anik20201231_10k.htm
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 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K/A

(Amendment No. 1)

 

(Mark One)

 

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

 

For the fiscal year ended December 31, 2020

 

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 001-14027

 

Anika Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

(State or Other Jurisdiction of Incorporation or Organization)

04-3145961

(IRS Employer Identification No.)

 

32 Wiggins Avenue, Bedford, Massachusetts 01730

(Address of Principal Executive Offices) (Zip Code)

 

(781457-9000

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share

ANIK

NASDAQ Global Select Market

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No

 

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 ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

 

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 ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company 

Emerging growth company 

  

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.  ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No

 

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

 

 

 

 

The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2020, the last day of the registrant’s most recently completed second fiscal quarter, was $530,765,794 computed by reference to the closing price of common stock on such date. The registrant does not have any non-voting stock outstanding.

 

At April 20, 2021, there were 14,366,686 shares of the registrant’s common stock outstanding.

 

Documents Incorporated By Reference: None.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ANIKA THERAPEUTICS, INC.

TABLE OF CONTENTS FOR FORM 10-K/A

 

 

 

 

Page

 

 

 

 

 

 

Explanatory Note

4

Part I

 

 

 

Item 1.

Business

5

Part II

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

 

Item 8.

Financial Statements and Supplementary Data

31

 

Item 9A.

Controls and Procedures

71

Part IV

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

75

Signatures

78

 

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

 

Anika, Arthrosurface, Anika Therapeutics, Cingal, Hyaff, Monovisc, Orthovisc, Parcus Medical, Tactoset, Hyvisc and WristMotion are our registered trademarks that appear in this amendment to our Annual Report on Form 10-K/A. For convenience, these trademarks appear in this amendment to our Annual Report on Form 10-K/A without ® and ™ symbols, but that practice does not mean that we will not assert, to the fullest extent under applicable law, our rights to the trademarks. This amendment to our Annual Report on Form 10-K/A also contains trademarks and trade names that are the property of other companies and licensed to us.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPLANATORY NOTE

 

This Amendment No. 1 on Form 10-K/A (this “Amendment”) to the Annual Report on Form 10-K of Anika Therapeutics, Inc. for the fiscal year ended December 31, 2020, initially filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2021 (the “Original Filing”), is being filed principally to correct typographical errors that resulted during the creation of the EDGAR version of the Original Filing. As the result of these errors, the Original Filing failed to include the following, all of which are included in this Amendment:

 

 

The entire paragraph, except for the word “Research”, in the section captioned “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Year ended December 31, 2020 compared to year ended December 31, 2019  Statement of Operations Detail  Research and development.

 

The words “a per share and tax effected basis.” at the end of the first paragraph in the section captioned “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Non-GAAP Financial Measures  Adjusted Net Income (Loss) and Adjusted EPS.”

 

The words “To the Board of Directors and Stockholders of Anika Therapeutics, Inc.” in the beginning of the “Report of Independent Registered Public Accounting Firm” contained within the section captioned “Item 8. Financial Statements and Supplementary Data.”

 

The conformed signature of Deloitte & Touche LLP on the “Report of Independent Registered Public Accounting Firm” contained within the section captioned “Item 9A. Controls and Procedures.” The Company received the manually signed Internal Control Report from Deloitte & Touche prior to filing the Original Filing.

 

In addition, this Amendment is being filed to update the explanation surrounding employees added in 2020 in the third sentence of the third full paragraph of the section captioned “Item 1. Business – Human Capital Management.”

 

This Amendment amends the cover page and includes Items 1, 7, 8, and 9A in their entirety without change from the Original Filing except as described above. In addition, pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, we are including with this Amendment new certifications of our principal executive officer and principal financial officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. Accordingly, Item 15 of Part IV has also been amended to reflect the filing of these new certifications.

 

Except for the foregoing amended information, this Amendment does not amend or update any other information contained in the Original Filing. This Amendment does not reflect events occurring after the date of the filing of the Original Filing or modify or update those disclosures that may be affected by subsequent events. Accordingly, this Amendment should be read in conjunction with the Original Filing and with our other filings with the SEC.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This amended Annual Report on Form 10-K/A 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 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 Annual 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 refer to "Item 1A. Risk Factors" contained in the Original Filing 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 amended Annual Report on Form 10-K/A 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.

 

 

 

4

 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

Founded in 1992, Anika Therapeutics, Inc. is 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 (“OA”) pain management, regenerative solutions, soft tissue repair and bone preserving joint technologies.

 

We have nearly thirty years of global expertise developing, manufacturing and commercializing products based on our hyaluronic acid, or HA, technology platform. HA is a naturally occurring polymer found throughout the body that is vital for proper joint health and tissue function. Our proprietary technologies for modifying the HA molecule allow product properties to be tailored specifically to multiple uses, including enabling longer residence time to support OA pain management and creating a solid form of HA called HYAFF, which is the platform for our regenerative solutions portfolio.

 

In early 2020, we expanded our overall technology platform and significantly enhanced our commercial infrastructure, especially in the United States, through our strategic acquisitions of Parcus Medical, LLC, or Parcus Medical, a sports medicine implant and instrumentation solutions provider focused on sports medicine and soft tissue repair, and Arthrosurface, Inc., or Arthrosurface, a company specializing in less invasive, bone preserving partial and total joint replacement solutions. Through these acquisitions, we have transformed our company. We expanded our addressable market from the over $1 billion global OA pain management market to the over $8 billion joint preservation market (which includes the faster growing sports medicine and extremities segments), improved our commercial capabilities, and expanded our product pipeline and research and development expertise in our target markets.

 

As we look towards the future, our business is positioned to capture value within our target market of joint preservation. We believe our success will be driven by our:

 

 

Decades of experience in HA-based regenerative solutions and early intervention orthopedics combined under new, common management with a strong financial foundation for future investment in meaningful solutions for our customers;

 

Robust network of stakeholders in our target markets to identify evolving unmet patient treatment needs;

 

Prioritized investment in differentiated research and development programs;

 

Expansion of our commercial capabilities globally within joint preservation;

 

Opportunity to pursue strategic inorganic growth opportunities, including potential partnerships and acquisitions, leveraging our strong financial foundation and operational capabilities; and

 

Energized and experienced team focused on strong values, talent, and culture.

 

 

 

5

 

Products

 

Joint Pain Management

 

Our Joint Pain Management product family consists of:

 

 

Monovisc and Orthovisc, our single- and multi-injection, HA-based viscosupplement offerings indicated to provide pain relief from OA conditions. Our Joint Pain Management products are generally administered to patients in an office setting. In the United States, Monovisc and Orthovisc are marketed exclusively by DePuy Synthes Mitek Sports Medicine, part of the Johnson & Johnson Medical Companies, or Mitek, and have been the market leaders, based on combined overall revenue in the viscosupplement market since 2018. Internationally, we market our Joint Pain Management products through a robust and growing worldwide network of commercial distributors.

 

 

Cingal, our novel, third-generation, single-injection OA product consisting of our proprietary cross-linked HA material combined with a steroid, is designed to provide both short- and long-term pain relief. Cingal is CE Mark approved and has been sold outside the United States in over 35 countries through our network of distributors for several years. In the United States, Cingal is a pipeline product under clinical development; for additional information please see the section captioned “Item 1. Business. Research and Development.”

 

 

Hyvisc, our high molecular weight injectable HA veterinary product for the treatment of joint dysfunction in horses due to non-infectious synovitis associated with equine OA. Hyvisc is distributed by Boehringer Ingelheim Vetmedica, Inc., or Boehringer, in the United States.

 

Joint Preservation and Restoration

 

Our Joint Preservation and Restoration product family consists of: 

 

 

Bone Preserving Joint Technologies. Our portfolio of more than 150 bone preserving joint technologies, including partial joint replacement, joint resurfacing, and minimally invasive and bone sparing implants, is designed to treat upper and lower extremity orthopedic conditions caused by trauma, injury and arthritic disease. These products span multiple joints including the shoulder, foot/ankle, wrist, knee and hip and are generally intended to mimic a patient’s natural anatomy to the extent feasible. These products are often used to treat patients with OA progression beyond where our Joint Pain Management products can allow them to retain an active lifestyle and early surgical intervention becomes preferable. We commercialize these products in the United States and utilize our distributor network for sales in certain international markets.

 

 

Soft Tissue Repair. Our line of soft tissue repair solutions is used by surgeons to repair and reconstruct damaged ligaments and tendons resulting from sports injuries, trauma and disease. These more traditional sports medicine solutions include screws, sutures, suture anchors, and other surgical systems that facilitate surgical procedures on the shoulder, knee, hip, upper and lower extremities, and other soft tissues. We commercialize these products in the United States and utilize our distributor network for sales in over 60 international markets.

