1,657       59 %     8,679       4,951       3,728       75 %
Selling, general and administrative     4,972       4,255       717       17 %     10,039       8,245       1,794       22 %
Total operating expenses     15,736       13,112       2,624       20 %     31,116       24,686       6,430       26 %
Income from operations     17,726       13,469       4,257       32 %     25,732       24,178       1,554       6 %
Interest income, net     16       49       (33 )     (67 %)     74       121       (47 )     (39 %)
Income before income taxes     17,742       13,518       4,224       31 %     25,806       24,299       1,507       6 %
Provision for income taxes     6,373       4,903       1,470       30 %     8,944       8,789       155       2 %
Net income   $ 11,369     $ 8,615     $ 2,754       32 %   $ 16,862     $ 15,510     $ 1,352       9 %
Product gross profit   $ 22,025     $ 20,510     $ 1,515       7 %   $ 39,323     $ 37,363     $ 1,960       5 %
Product gross margin     78 %     77 %                     77 %     77 %                

 

* Percentage increase has been omitted due to magnitude.

 

Product Revenue

 

Product revenue for the three-month period ended June 30, 2017 was $28.3 million, an increase of 7% as compared to $26.6 million for the three-month period ended June 30, 2016. Product revenue for the six-month period ended June 30, 2017 was $51.7 million, an increase of 6% as compared to $48.9 million for the six-month period ended June 30, 2016. For the three- and six-month periods ended June 30, 2017, the increase in product revenue was mainly driven by the growth of our orthobiologics franchise and the growth of our veterinary product in the other franchise category with such increase being partially offset by a decrease in revenue from our surgical and dermal franchises.

 

The following tables present product revenue by product group for the three- and six-month periods ended June 30, 2017 and 2016:

 

    Three Months Ended June 30,
    2017   2016   $ Inc/(Dec)   % Inc/(Dec)
    (in thousands, except percentages)
Orthobiologics   $ 24,468     $ 23,304     $ 1,164       5 %
Surgical     1,335       1,433       (98 )     (7 %)
Dermal     453       582       (129 )     (22 %)
Other     2,084       1,256       828       66 %
Total   $ 28,340     $ 26,575     $ 1,765       7 %

 

    Six Months Ended June 30,
    2017   2016   $ Inc/(Dec)   % Inc/(Dec)
    (in thousands, except percentages)
Orthobiologics   $ 44,695     $ 42,891     $ 1,804       4 %
Surgical     2,631       2,751       (120 )     (4 %)
Dermal     878       963       (85 )     (9 %)
Other     3,517       2,248       1,269       56 %
Total   $ 51,721     $ 48,853     $ 2,868       6 %

 

Orthobiologics

 

Our orthobiologics franchise consists of our joint health and orthopedic products. Overall, sales increased 5% and 4% for the three- and six-month periods ended June 30, 2017, respectively, as compared to the same periods in 2016. The growth in the three-month period ended June 30, 2017 was primarily due to an increase in global MONOVISC revenue. Domestically, both ORTHOVISC and MONOVISC unit volumes increased during the three-month period ended June 30, 2017. MONOVISC maintained its strong growth trajectory as end-user demand continued to shift from multi-injection treatments to more convenient single-injection options both domestically and internationally. CINGAL and ORTHOVISC-T, both of which launched internationally during the second half of 2016, also contributed to the growth of orthobiologics revenue during the period. We expect orthobiologics revenue to continue to grow for the remainder of 2017, led by increased MONOVISC revenue in domestic and international markets, including in India, where regulatory approval was achieved in the second quarter of 2017, and Australia, where we expect regulatory approval in the second half of 2017, the commercial availability of CINGAL in Canada and Europe, as well as overall revenue growth from our viscosupplementation products both domestically and internationally.

 

  16  
 

 

Surgical  

 

Our surgical franchise consists of products used to prevent surgical adhesions and to treat ear, nose, and throat (“ENT”) disorders. Sales of our surgical products decreased 7% and 4% for the three- and six-month periods ended June 30, 2017 to $1.3 million and $2.6 million, respectively, as compared to the same periods in 2016. The decrease in surgical product revenue for the three- and six-month periods was primarily due to a decrease in unit sales of our gynecological/anti-adhesion surgical products based on order timing by our distribution partners, which was partially offset by an increase in unit sales to our worldwide ENT commercial partner. We expect surgical product revenue to increase modestly in 2017, as compared to 2016, primarily due to increased worldwide sales of our ENT products .