 

 

Regenerative Solutions. Our portfolio of orthopedic regenerative solutions based on our proprietary HA and Hyaff technologies, which is a solid form of HA. These products include Tactoset, an HA-enhanced injectable bone repair therapy designed to treat insufficiency fractures that we commercialize only in the United States, and Hyalofast, a biodegradable support for human bone marrow mesenchymal stem cells used for cartilage regeneration and as an adjunct for microfracture surgery. Hyalofast is CE Mark approved and currently available in Europe, South America, Asia, and certain other international markets. In the United States, Hyalofast is a pipeline product under clinical development; for additional information please see the section captioned “Item 1. Business. Research and Development.”

     

 

6

 

Other

 

Our Other product family consists of legacy HA-based products that do not fit into one of our other primary product categories. These products include, Hyalobarrier, an anti-adhesion barrier indicated for use after abdomino-pelvic surgeries, and Hyalomatrix, which is used for the treatment of complex wounds such as burns and ulcers, products used in connection with the treatment of ears, nose and throat disorders, and ophthalmic products, including injectable, high molecular weight HA products used as viscoelastic agents in ophthalmic surgical procedures such as cataract extraction and intraocular lens implantation.

 

Sales Channels

 

A substantial majority of our products are used by clinicians and surgeons in one of two environments: office-based procedures usually focused on injections, or surgical settings, including hospital operating rooms and ambulatory surgery centers, or ASCs. These settings typically require different commercial approaches and have distinct call points, which requires diversity in our sales approach. For instance, our Joint Pain Management family and certain products in our Other category are almost entirely utilized in an office-based setting while our Joint Preservation and Restoration products are almost exclusively consumed in hospital operating rooms or ASCs.

 

As a result of these distinctions, we employ multiple sales models in the United States to ensure that we are meeting the needs of our customers and other healthcare system stakeholders. For many years, we have maintained a mutually beneficial commercial partnership with Mitek, which sells Orthovisc and Monovisc throughout the United States. We also have other U.S. commercial partnerships for certain other products in our Joint Pain Management and Other product families. Under these commercial partnerships, we sell our products directly to our partners, which perform the vast majority of the downstream sales and marketing activities to customers and end-users. In addition to a transfer price, we may also structure our arrangements to receive a royalty on end user sales.

 

Since 2019, and with our expanded commercial infrastructure as a result of the Parcus Medical and Arthrosurface acquisitions, we have sold our Joint Preservation and Restoration family directly to customers, including hospitals and ASCs, through our direct sales representatives and large network of independent third party distributors. Within this framework, we employ selling models that seek to maximize the benefit for our company and our customers, including contracts with group purchasing organizations and certain fixed-price delivery models. During 2020, we completed the integration of our U.S. commercial organization including effecting cross training to sell the consolidated Joint Preservation and Restoration product portfolio.

 

For business outside of the United States, we market and sell our products using a worldwide network of commercial partners to provide a solid foundation for revenue growth and territorial expansion. Our relationships with these partners are generally structured such that we sell our products to these partners directly while they, with global support from our team, perform the in-country sales and marketing activities to drive growth and adoption locally. We expect to generally maintain this model for the foreseeable future, while also selectively evaluating other options and being opportunistic about adopting other models, including direct sales, in certain jurisdictions.

 

We believe that our overall sales approach provides our business with a strong base to drive revenue growth as we continue to grow and scale our commercial infrastructure while retaining the flexibility in certain circumstances to enter into strategic arrangements to take advantage of the benefits certain other organizations have established for themselves. We will continue to focus on expanding our own commercial capabilities, including with respect to market access, innovative sales and delivery models, and improved logistics management.

 

Manufacturing

 

We manufacture all of our HA-based products, including all of our Joint Pain Management products and certain additional products, at our facility in Bedford, Massachusetts, where we have developed significant know-how around procedures such as homogenized mixing and filling of highly-viscous liquids and manipulation of solid HA into scaffolds or other presentations. We have a substantial manufacturing presence at our facility in Sarasota, Florida, and we engage third-party organizations as contract manufacturers for a number of our products including our bone preserving joint technologies.

 

7

 

The raw materials necessary to manufacture our products are generally available from multiple sources. However, we rely on a small number of suppliers for certain key raw materials and a small number of suppliers for certain other materials required for the manufacturing and delivery of these products.

 

Research and Development

 

Our research and development efforts primarily consist of the development of new medical applications for our technology platforms, the development of intellectual property with respect to our technology platforms, the management of clinical trials for certain product candidates, the preparation and processing of applications for regulatory clearances and approvals, and process development and scale-up manufacturing activities for our existing and new product development initiatives. For 2020, 2019, and 2018, research and development expenses were $23.4 million, $16.7 million and $18.2 million respectively. The increase in 2020 was primarily due to preparation activities and initial execution related to the clinical studies in the United States for Cingal and Hyalofast, certain European post-market clinical studies, and activities associated with new product development in our research and development pipeline, including the acquisitions of Arthrosurface and Parcus Medical in early 2020. We anticipate that we will continue to commit significant resources to research and development activities, including in relation to new product development, pre-clinical activities and clinical trials.

 

Our new product development efforts focus on products in four large and growing orthopedic markets to drive long-term growth: OA pain management, regenerative solutions, soft tissue repair and bone preserving joint technologies. In order to better inform and target our research and development investment, we routinely interact with key external stakeholders to leverage customer and patient insights in our development process that help ensure we bring needed solutions to the market. In the near term, our general new product development will be focused on enhancements to existing products, new soft tissue fixation and extremities products like our WristMotion product that recently achieved 510(k) clearance from the U.S. Food and Drug Administration, or FDA, and clinical development to enable us to commercialize in the U.S. market our Cingal and Hyalofast products, which are currently sold only outside the United States. As we move forward, we plan to continue to invest in novel and meaningful products for our target markets based on our core capabilities, including our regenerative HA technology platform and manufacturing expertise.

 

Our development focus for OA pain management will continue to be on bringing Cingal, our third-generation, single-injection viscosupplement product, to the U.S. market. While we have conducted previous clinical trials for Cingal, including a trial that supported CE Mark approval for Cingal, the FDA has indicated an additional Phase III trial is necessary to support U.S. approval. In 2020, we initiated a pilot study to confirm our trial design to increase our probability of success in a Phase III trial and generate data that ultimately will be needed to support FDA approval. Several trial sites were activated during 2020, and the first patient was enrolled in the pilot study in September 2020. However, as a result of the COVID-19 pandemic, we continue to face uncertainty related to the ultimate timing of this Cingal pilot study due to COVID-19-related enrollment challenges. Given the evolving environment, we will continue to update clinical trial timelines as we have more visibility with respect to the length and regional impacts of the COVID-19 pandemic. For additional information on the impact of the COVID-19 pandemic on our Cingal pilot study, please refer to the section captioned “Item 1A. Risk Factors. Risks related to the COVID-19 Pandemic. The COVID-19 pandemic could adversely impact our development activities, preclinical studies and clinical trials, which could significantly impair our long-term business plans and operating results.

 

Development for our Joint Preservation and Restoration family is focused in several areas. We continue to progress the ongoing clinical trial to support approval in the United States for Hyalofast, our single step cartilage repair therapy, currently sold only outside the United States. We are actively pursuing multiple solutions to accelerate patient enrollment, including initiating sites in Mexico, Indonesia, and the Philippines which has been delayed due to COVID-19. We are also focused on the development of additional solutions and line extensions for our soft tissue repair and bone preserving joint technologies business, largely within the faster-growing extremities segments. These include continued progress on a therapy targeted at rotator cuff repair utilizing our proprietary solid HA technology, as well as other programs that leverage our HA expertise to augment or improve our current offerings.

 

8

 

Intellectual Property

 

We seek patent and trademark protection for our key technologies, products and product improvements, both in the U.S. and in select foreign countries. When determined appropriate, we enforce and plan to enforce and defend our patent and trademark rights. While we rely on our patent and trademark portfolio to provide us with competitive advantages as it relates to our existing and future product lines, it is not our sole source of protection. We also rely upon trade secrets and continuing technological innovations to develop and maintain our competitive position.

 

Governmental Regulation

 

The clinical development, manufacturing, and marketing of our products are subject to governmental regulation in the United States, the European Union, and other territories worldwide. Various statutes, regulations and interpretations thereof, directives, and guidelines, including the Food, Drug, and Cosmetic Act in the United States, govern the development, design, non-clinical and clinical research, testing, manufacture, safety, efficacy, labeling, packaging, storage, record keeping, premarket clearance or approval, adverse event reporting, advertising, and promotion of our products. Product development and approval within these various regulatory frameworks can take a number of years and generally involves the expenditure of substantial resources. Pharmaceutical and medical device manufacturers are also inspected regularly by the FDA and other applicable regulatory bodies.

 

Medical products regulated by the FDA are generally classified as drugs, biologics, or medical devices, and the current classification standards for our current or future products may be altered over time. Drugs and biologic products undergo rigorous preclinical testing prior to beginning clinical trials. Clinical trials for new drugs or biologic products include Phase I trials in healthy volunteers to understand safety, dosage tolerance, and pharmacokinetics, Phase II trials in a limited patient population to identify initial efficacy and side effects, and Phase III pivotal trials to statistically evaluate the safety and efficacy of the product. Medical devices intended for human use are classified into three categories (Class I, II or III) on the basis of the controls deemed reasonably necessary by the FDA to assure their safety and effectiveness. Class II devices are cleared for marketing under the pre-market notification 510(k) regulatory pathway, which may include clinical testing. Class III devices require pre-market approval based on valid scientific evidence of safety and effectiveness, including evidence elicited through appropriate clinical testing. The failure to adequately demonstrate the quality, safety, and efficacy of a product under development can delay or prevent regulatory approval of the product. In order to gain marketing approval, we must submit to the relevant regulatory authority for review information on the quality aspects of the product as well as the non-clinical and clinical data. The FDA undertakes this review in the United States.

 

In the European Union, medical devices must be CE Marked in order to be marketed. CE marking a device involves working with a Notified Body, and in some cases a Competent Authority, to demonstrate that the device meets all applicable requirements of the Medical Devices Directive and that the Quality Management System is compliant. Europe’s Medical Device Directive, or MDD, is being replaced by the European Medical Device Regulation, or MDR, enacted in 2017, and due for implementation in May 2021. MDR requirements will phase in on a product-by-product basis as certifications under MDD lapse and will require all products to undergo review and approval under these new regulations, which will generally require increased levels of clinical support as compared to MDD requirements. Drug approval in the European Union follows one of several possible processes: (i) a centralized procedure involving members of the European Medicines Agency’s Committee for Medicinal Products for Human Use; (ii) a “mutual recognition procedure” in which an individual country's regulatory agency approves the product followed by “mutual recognition” of this approval by regulatory agencies of other countries; or (iii) a decentralized procedure in which the approval is sought through the regulatory agencies of multiple countries at the same time.

 

Approval timelines can range from several months to several years, or applications can be denied entirely. Product or product component classifications as drugs, biologics, or medical devices may change over time due to new regulations or augmented interpretation of data or current regulations. The approval process can be affected by a number of factors. For example, additional studies or clinical trials may be requested during the review, which may delay marketing approval and involve unbudgeted costs. As a condition of approval, the regulatory agency may require post-marketing surveillance to monitor for adverse effects, and may require other additional studies, as it deems appropriate. After approval for an initial indication, further clinical studies are generally necessary to gain approval for any additional indications. The terms of any approval, including labeling content, may be more restrictive than expected and could affect the marketability of a product.

   

9

 

The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that we failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, including, without limitation, issuing an FDA Form 483 notice of inspectional observations or a warning letter, imposing civil money penalties, suspending or delaying issuance of approvals, requiring product recall, imposing a total or partial shutdown of production, withdrawal of approvals or clearances already granted, pursuing product seizures, consent decrees or other injunctive relief, or criminal prosecution through the Department of Justice. The FDA can also require us to repair, replace, or refund the cost of products that we manufactured or distributed. Outside the United States, regulatory agencies may exert a range of similar powers.

 

We are subject to various U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback, false claims, and transparency reporting laws. Similar review and regulation of advertising and marketing practices exists in the other geographic areas where we operate.

  

We are also subject to various laws and regulations concerning data privacy in the United States, Europe, and elsewhere, including the General Data Protection Regulation (“GDPR”) in the European Union. These regulations impose several requirements on the processing, administration, security, and confidentiality of personal data and empower enforcement agencies to impose large penalties for noncompliance.

 

Environmental Laws

 

We believe that we are in compliance with all foreign, federal, state, and local environmental regulations with respect to our manufacturing facilities. The cost of ongoing compliance with such regulations does not have a material effect on our operations. 

 

Competition

 

We compete with many companies including large pharmaceutical firms and large and specialized medical device companies across our product lines. For our Joint Pain Management products, our principal competitors include Sanofi Genzyme, Zimmer Biomet, Inc., Bioventus Inc., and Ferring Pharmaceuticals, as well as other companies that are commercializing or developing competitive products. Our key competitors for our Joint Preservation and Restoration products include Arthrex, Inc., the DePuy Synthes Companies of Johnson & Johnson, Smith & Nephew PLC., Stryker Corporation, and Zimmer Biomet, Inc., as well as certain smaller organizations that focus on subsets of the larger industry. Many of these companies have substantially greater financial resources, larger research and development staffs, more extensive marketing and manufacturing organizations, and more experience in the regulatory processes than we have. We also compete with academic institutions, government agencies, and other research organizations that may be involved in the research and development and commercialization of products. Many of our competitors also compete against us in securing relationships with collaborators for their research and development and commercialization programs.

 

We compete with other market participants primarily on the efficacy of our products, our products’ reputation for safety, and the breadth of our overall product portfolio. Other factors that impact competition in our industry are the timing and scope of regulatory approvals, the availability of raw material and finished product supply, marketing and sales capability, reimbursement coverage, product pricing, and patent protection. Some of the principal factors that may affect our ability to compete in our target markets include:

 

 

The quality and breadth of our continued development of our product portfolio;

 

 

Our ability to complete successful clinical studies and obtain FDA marketing and foreign regulatory approvals prior to our competitors;

 

10

 

 

Our ability to continue to build our commercial infrastructure, integrate our sales channels and execute our sales strategies;

 

 

 

 

 

 

The execution by our key partners of their commercial strategies for our products and our ability to manage our relationships with those key partners;

 

 

 

Our ability to recruit and retain skilled employees; and

 

 

The availability of capital resources to fund strategic activities related to the significant expansion of our business or product portfolio, including through acquisitions of third parties or certain assets.

 

 We are aware of a number of companies that are developing and/or marketing competitive products. In some cases, competitors have already obtained product approvals, submitted applications for approval, or commenced human clinical studies, either in the United States or in certain foreign countries. All products face substantial competition. There is a risk that we will be unable to compete effectively against our current or future competitors. Additionally, legislation and regulation aimed at curbing rising healthcare costs has resulted in a consolidation trend in the healthcare industry to create larger companies, including hospitals, with greater market power. In turn, this has led to greater and more intense competition in the provision of products and services to market participants. Important market makers, like group purchasing organizations and integrated delivery networks, have increased their negotiating leverage, and if these market makers demand significant price concessions or if we are excluded as a supplier by these market makers, our product revenue could be adversely impacted.

 

Seasonality

 

Our business is generally not seasonal in nature due to the nature of our product mix and sales channels and strategies.

 

Human Capital Management

 

We believe that creating a diverse, talented, and inclusive workplace is a central aspect to our culture, employee engagement, innovation, operational excellence and overall performance. In turn, this culture and drive for performance is an important factor in our ability to attract and retain qualified employees and key talent. Our culture is centered around our fundamental values of:

 

 

People: we engage and invest in each other in a community that values diversity and inclusion.

 

 

Innovation: we are agile and entrepreneurial in developing and delivering meaningful solutions to our healthcare stakeholders within our target markets.

 

 

Quality: we strive for the highest quality and compliance in everything we do.

 

 

Teamwork: we operate with mutual respect and trust and are collaborative as we grow together.

 

 

Integrity: we live up to our promises and do the right thing, every day.

 

 

Accountability: we are empowered and accountable to deliver results and value to all of our stakeholders.

 

Our industry requires complex processes for product development and commercialization, each of which requires deep expertise and experience across a broad array of disciplines. Medical device companies therefore compete for a limited number of qualified applicants to fill specialized positions, which requires competitive compensation and benefits packages and an attractive culture, among other things.

 

As of December 31, 2020, we employed 277 fulltime employees at four physical facilities primarily located in Bedford, Massachusetts; Franklin, Massachusetts; Sarasota, Florida; and Padova, Italy. The Franklin and Sarasota sites were added in 2020 as a result of acquisitions of Arthrosurface and Parcus Medical, respectively. We grew our employee base by 123 people in 2020, 112 of whom were added as a direct result of the companies we acquired. Twenty-five of our employees are located outside the United States.

 

11

 

We expect to continue to add employees in 2021 and beyond as we grow our business. To attract and retain qualified employees and key talent, we offer total rewards packages to every employee consisting of base salary, a potential cash bonus based on individual and company performance, and a comprehensive benefit package, as well as equity compensation for certain employees based on various criteria including their level within the company. Bonus opportunity and equity compensation increase as a percentage of total compensation based on level of responsibility. A large number of our employees have obtained advanced degrees in their professions. We support our employees’ further development with individualized development plans, mentoring, coaching, group training, conference attendance and financial support, including tuition reimbursement.

 

We believe that employees understanding how their work contributes to our overall strategy and performance is key to our success. In order to communicate with respect to these important topics in manners that are engaging to our team, we utilize a variety of channels, including all employee town hall meetings with senior management, regular email updates from our chief executive officer and other key members of the executive team, and employee engagement surveys.