 

Dermal

 

Our dermal franchise consists of advanced wound care products, which are based on our HYAFF technology, and aesthetic dermal fillers . Our advanced wound care products treat complex skin wounds ranging from burns to diabetic ulcers, with HYALOMATRIX and HYALOFILL as the lead products. For the three- and six-month periods ended June 30, 2017, dermal product sales decreased 22% and 9%, respectively, as compared to the same periods in 2016. This decrease reflects order timing by our distribution partners. We expect dermal revenue to increase in 2017 as compared to 2016 primarily due to increased end-user demand and geographic expansion related to our advanced would care products, particularly in the U.S., European, and Latin American markets.

 

Other  

Other product revenue includes revenues from our ophthalmic and veterinary franchises. Product revenue from each of these franchises increased for the three- and six-month periods ended June 30, 2017 as compared to the same periods in 2016. We expect other revenue to increase in 2017 as compared to 2016, driven primarily by our veterinary product.

 

Licensing, milestone and contract revenue  

 

Licensing, milestone and contract revenue for the three- and six-month periods ended June 30, 2017 was $5.1 million, as compared to $6 thousand and $11 thousand for the same periods in 2016, respectively. Revenue for the quarter ended June 30, 2017 included a $5.0 million milestone payment associated with our U.S. license agreement with Mitek for MONOVISC. The Company fully recognized revenue the milestone payment as a result of MONOVISC achieving $100.0 million in U.S. end-user sales within a consecutive 12-month period ending in June 2017 .

 

Product gross profit and margin

 

Product gross profit for the three- and six-month periods ended June 30, 2017 increased $1.5 million and $2.0 million to $22.0 and $39.3 million, respectively, representing 78% and 77% of product revenue. Product gross profit for the three- and six- months ended June 30, 2016 was $20.5 million and $37.4 million , respectively, or 77% of product revenue for both periods. The increase in product gross margin for the six-month period ended June 30, 2017, as compared to the same period in 2016, was primarily attributable to a more favorable revenue mix offset by certain inventory write-offs as a result of a product component part change during the period. This current product gross margin may not be indicative of the rest of the year due to dynamics such as future revenue mix and production volume variability .

 

Research and development

 

Research and development expenses for the three- and six-month periods ended June 30, 2017 were $4.4 million and $8.7 million, representing 13.3% and 15.3% of total revenue for the respective periods, an increase of $1.7 million and $3.7 million, respectively, as compared to the same periods in 2016. The increase in research and development expenses was primarily due to a higher level of clinical and regulatory activities, including our HYALOFAST and CINGAL phase III clinical studies. Furthermore , we also increased our pre-clinical product development activities with respect to certain product candidates in our research and development pipeline. Research and development spending is expected to increase in 2017 and thereafter, as compared to 2016, as we further develop new products and line extensions and initiate new clinical trials based on our existing technology assets, including CINGAL and HYALOFAST, as well as increase development activities for other products and line extensions in the pipeline.

 

  17  
 

 

Selling, general and administrative

 

Selling, general and administrative (“SG&A”) expenses for the three- and six-month periods ended June 30, 2017 were $5.0 million and $10.0 million, representing 14.9% and 17.7% of total revenue for the periods, an increase of $0.7 million and $1.8 million, respectively, as compared to the same periods in 2016. SG&A expenses increased for the three- and six-month periods ended June 30, 2017 primarily as a result of increases in personnel related costs, external professional fees, and marketing initiatives to support the CINGAL and ORTHOVISC-T international launches. We expect SG&A expenses for 2017 will increase to reflect the support, including the implementation of improved operational and financial technology platforms, required to grow our business both domestically and internationally.

 

Income taxes

 

Provisions for income taxes were $6.4 million and $8.9 million for the three- and six-month periods ended June 30, 2017, based on effective tax rates of 35.9% and 34.7%, respectively.  Provisions for income taxes were $4.9 million and $8.8 million for the three- and six-month periods ended June 30, 2016, based on effective tax rates of 36.3% and 36.2%, respectively. The increase in income taxes for the three- and six-month periods ended June 30, 2017 resulted from increased income before income taxes offset by a net decrease in the effective tax rate as compared to the same period in the prior year. The net decrease in the effective tax rate for the three- and six-month periods ended June 30, 2017, as compared to the same periods in 2016, was primarily due to the increase in the expected research and development and state investment tax credits.  In addition, the Company realized windfall tax benefits related to share-based payments in connection with the adoption of ASU 2016-09 during the period. The amount of excess tax benefits recognized as a discrete period income tax benefit was nominal and $0.3 million for the three- and six-month periods ended June 30, 2017, respectively, which decreased the effective tax rate for the interim period by 0.0% and 1.2%, respectively. Prior to the adoption of ASU 2016-09 excess tax benefits and deficiencies were previously recorded in equity. The amount of excess tax benefits recognized through additional paid-in-capital was $0.1 million and $0.4 million for the three- and six-month periods ended June 30, 2016, respectively.

 

Liquidity and Capital Resources

 

We expect that our requirements for cash to fund operations and capital expenditures will increase as the scope of our operations expands. Historically, we have generated positive cash flow from operations, which together with our available cash and investments have met our cash requirements. Cash, cash equivalents, and investments totaled $142.9 million and $124.8 million at June 30, 2017 and December 31, 2016, respectively. Working capital totaled $179.4 million at June 30, 2017 and $161.6 million at December 31, 2016. We believe that we have adequate financial resources to support our business for at least the next twelve months beyond release of the financial statements.

 

Cash provided by operating activities was $21.7 million for the six-month periods ended June 30, 2017, as compared to cash provided by operating activities of $7.1 million for the same period in 2016. The increase in cash provided by operations for the six-month period ended June 30, 2017, as compared to the same period in 2016, was primarily related to an increase in accounts payable and income taxes payable due to the timing of payments. 

 

Cash used in investing activities was $8.4 million for the six-month period ended June 30, 2017, as compared to cash used in investing activities of $4.6 million for the same period in 2016. The increase in cash used in investing activities was primarily the result of the purchase of investments offset by maturities of investments during the first half of 2017. Furthermore, expenditures for the buildout of our Bedford, Massachusetts facility are declining and the Company expects to be fully completed before the end of 2017 .  

 

Cash provided by financing activities was $0.2 million for the six-month period ended June 30, 2017, as compared to cash used by financing activities totaling $24.1 million for the same period in 2016. The decrease in cash used in financing activities for the six-month period ended June 30, 2017 was primarily attributable to the Fixed Dollar Accelerated Share Repurchase Transaction to repurchase $25.0 million of shares of our common stock in February 2016.

 

Critical Accounting Estimates

 

There were no other significant changes in our critical accounting estimates during the six months ended June 30, 2017 to augment the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

Recent Accounting Pronouncements

 

A discussion of Recent Accounting Pronouncements is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and is updated in Note 3 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

 

  18  
 

 

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 Annual Report on Form 10-K for the year ended December 31, 2016. We had no material changes outside the ordinary course to our contractual obligations reported in our 2016 Annual Report on Form 10-K during the first six months of 2017.

 

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, except for operating leases, 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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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, 2016. There have been no material changes in the first six months of 2017 to our market risks or to our management of such risks.

 

ITEM 4. CONTROLS AND PROCEDURES

 

  (a) Evaluation of disclosure controls and procedures.

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures 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 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 it files or submits 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 changes in our internal control over financial reporting during the three-month period ended June 30, 2017 that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are involved in various legal proceedings arising in the normal course of business. Although the outcomes of these legal proceedings are inherently difficult to predict, we do not expect the resolution of these legal proceedings to have a material adverse effect on our financial position, results of operations, or cash flow. There have been no material changes to the information provided in the section captioned “Part I, Item 3, Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

ITEM 1A. RISK FACTORS

 

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, 2016. 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, 2016, which could materially affect our business, financial condition, or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. 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.

 

  19  
 

 

ITEM 6. EXHIBITS

 

Exhibit No.   Description
       
10.22a   Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan, incorporated herein by reference to Exhibit 99.1 to Form 8-K, filed with SEC on June 19, 2017.
       