 

As a result of the COVID-19 pandemic, we have augmented certain of our normal business practices to ensure that we promote health and safety for our employees. We have established safety policies and protocols, and we regularly update our employees with respect to any changes. We transitioned much of our administrative workforce to work remotely in order to prioritize the health of those who must be onsite to perform their jobs, including our manufacturing staff, and we have adjusted attendance policies to encourage those who may be ill to stay home. We have provided an abundance of personal protective equipment and cleaning supplies. We require masks to be worn in our facilities and have prohibited all non-essential domestic and international travel for all employees. We have also provided general information updates and support for our employees to ensure that they have resources and information to protect their health and that of those around them, including their families and co-workers.

 

Product Liability

 

The testing, marketing, and sale of human health care products entail an inherent risk of allegations of product liability, and we cannot assure that substantial product liability claims will not be asserted against us. Although we have not received any material product liability claims to date, we cannot assure that if material claims arise in the future, our insurance will be adequate to cover all situations. Moreover, we cannot assure that such insurance, or additional insurance, if required, will be available in the future or, if available, will be available on commercially reasonable terms. Any product liability claim, if successful, could have a material adverse effect on our business, financial condition, and results of operations.

 

Available Information

 

We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

 

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and other information, including amendments and exhibits to such reports, filed or furnished pursuant to the Securities Exchange Act of 1934 are available free of charge in the “SEC Filings” section of our website located at http://www.anika.com, as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. The information on our website is not part of this Annual Report on Form 10-K.

 

12

 

PART II

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following section contains statements that are not statements of historical fact and are forward-looking statements within the meaning of the federal securities laws. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievement to differ materially from anticipated results, performance, or achievement, expressed or implied in such forward-looking statements. These statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties. We discuss many of these risks and uncertainties at the beginning of this Annual Report on Form 10-K and under the sections captioned “Business” and “Risk Factors.” The following discussion should also be read in conjunction with the consolidated financial statements and the Notes thereto appearing elsewhere in this Annual Report on Form 10-K.

 

 

 

 

 

 

13

 

Management Overview

 

Founded in 1992, Anika Therapeutics, Inc. is 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 (“OA”) pain management, regenerative solutions, soft tissue repair and bone preserving joint technologies.

 

We have nearly thirty years of global expertise developing, manufacturing and commercializing products based on our hyaluronic acid, or HA, technology platform. HA is a naturally occurring polymer found throughout the body that is vital for proper joint health and tissue function. Our proprietary technologies for modifying the HA molecule allow product properties to be tailored specifically to multiple uses, including enabling longer residence time to support OA pain management and creating a solid form of HA called Hyaff, which is the platform for our regenerative solutions portfolio.

 

In early 2020, we expanded our overall technology platform and significantly enhanced our commercial infrastructure, especially in the United States, through our strategic acquisitions of Parcus Medical, LLC, or Parcus Medical, a sports medicine implant and instrumentation solutions provider focused on sports medicine and soft tissue repair, and Arthrosurface, Inc., or Arthrosurface, a company specializing in less invasive, bone preserving partial and total joint replacement solutions. Through these acquisitions, we have transformed our company. We have expanded our addressable market from the over $1 billion global OA pain management market to the over $8 billion joint preservation market (which includes the faster growing sports medicine and extremities segments), improved our commercial capabilities, and expanded our product pipeline and research and development expertise in our target markets.

 

As we look towards the future, our business is positioned to capture value within our target market of joint preservation. We believe our success will be driven by our:

 

 

Decades of experience in HA-based regenerative solutions and early intervention orthopedics combined under new, common management in 2020 with a strong financial foundation for future investment in meaningful solutions for our customers;

 

Robust network of stakeholders in our target markets to identify evolving unmet patient treatment needs;

 

Prioritized investment in differentiated research and development programs;

 

Expansion of our commercial capabilities globally within joint preservation;

 

Opportunity to pursue strategic inorganic growth opportunities, including potential partnerships and acquisitions, leveraging our strong financial foundation and operational capabilities; and

 

Energized and experienced team focused on strong values, talent, and culture.

 

For additional information regarding our business, please refer to “Item 1. Business” of this Annual Report on Form 10-K.

 

Key Developments during the Year Ended December 31, 2020

 

 

We completed the acquisitions of Arthrosurface and Parcus Medical thereby substantially expanding our product portfolio, commercial capabilities, and addressable market.

 

We strengthened our executive team and our Board of Directors through the appointment of multiple industry veterans, including Cheryl R. Blanchard, Ph.D. as our President and Chief Executive Officer and Michael Levitz as our Executive Vice President, Chief Financial Officer, and Treasurer.

 

We dramatically enhanced our commercial infrastructure by adding over 30 direct sales representatives in the U.S. market trained to sell our entire Joint Preservation and Restoration family of products and by augmenting our already-strong network of distributors.

 

14

 

 

We completed the launch activities for seven Joint Preservation and Restoration surgical devices and instruments. The new products enable procedures ranging from rotator cuff repair to arthroscopic knee repairs and treating arthritis damage in the hand and wrist.

 

We commenced our Cingal Pilot Study and enrolled the first patients in the study. We continued patient enrollment in our Hyalofast clinical trial.

 

We managed the COVID-19 pandemic environment without interruption to supply to our customers. As a precaution, we drew down $50 million from our credit facility in April 2020 and then repaid the entire $50 million prior to December 31, 2020 as we delivered positive cash flows during the year.

 

COVID-19 Pandemic

 

As discussed more fully in the section captioned “Results of Operations – Year ended December 31, 2020 compared to year ended December 31, 2019below, the COVID-19 pandemic impacted our full year financial condition and operations. In March 2020, the World Health Organization declared the spread of the COVID-19 virus a pandemic. This pandemic has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. There has been significant volatility in our results on a quarterly basis due to the worldwide cancellation or delay of elective procedures as well as the impact on timelines associated with certain clinical studies. While elective procedure volume had a limited recovery after the initial pandemic impacts seen in the first and early parts of second quarter of 2020 due to the easing of COVID-19 related restrictions in certain jurisdictions, areas of the United States and other countries have recently seen and continue to see fluctuating infection rates, which makes future results difficult to predict despite recent advances in vaccinations for certain parts of the population. Please see the section captioned “Part I, Item 1A. Risk Factors” of this Annual Report on Form 10-K for additional information with respect to the risks faced by our business in light of the COVID-19 pandemic. In this time of uncertainty as a result of the COVID-19 pandemic, we have taken many precautions to provide a safe work environment for our employees and customers, including the establishment and implementation a work from home policy where possible. We may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities. To date, we do not anticipate disruption to our ability to supply products to our customers. Our commercial day-to-day operations have been impacted due to the worldwide cancellation or delay of elective procedures, and timelines associated with certain clinical studies and research and development programs have been delayed. While the impact has been limited to these items to date, we caution that there continues to be a possibility for potential future implementation of certain additional restrictions in certain jurisdictions. The impact of these restrictions on our operations, if implemented, is currently unknown but could be significant.

 

 Product Categories

 

Joint Pain Management

 

Our Joint Pain Management product family consists of Monovisc, Orthovisc, Cingal, and Hyvisc our injectable, HA-based viscosupplement offerings that are indicated to provide pain relief from osteoarthritis conditions.

 

Joint Preservation and Restoration

 

Our Joint Preservation and Restoration product family consists of: (a) our portfolio of over 150 bone preserving joint technology products, including partial joint replacement, joint resurfacing, and minimally invasive and bone sparing implants, designed to treat upper and lower extremity orthopedic conditions caused by trauma, injury and arthritic disease; (b) our line of soft tissue repair solutions used to repair and reconstruct damaged ligaments and tendons due to sports injuries, trauma and disease; and (c) several orthopedic regenerative solutions products, including Hyalofast and Tactoset.

 

15

 

Other

 

Our Other product family consists of legacy HA-based products that do not fit into one of our other primary product categories, including our adhesion barrier product, advanced wound care products, our ear, nose and throat products, and our ophthalmic products.

 

For additional information with respect to our products, including information related to how they are sold and new product development initiatives, please see the sections captioned “Products,” “Sales Channels,” and “Research and Development” contained within “Part I. Item I. Business” of this Annual Report on Form 10-K.

 

Results of Operations

 

Year ended December 31, 2020 compared to year ended December 31, 2019

 

Statement of Operations Detail

 

    Year Ended December 31,            
   

2020

   

2019

   

$ change

   

% change

 
    (in thousands, except percentages)

Product revenue

  $ 130,457     $ 114,512     $ 15,945       14 %

Licensing, milestone and contract revenue

    -       98       (98 )     (100 %)

Total revenue

    130,457       114,610       15,847       14 %

Cost of revenue

    61,431       28,747       32,684       114 %

Gross Profit

    69,026       85,863       (16,837 )     (20 %)
Gross margin     53 %     75 %                

Operating expenses:

                               

Research & development

    23,431       16,665       6,766       41 %

Selling, general & administrative

    60,063       34,950       25,113       72 %

Goodwill impairment

    42,520       -       42,520       -  

Change in fair value of contingent consideration

    (28,666 )     -       (28,666 )     -  

Total operating expenses

    97,348       51,615       45,733       89 %

Income (loss) from operations

    (28,322 )     34,248       (62,570 )     (183 %)

Interest and other income (expense), net

    (302 )     1,873       (2,175 )     (116 %)

Income (loss) before income taxes

    (28,624 )     36,121       (64,745 )     (179 %)

Provision for (benefit from) income taxes

    (4,642 )     8,928       (13,570 )     (152 %)

Net income (loss)

  $ (23,982 )   $ 27,193     $ (51,175 )     (188 %)

 

 

16

 

Total and Product revenue

 

Total and Product revenue for the year ended December 31, 2020 was $130.5 million, an increase of $15.9 million, or 14%, compared to prior year. This increase was primarily driven by growth in our Joint Preservation and Restoration product family, as a result of our acquisitions of Parcus Medical and Arthrosurface in early 2020, offset by a decrease in revenue from our Joint Pain Management products due to the impact of the COVID-19 pandemic on elective procedure volumes worldwide. The following table presents product revenue by product family for fiscal years 2020 and 2019 (dollars in thousands):

 

    Years Ended December 31,            
   

2020

   

2019

   

$ change

   

% change

 
                                 

Joint Pain Management

  $ 83,029     $ 103,466     $ (20,437 )     (20 %)

Joint Preservation and Restoration

    39,368       2,070       37,298       1801 %

Other

    8,060       8,976       (916 )     (-10 %)
    $ 130,457     $ 114,512     $ 15,945       14 %

 

Revenue from our Joint Pain Management product family decreased, primarily due to the worldwide impact of the COVID-19 pandemic on elective procedure volumes. Revenue from our Joint Preservation and Restoration products increased primarily from the addition of revenue from the Arthrosurface and Parcus Medical product portfolios following their early 2020 acquisition by us, offset in part by the impact of the COVID-19 pandemic on elective surgery procedure volumes worldwide. Revenue from our Other product family decreased due to the impact of the COVID-19 pandemic on procedure volumes worldwide.

 

Gross profit and margin

 

 

Gross profit for the year ended December 31, 2020 was $69.0 million, or gross margin of 53%, as compared with $85.9 million, or gross margin of 75%, for the year ended December 31, 2019. The decrease in gross margin was primarily due to the inventory step-up associated with the Arthrosurface and Parcus Medical acquisitions, as well as acquisition-related amortization expenses, which together increased cost of revenue by $16.9 million, or 13 points of gross margin, for the year ended December 31, 2020. Gross margin also decreased due to lower volumes as a result of the COVID-19 pandemic. In addition, during the year ended December 31, 2020, gross profit decreased due to a non-cash inventory impairment charge of $1.9 million following our determination not to pursue CE Mark renewals for certain of our legacy HA-based products primarily in the Other product family. 

 

Research and development

 

Research and development expenses for the year ended December 31, 2020 were $23.4 million, an increase of $6.8 million, or 41%, as compared to the prior year, primarily due to activities associated with new product development in our research and development pipeline, including those related to Parcus Medical and Arthrosurface following their acquisition in the first quarter of 2020, as well as preparation and initial execution activities for the Cingal Pilot study and certain European post-market clinical studies to support CE Mark approvals for our products, Hyalofast clinical study activities, and In-Process Research and Development (“IPR&D”) impairment charges related to Hyalonect and Hyalobone projects.

 

For additional information on our research and development activities, please see the section captioned “Part I. Item 1. Business. Research and Development” in this Annual Report on Form 10-K.

 

Selling, general and administrative

 

Selling, general and administrative, or SG&A, expenses for the year ended December 31, 2020 were $60.1 million, an increase of $25.1 million, or 72%, as compared to the prior year. The increase was primarily related to expenses associated with operating Parcus Medical and Arthrosurface following their acquisition in the first quarter of 2020, including incremental expenses to integrate our commercial infrastructure, as well as incentive compensation, partially offset by a decrease in stock compensation expense due to the forfeiture of unvested equity awards. 

 

17

 

Goodwill Impairment Charge

 

We assess goodwill for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. U.S. government policy responses to the COVID-19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of domestic elective surgical procedures. As a result of these events during the first quarter of 2020, we performed a quantitative assessment of goodwill impairment related to the Parcus Medical and Arthrosurface reporting unit as of March 31, 2020. The results of these interim impairment tests indicated that the estimated fair value of this reporting unit was less than its carrying value. Consequently, a non-cash goodwill impairment charge of $18.1 million was recorded in the quarter ended March 31, 2020. The decline in fair value was primarily due to decreases in immediate term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures which directly impact the Parcus Medical and Arthrosurface reporting unit. We also performed our annual impairment testing related to the Parcus Medical and Arthrosurface reporting unit in the fourth quarter of 2020. The results of the annual impairment test indicated that the estimated fair value of the reporting unit was less than its carrying value. This was primarily due to a decline in projected net cash flows as a result of the continued impact of COVID-19 on revenue and related cash flows, the expectation that the economic recovery will take longer than expected to materialize, and additional projected investment to support future growth. Consequently, a non-cash goodwill impairment charge was recorded in the amount of $24.4 million during the fourth quarter of 2020. The total non-cash goodwill impairment charge with respect to the reporting unit amounted to $42.5 million for the year ended December 31, 2020.

 

Contingent Consideration Fair Value Change

 

In the year ended December 31, 2020, we recorded a $28.7 million net benefit related to the change in fair value of our contingent consideration liabilities incurred as a result of the acquisition of Parcus Medical and Arthrosurface in the first quarter of 2020. The liability for contingent consideration is remeasured at each reporting period until the contingency is resolved. The decrease in fair value of the contingent consideration was largely due to a decrease in revenue projections related primarily to the COVID-19 pandemic. On October 15, 2020, we received FDA clearance for the WristMotion Total Arthroplasty System, triggering a $5 million regulatory-based milestone payment per the Arthrosurface merger agreement.

 

Income taxes

 

The benefit from income taxes was $4.6 million for the twelve-month period ended December 31, 2020, based on an effective tax rate of 16.2%. The provision for income taxes was $8.9 million for the twelve-month period ended December 31, 2019, based on an effective tax rate of 24.7%. The net decrease in the effective tax rate benefit for the year ended December 31, 2020, as compared to the prior year, was primarily due to the $4.8 million tax expense on the impairment of non-tax deductible goodwill, partially offset by the $1.9 million tax benefit on the decrease in the fair value of the contingent consideration.

 

Net income (loss)

 

For the year ended December 31, 2020, net loss was $23.9 million, or $1.69 net loss per diluted share, compared to net income of $27.2 million, or $1.89 net income per diluted share, for the prior year. The decrease in net income and diluted earnings per share was primarily a result of the increased expenses associated with acquisitions of Parcus Medical and Arthrosurface previously discussed, in addition to the unfavorable impact on sales and gross profit from the COVID-19 pandemic.

 

Non-GAAP Financial Measures

 

We present certain information with respect to adjusted EBITDA, adjusted net income, and adjusted earnings per share, 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.

 

18

 

We have presented adjusted EBITDA, adjusted net income (loss), and adjusted earnings per share 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 the expenses eliminated in calculating these measures can provide a useful tool for period-to-period comparisons of our core operating performance. Accordingly, we believe that these measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making.

 

Adjusted EBITDA

 

We present information below with respect to adjusted EBITDA, which we define as our net income (loss) excluding interest and other income, net, income tax benefit (expense), depreciation and amortization, stock-based compensation, product rationalization, and acquisition related expenses. In light of the COVID-19 pandemic, we have also excluded the impacts of goodwill impairment charges and changes in the fair value of contingent consideration associated with our acquisition transactions in early 2020.

 

Adjusted EBITDA is not prepared in accordance with 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 income (loss), 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 stock-based compensation expense from adjusted EBITDA although (a) it has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our 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;

 

 

we exclude acquisition related expenses, including transaction costs and other related expenses, amortization and depreciation of acquired assets, and the impact of inventory fair-value step up on cost of revenue;

 

 

we exclude certain impairment charges, including impairment related to In-Process Research and Development, or IPR&D, assets, certain product rationalization charges related to non-core legacy assets as a result of managing our financial position in light of our recent acquisitions, the impact of COVID-19 and changing regulatory requirements;

 

 

we exclude goodwill impairment charges and changes in the fair value of contingent consideration;

 

 

the expenses and other items that we exclude in our calculation of adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from adjusted EBITDA when they report their operating results;

 

 

adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs;

 

19

 

 

adjusted EBITDA does not reflect provision for (benefit from) income taxes or the cash requirements to pay taxes; and

 

 

adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments.