10.22b   Form of Notice of Grant of Incentive Stock Option, including Terms and Conditions of Stock Option, granted under Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan, incorporated herein by reference to Exhibit 99.2 to Form 8-K, filed with SEC on June 19, 2017.
       
10.22c   Form of Notice of Grant of Nonqualified Stock Option, including Terms and Conditions of Stock Option, granted under Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan, incorporated herein by reference to Exhibit 99.3 to Form 8-K, filed with SEC on June 19, 2017.
       
10.22d   Form of Notice of Grant of Restricted Stock Award, including Terms and Conditions of Restricted Stock Award, granted under Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan, incorporated herein by reference to Exhibit 99.4 to Form 8-K, filed with SEC on June 19, 2017.
       
10.22e   Form of Notice of Grant of Restricted Stock Unit, including Terms and Conditions of Restricted Stock Unit, granted under Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan, incorporated herein by reference to Exhibit 99.5 to Form 8-K, filed with SEC on June 19, 2017.
       
10.23   Negotiated Settlement Agreement and General Release, dated July 13, 2017, by and between Stephen Mascioli, M.D., MPH and Anika Therapeutics, Inc., incorporated herein by reference to Exhibit 10.1 to Form 8-K, filed with SEC on July 14, 2017.  
     
10.24   Employment Agreement, dated July 27, 2017, by and between Anika Therapeutics, Inc. and Joseph Darling, incorporated herein by reference to Exhibit 10.1 to Form 8-K, filed with SEC on July 27, 2017.
       
(31)   Rule 13a-14(a)/15d-14(a) Certifications.
       
*31.1   Certification of Charles H. Sherwood, Ph.D., pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
*31.2   Certification of Sylvia Cheung pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
(32)   Section 1350 Certifications.
       
**32.1   Certification of Charles H. Sherwood, Ph.D., and Sylvia Cheung, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
(101)   XBRL
       
*101   The following materials from Anika Therapeutics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, as filed with the SEC on July 28, 2017, formatted in XBRL (eXtensible Business Reporting Language), as follows:
       
    i. Condensed Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016 (unaudited)
    ii. Condensed Consolidated Statements of Operations and Comprehensive Income for the Three- and Six-Month Periods Ended June 30, 2017 and June 30, 2016 (unaudited)
    iii. Condensed Consolidated Statements of Cash Flows for the Six-Month Period Ended June 30, 2017 and June 30, 2016 (unaudited)
    iv. Notes to Condensed Consolidated Financial Statements (unaudited)

 

* Filed herewith.
**  Furnished herewith.

 

 

  20  
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    ANIKA THERAPEUTICS, INC.
   
Date: July 28, 2017 By: /s/ SYLVIA CHEUNG
    Sylvia Cheung
    Chief Financial Officer
    (Authorized Officer and Principal Financial Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 

 

Exhibit 31.1

 

CERTIFICATION

 

I, Charles H. Sherwood, certify that:

 

  1.

I have reviewed this report on Form 10-Q for the quarterly period ended June 30, 2017 of Anika Therapeutics, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 28, 2017 /s/ CHARLES H. SHERWOOD
  Charles H. Sherwood, Ph.D.
  Chief Executive Officer
  Principal Executive Officer

Exhibit 31.2

 

CERTIFICATION

 

I, Sylvia Cheung, certify that:

 

  1.

I have reviewed this report on Form 10-Q for the quarterly period ended June 30, 2017 of Anika Therapeutics, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

 Date: July 28, 2017 /s/ SYLVIA CHEUNG
  Sylvia Cheung
  Chief Financial Officer
  Principal Financial Officer

Exhibit 32.1

 

Section 906 Certification

 

The undersigned officers of Anika Therapeutics, Inc. (the “Company”) hereby certify to their knowledge and in their respective capacities that the Company’s quarterly report on Form 10-Q to which this certification is attached (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date: July 28, 2017 /s/ CHARLES H. SHERWOOD
  Charles H. Sherwood, Ph.D.
  Chief Executive Officer
  Principal Executive Officer
 

 

 

Date: July 28, 2017 /s/ SYLVIA CHEUNG
  Sylvia Cheung
  Chief Financial Officer
  Principal Financial Officer

 

This certification shall not be deemed “filed” for any purpose, nor shall it be deemed to be incorporated by reference into any filing, under the Securities Act of 1933, as amended, or the Exchange Act.