 

The following is a reconciliation of net income (loss) to adjusted EBITDA for the years ended December 31, 2020 and 2019, respectively:

 

   

Years Ended December 31,

 
   

2020

   

2019

 

Net income (loss)

  $ (23,982 )   $ 27,193  

Interest and other expense (income) , net

    302       (1,873

)

(Benefit) provision for income taxes

    (4,642 )     8,928  

Depreciation and amortization

    6,844       5,991  

Stock-based compensation

    5,386       6,087  

Product rationalization charges

    2,892       -  

IPR&D impairment

    1,414       -  

Acquisition related expenses

    4,168       2,859  

Acquisition related intangible asset amortization

    6,620       -  

Acquisition related inventory step up

    11,082       -  

Goodwill impairment

    42,520       -  

Change in fair value of contingent consideration

    (28,666 )     -  

Adjusted EBITDA

  $ 23,938     $ 49,185  

 

Adjusted EBITDA in the year ended December 31, 2020 decreased $25.2 million as compared with the prior year. The decrease in adjusted EBITDA for the period was primarily due to the unfavorable impact of the COVID-19 pandemic on our revenues, unfavorable revenue mix and higher expenses following our acquisitions of Parcus Medical and Arthrosurface.

 

Adjusted Net Income (Loss) and Adjusted EPS

 

We present information below with respect to adjusted net income (loss) and adjusted diluted earnings per share, which we refer to as adjusted EPS. We define adjusted net income (loss) as our net income (loss) excluding acquisition-related expenses, amortization and depreciation of acquired assets, the impact of inventory fair-value step up on cost of revenue and the impacts of goodwill impairment charges and changes in the fair value of contingent consideration, as well as certain impairment charges, including impairment related to IPR&D assets and non-cash product rationalization charges associated with certain non-core legacy products, each on a tax effected basis. Acquisition related expenses are those that the we would not have incurred except as a direct result of acquisition transactions. Acquisition related expenses consist of investment banking, legal, accounting, and other professional and related expenses. The amortized assets contribute to revenue generation, and the amortization of such assets will recur in future periods until such assets are fully amortized. These assets include the estimated fair value of certain identified assets acquired in acquisitions, including in-process research and development, developed technology, customer relationships and acquired tradenames. We define adjusted EPS as GAAP diluted earnings per share excluding the above adjustments to net income used in calculating adjusted net income, each on a per share and tax effected basis.

 

20

 

The following is a reconciliation of adjusted net income to net income for the years ended December 31, 2020 and 2019, respectively:

 

   

For the Twelve Months Ended December 31,

 
   

2020

   

2019

 

Net income (loss)

  $ (23,982 )   $ 27,193  

Product rationalization charges, tax effected

    2,376          

IPR&D impairment, tax effected

    1,414       -  

Acquisition related expenses, tax effected

    3,146       2,256  

Acquisition related intangible asset amortization, tax effected

    4,997       -  

Acquisition related inventory step up

    8,365       -  

Goodwill impairment, tax effected

    37,702       -  

Change in fair value of contingent consideration, tax effected

    (23,872 )     -  

Adjusted net income

  $ 10,146     $ 29,449  

 

The following is a reconciliation of adjusted diluted EPS to diluted EPS for the years ended December 31, 2020 and 2019, respectively (in thousands, expect per share data):

 

   

For the Twelve Months Ended December 31,

 
   

2020

   

2019

 

Diluted earnings per share (EPS)

  $ (1.69 )   $ 1.89  

Product rationalization charges, tax effected

    0.17          

IPR&D impairment, tax effected

    0.10          

Acquisition related expenses per share, tax effected

    0.22       0.16  

Acquisition related intangible asset amortization, tax effected

    0.35       -  

Acquisition related inventory step up

    0.59       -  

Goodwill impairment, tax effected

    2.65       -  

Change in fair value contingent consideration, tax effected

    (1.68 )     -  

Adjusted diluted EPS

  $ 0.71     $ 2.05  

 

Adjusted net income and adjusted diluted EPS in the year ended December 31, 2020 decreased $19.2 million and $1.34 per share, respectively, as compared with the prior year. The decrease was primarily due to the unfavorable impact of the COVID-19 pandemic on our revenues, unfavorable revenue mix and higher expenses following our acquisitions of Parcus Medical and Arthrosurface.

 

21

 

Year ended December 31, 2019 compared to year ended December 31, 2018

 

Statement of Operations Detail    

 

    Years Ended December 31,            
   

2019

   

2018

   

$ change

   

% change

 
   

(in thousands, except percentages)

 

Product revenue

  $ 114,512     $ 105,531     $ 8,981       9

%

Licensing, milestone and contract revenue

    98       24       74       308

%

Total revenue

    114,610       105,555       9,055       9

%

Cost of revenue

    28,747       31,280       (2,533

)

    (8

%)

Gross Profit

    85,863       74,275       11,588       16 %
Gross margin     75 %     70 %                

Operating expenses:

                               

Research & development

    16,665       18,190       (1,525

)

    (8

%)

Selling, general & administrative

    34,950       34,336       614       2

%

Total operating expenses

    51,615       52,526       (911

)

    (2

%)

Income from operations

    34,248       21,749       12,499       57

%

Interest income, net

    1,873       1,458       415       28

%

Income before income taxes

    36,121       23,207       12,914       56

%

Provision for income taxes

    8,928       4,485       4,443       99

%

Net income

  $ 27,193     $ 18,722     $ 8,471       45

%

 

Total revenue

 

Total revenue for the year ended December 31, 2019 increased by $9.1 million, as compared to the prior year, to $114.6 million. This increase was primarily due to increase in global Joint Pain Management revenue and the recovery from the 2018 voluntary recall of certain production lots of certain of our HYAFF-based products.

 

Product revenue

 

Product revenue for the year ended December 31, 2019 was $114.5 million, an increase of $9.0 million, or 9%, compared to the prior year. The following table presents comparative product revenue analysis by product franchise:

 

    Years Ended December 31,            
   

2019

   

2018

   

$ change

   

% change

 
                                 

Joint Pain Management

  $ 103,466     $ 96,719     $ 6,747       7

%

Joint Preservation and Restoration

    2,070       1,127       943       84

%

Other

    8,976       7,685       1,291       17

%

    $ 114,512     $ 105,531     $ 8,981       9

%

 

Joint Pain Management

 

Overall, revenue from our Joint Pain Management product family increased by $6.7 million in 2019 as compared to 2018, primarily driven by increased revenue from Monovisc domestically and internationally, as well as increased revenue from Cingal in international markets.

 

 

22

 

Joint Preservation and Restoration

 

Revenue from our Joint Preservation and Restoration product family increased by $0.9 million in 2019 as compared to 2018 primarily due to recovery from our 2018 voluntary product recall and the U.S. commercial launch of Tactoset.

 

Other

 

Overall, revenue from our Other product family increased by $1.3 million in 2019 as compared to 2018 primarily due to our recovery from 2018 voluntary recall of certain production lots.

 

Gross profit and margin

 

 

Gross profit for the year ended December 31, 2019 was $85.9 million, or gross margin of 75%, as compared with $74.3 million, or gross margin of 70%, for the year ended December 31, 2018. The increase in gross margin for the year ended December 31, 2019 was primarily driven by more favorable changes in revenue mix, including an increase in domestic royalty revenue from our viscosupplement products and the recovery from the 2018 voluntary product recall.

 

Research and development

 

Research and development expenses for the year ended December 31, 2019 decreased by $1.5 million, or 8%, as compared to the prior year, primarily due to a decrease in clinical trial expenses related to the Cingal phase III clinical trial partially offset by higher pre-clinical product development activities associated with the development of product candidates in our research and development pipeline, including our rotator cuff therapy. 

 

Selling, general and administrative

 

Selling, general and administrative expenses for the year ended December 31, 2019 increased by $0.6 million, or 2%, as compared to 2018. The increase was primarily due to costs related to the acquisitions of Parcus Medical and Arthrosurface, which totaled $2.9 million in 2019, the buildout of our U.S. commercial infrastructure, and the launch of Tactoset, as well as increased personnel-related costs and external professional fees. 

 

Income taxes

 

Provisions for income taxes were $8.9 million and $4.5 million for the years ended December 31, 2019 and 2018, respectively. The increase in the effective tax rate in 2019 of 5.4%, as compared to 2018, is primarily due to a windfall tax benefit in 2018 related to exercises of employee equity awards resulting in an income tax benefit of $1.5 million compared to an insignificant amount in 2019.

 

Net income

 

For the year ended December 31, 2019, net income was $27.2 million, or $1.89 per diluted share, compared to $18.7 million, or $1.27 per diluted share, for the same period in the prior year. The increase in net income and diluted earnings per share was primarily a result of increased total revenue, increased gross profit and a decrease in one-time expenses associated with the retirement of a former CEO and the 2018 voluntary product recall.

 

Concentration of Risk

 

We have historically derived the majority of our revenues from a small number of customers, most of whom resell our products to end-users and are significantly larger companies than us. For the year ended December 31, 2020, five customers accounted for 58% of product revenue, with Mitek alone accounting for 49% of product revenue. While we believe that our expanded commercial infrastructure will substantially diversify our revenue base, we expect to continue to be dependent on a small number of large customers, especially Mitek, for a sizeable portion of our revenues in the near-term future. The failure of these customers to purchase our products in the amounts they historically have or in amounts that we expect could materially impact our business.

 

23

 

In addition, if present and future customers terminate their purchasing arrangements with us, significantly reduce or delay their orders, or seek to renegotiate their agreements on terms less favorable to us, our business, financial condition, and results of operations will be adversely affected. If we accept terms less favorable than the terms of the current agreements, such renegotiations may have a material adverse effect on our business, financial condition, and/or results of operations. Furthermore, in any future negotiations we may be subject to the perceived or actual leverage that these customers may have given their relative size and importance to us. Any termination, change, reduction, or delay in orders could seriously harm our business, financial condition, and results of operations. Accordingly, unless and until we diversify and expand our customer base, our future success will significantly depend upon the timing and size of future purchases by our largest customers and the financial and operational success of these customers. The loss of any one of our major customers or the delay of significant orders from such customers, even if only temporary, could reduce or delay our recognition of revenues, harm our reputation in the industry, and reduce our ability to accurately predict cash flow, and, as a consequence, it could seriously harm our business, financial condition, and results of operations.

 

See Note 13, Revenue by Product Group, by Significant Customer and by Geographic Location; Geographic Information, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information regarding significant customers.

 

Liquidity and Capital Resources

 

 

We require cash to fund our operating expenses and to make capital expenditures. We expect that our requirements for cash to fund these uses will increase as our operations expand. Historically we have generated positive cash flow from operations, which, together with our available cash, investments, and debt, have met our cash requirements. Cash, cash equivalents, and investments aggregated $98.3 million and $184.9 million, and working capital totaled $140.5 million and $218.0 million, at December 31, 2020 and December 31, 2019, respectively. We are closely monitoring our liquidity and capital resources for any potential impact that the COVID-19 pandemic may have on our operations. As a precautionary measure, we executed a drawdown of $50 million from our existing credit facility with Bank of America in April 2020, all of which we repaid during the year ended December 31, 2020. As of December 31, 2020, there were no outstanding borrowings and we are in compliance with the terms of the existing credit facility. During 2020, we also implemented a number of internal short-term expense controls and prioritized business initiatives to conserve cash flow.

 

Cash provided by operating activities was $13.1 million, $37.0 million, and $34.9 million for 2020, 2019, and 2018, respectively. The decrease in 2020 was due primarily to the impact of the COVID-19 pandemic on sales and gross profit, as well as increased operational spending following the acquisitions of Parcus Medical and Arthrosurface.

 

Investing activities used $71.3 million of cash in 2020, provided $39.7 million of cash in 2019, and used $50.3 million of cash in 2018. The change in 2020 was primarily due to the acquisitions of Parcus Medical and Arthrosurface.

 

Cash used in financing activities was $3.8 million, $8.1 million, and $28.9 million for 2020, 2019, and 2018, respectively. The financing activities in 2020 were primarily associated with a $5 million regulatory-based milestone paid per the Arthrosurface merger agreement, of which $4.5 million was recorded within financing activities and the remainder within operating activities. For the years ended December 31, 2019 and 2018 we executed $30 million accelerated share repurchase programs each year. The decrease in cash used in financing activities for the year ended December 31, 2020, was primarily the result of a decrease in share repurchase partially offset by a decrease in proceeds from the exercise of employee equity awards as compared to the corresponding period in 2019 and 2018, respectively.

 

 

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Contractual Obligations and Other Commercial Commitments

 

The table below summarizes our non-cancelable operating leases, purchase commitments, and contractual obligations related to future periods which are not reflected in our consolidated balance sheet at December 31, 2020. Purchase commitments relate primarily to non-cancellable inventory commitments and capital expenditures entered in the normal course of business:

 

   

Payments due by period (in thousands)

 
           

Less than

                   

More than

 
   

Total

   

1 year

   

1 - 3 years

   

3 - 5 years

   

5 years

 

Operating and Finance Leases

  $ 30,636     $ 2,470     $ 4,689     $ 4,027     $ 19,450  

Purchase Commitments (1)

    2,519       1,597       611       311       -  

Year Ended December 31, 2020

  $ 33,155     $ 4,067     $ 5,300     $ 4,338     $ 19,450  

 

(1)

Includes purchase commitments for materials, clinical trials, and other day to day business requirements.

  

Under the Parcus Medical and Arthrosurface merger agreements, there are earn-out milestones totaling up to $100 million payable from 2020 to 2022. Parcus Medical has net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface has both regulatory and net sales earn-out milestones in 2020 and 2021. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model or a Monte Carlo simulation approach. As of December 31, 2020, the Company estimated total remaining earn-outs to be $35.4 million, of which $13.1 million is due within one year and $22.3 million due thereafter.

 

Accounting for Off-Balance Sheet Arrangements

 

We do not use special purpose entities or other off-balance sheet financing techniques, except for operating leases as disclosed in the contractual obligations table above, 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.

 

Summary of Critical Accounting Policies; Significant Judgments and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, which consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. 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.

 

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout this section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

Business Combinations and Contingent Consideration

 

Amounts paid for acquisitions are allocated to the intangible and tangible assets acquired and liabilities assumed, if any, based on their fair values at the dates of acquisition. This purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets and deferred revenue obligations. Critical estimates include, but are not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions determined by management. Any excess of purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of comprehensive income. The fair value of contingent consideration includes estimates and judgments made by management regarding the probability that future contingent payments will be made.

 

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We use the income approach to determine the fair value of certain identifiable intangible assets including developed technology and IPR&D. This approach determines fair value by estimating after-tax cash flows attributable to these assets over their respective useful lives and then discounting these after-tax cash flows back to a present value. The estimated economic lives were determined using a variety of indicators including historical usage, evolutionary changes and other observable market data. We base our assumptions on estimates of future cash flows, expected growth rates and expected trends in technology. We base the discount rate used to arrive at the present value used in this method as of the date of acquisition on the time value of money and certain industry-specific risk factors. We use the relief-from-royalty method of the income approach to determine the fair value of trade names. This approach determines fair value by estimating the after-tax royalty savings attributable to owning the intangible asset and then discounting these after-tax royalty savings back to a present value. We base our assumptions on the estimated revenue attributable to the trade name and the estimated royalty rate attributable to the trade name. We use the avoided costs/lost profits method to determine the fair of customer relationships. This approach determines fair value by estimating the projected revenues related to the asset and estimated costs to recreate the intangible asset. We believe the estimated purchased customer relationships, developed technologies, trade name, and in process research and development amounts so determined represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the assets.

 

We use the comparative sales method to determine the fair value of work-in-process and finished goods inventory acquired and ultimately the inventory step- up required. The fair value of WIP inventory was estimated as the selling price less the sum of (a) costs to complete, (b) costs of disposal, and (c) a reasonable profit allowance for the selling effort of the acquiring entity based on profit for similar products. The fair value of finished goods inventory was estimated as the selling price less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity based on profit for similar products.

 

For contingent consideration, management updates these estimates and the related fair value of contingent consideration at each reporting period based on the estimated probability of achieving the earn-out targets and applying a discount rate that captures the risk associated with the expected contingent payments. Under the Parcus Medical and Arthrosurface merger agreements, there are earn-out milestones totaling $100 million payable from 2020 to 2022. Parcus Medical has net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface has both regulatory and net sales earn-out milestones in 2020 and 2021. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model or a Monte Carlo simulation approach. To the extent our estimates change in the future regarding the likelihood of achieving these targets we may need to record material adjustments to our accrued contingent consideration. Changes in the fair value of contingent consideration are recorded in our consolidated statements of operations.

 

Revenue Recognition – General

  

Pursuant to ASC 606, we recognize revenue when a customer obtains control of promised goods or services. The amount of revenue that is recorded reflects the consideration that we expect to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are capable of being distinct or distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation.

 

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We generate sales principally through three types of customers: (i) commercial partnerships (ii) hospitals and surgery centers, and (iii) distributors, referred to as distribution model.

 

For commercial partnership sales, we sell our products directly to these partners, who perform the vast majority of the downstream sales and marketing activities to customers and end-users. These arrangements may include the grant of certain licenses, performance of development services, and the supply of product. Our largest such customer, Mitek, represented 49% of total revenues for the year-ended December 31, 2020. We recognize revenue from product sales when the customer obtains control of our product, which typically occurs upon shipment to the customer. Commercial partnership agreements may also include sales-based royalties and milestones. As we considered the license to be the predominant item to which the royalties relate for these agreements, sales-based royalties and milestones are only recognized when the later of the underlying sale occurs or the performance obligation to which some or all of the sales-based royalty has been satisfied (or partially satisfied). This is generally in the same period that our licensees complete their product sales in their territory, for which we are contractually entitled to a percentage-based royalty. We record royalty revenues based on estimated net sales of licensed products as reported to us by our commercial partners. Differences between actual and estimated royalty revenues have not been material and are typically adjusted in the following quarter when the actual amounts are known. Revenue from sales-based royalties is included in product revenues.

 

For sales to hospitals and surgery centers, which generally pairs an in-house team of regional sales directors with local or regional distributors, the inventory is generally consigned to sales agents so that products are available when needed for surgical procedures. No revenue is recognized upon the placement of inventory into consignment, as we retain the ability to control the inventory. Revenue is recognized typically as of the date of surgical implantation of the product.

 

For distributor sales, we sell our products to our distributors, generally outside the United States, who subsequently resell the products to sub-distributors and health care providers, among others. We recognize revenue from product sales when the distributor obtains control of our product, which typically occurs upon shipment to the distributor, in return for agreed-upon, fixed-price consideration. Performance obligations are generally settled quickly after purchase order acceptance; therefore, the value of unsatisfied performance obligations at the end of any reporting period is generally insignificant. We sell to a diversified base of distributors and, therefore, believes there is no material concentration of credit risk.

 

Certain of our supply agreements contain terms that represent a promise to deliver product at the customer’s discretion that are considered distributor options. We assess if these options provide a material right to the licensee, and if so, they are accounted for as separate performance obligations. Our supply agreements do not provide options that are considered material rights.

 

Our payment terms are consistent with prevailing practice in the respective markets in which we do business. Most of our customers make payments based on contract terms, which are not affected by contingent events that could impact the transaction price. Payment terms fall within the one-year guidance for the practical expedient, which allows us to forgo adjustment of the contractual payment amount of consideration for the effects of a significant financing component. Our contracts with customers do not customarily provide a right of return, unless certain product quality standards are not met.

 

Some of our distributor agreements have volume-based discounts with tiered pricing which are generally prospective in nature. These prospective discounts together with any free-of-charge sample units offered are evaluated as potential material rights. If the prospective discounts or free-of-charge sample units are considered material rights, these would be separate performance obligations and a portion of the sales transaction price is allocated to the material right. Revenue allocated to the material right is recognized when the additional goods are transferred to the customer or when the option expires. During 2020, the consideration allocated to material rights was not significant.

 

27

 

We receive payments from our customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional. Deferred revenue was $0.2 million and $0 as of December 31, 2020 and 2019, respectively.

 

Generally, customer contracts contain Free on Board (FOB) or Ex-Works (EXW) shipping point terms where the customer pays the shipping company directly for all shipping and handling costs. In those contracts in which we pay for the shipping and handling, the associated costs are generally recorded along with the product sale at the time of shipment in cost of revenue when control over the products has transferred to the customer. Value-add and other taxes we collected concurrently with revenue-producing activities are excluded from revenue. Our general product warranty does not extend beyond an assurance that the product or services delivered will be consistent with stated contractual specifications, which does not create a separate performance obligation. We recognize the incremental costs of obtaining contracts as an expense when incurred as the amortization period of the assets that we otherwise would have recognized is one year or less in accordance with the practical expedient in paragraph ASC 340-40-25-4. These costs are included in selling, general and administrative expenses.

 

Inventories

 

Inventories are primarily stated at the lower of standard cost and net realizable value, with approximate cost determined using the first-in, first-out (FIFO) method. Work-in-process and finished goods inventories include materials, labor, and manufacturing overhead. Inventory costs associated with product candidates that have not yet received regulatory approval are capitalized if we believe there is probable future commercial use and future economic benefit.

 

Our policy is to write-down inventory when conditions exist that suggest inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for our products and market conditions. We regularly evaluate the ability to realize the value of inventory based on a combination of factors including, but not limited to, historical usage rates, forecasted sales or usage, product end of life dates, and estimated current or future market values. Purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure.

 

When recorded, inventory write-downs are intended to reduce the carrying value of inventory to its net realizable value. If actual demand for our products deteriorates, or if market conditions are less favorable than those projected, additional inventory write-downs may be required. Other long-term assets include inventory expected to remain on hand beyond one year.

 

Goodwill and Acquired In-Process Research and Development

 

Goodwill is the amount by which the purchase price of acquired net assets in a business combination exceeded the fair values of net identifiable assets on the date of acquisition. Acquired IPR&D represents the fair value assigned to research and development assets that we acquire that have not been completed at the date of acquisition or are pending regulatory approval in certain jurisdictions. The value assigned to the acquired IPR&D is determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting revenue from the projects, and discounting the net cash flows to present value.

 

Goodwill and IPR&D are not amortized but are evaluated for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Our goodwill impairment assessment is performed by reporting unit. A reporting unit is the operating segment, or a business one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. We have two reporting units: the legacy Anika reporting unit, which specializes in therapies based on our HA technology platform, and a joint preservation and restoration reporting unit established in 2020 upon the acquisitions of Parcus Medical and Arthrosurface. Factors we consider important, on an overall company basis, that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, or a reduction of our market capitalization relative to net book value.

 

28

 

To conduct impairment tests of goodwill, the fair value of the reporting unit is compared to its carrying value. If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value, not to exceed the recorded amount of goodwill. We estimated the fair value of the reporting units using a discounted cash flow method, which is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the reporting units beyond the cash flows from the discrete projection period. We determined that a discounted cash flow model provided the best approximation of fair value of the reporting units for the purpose of performing the impairment test. This approach incorporates significant estimates and assumptions related to the forecasted results including revenues, expenses, the achievement of certain cost synergies, terminal growth rates and discount rates to estimate future cash flows. Rates used to discount cash flows are dependent upon interest rates and the cost of capital based on our industry and capital structure, adjusted for equity and size risk premiums based on market capitalization, as well as other financial inputs from a selection of comparable publicly-traded companies with product offerings similar to those of the reporting unit. While assumptions utilized are subject to a high degree of judgment and complexity, we made our best estimate of future cash flows under a high degree of economic uncertainty that existed as of November 30, 2020. In developing the assumptions, we also considered observed trends of our industry participants.

 

U.S. and international government policy responses to the COVID-19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of global elective surgical procedures. As a result, the widespread economic volatility triggered impairment testing in the first quarter of 2020, and accordingly, we performed interim impairment testing on the goodwill balances of our reporting units. We also performed our annual impairment testing in the fourth quarter of 2020.

 

For the legacy Anika reporting unit, we performed an interim qualitative assessment in the first quarter including consideration of (i) general macroeconomic factors, (ii) industry and market conditions, and (iii) the extent of the excess of the fair value over the carrying value indicated in prior impairment testing. We determined it was not more likely than not that the fair value of the legacy Anika reporting unit is less than its carrying amount and thus goodwill was not impaired as of March 31, 2020. As part of our annual impairment testing, we decided to perform a quantitative assessment related to the legacy Anika reporting unit as of November 30, 2020, due to the expectation that the economic recovery would take longer than expected to materialize. The results of the impairment test indicated that the estimated fair value of the legacy Anika reporting unit was greater than its carrying value, and therefore we did not record any impairment charges related to the legacy Anika reporting unit for the year ended December 31, 2020.

 

For our newly created reporting unit, which includes Parcus Medical and Arthrosurface, we also performed an interim quantitative assessment of goodwill impairment as of March 31, 2020. We estimated the fair value of the reporting unit using a discounted cash flow method. The results of the interim impairment test indicated that the estimated fair value of the reporting unit was less than its carrying value. This was primarily due to decreases in near term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures which directly impact the reporting unit. Consequently, a non-cash goodwill impairment charge was recorded in the amount of $18.1 million during the first quarter of 2020. As part of our annual impairment testing, we also performed a quantitative assessment related to the new reporting unit as of November 30, 2020. The results of the annual impairment test indicated that the estimated fair value of the reporting unit was less than its carrying value. This was primarily due to a decline in projected net cash flows as a result of the continued impact of COVID-19 on revenue and related cash flows, the expectation that the economic recovery will take longer than expected to materialize, and additional projected investment to support future growth. Consequently, a non-cash goodwill impairment charge was recorded in the amount of $24.4 million during the fourth quarter of 2020. The total non-cash goodwill impairment charge with respect to the reporting unit amounted to $42.5 million for the year ended December 31, 2020.

 

29

 

During the fourth quarter of 2020, we decided not to further invest in our HyaloBone and HyaloNect IPR&D projects as they were no longer aligned with our core strategic focus. As a result, we recorded an impairment charge in the period totaling $1.4 million recorded in research and development expenses in our consolidated statements of operations.

 

We performed our annual assessment of the remaining IPR&D intangible assets as of November 30, 2020. We estimated the fair value of the IPR&D intangible assets using the income approach which is based on the Multi-Period Excess Earnings Method, or MPEEM. MPEEM measures economic benefit indirectly by calculating the income attributable to an asset after appropriate returns are paid to complementary assets used in conjunction with the subject asset to produce the earnings associated with the subject asset, commonly referred to as contributory asset charges. This approach incorporates significant estimates and assumptions related to the forecasted results including revenues, expenses, expected economic life of the asset, contributory asset charges and discount rates to estimate future cash flows. While assumptions utilized are subject to a high degree of judgment and complexity, we made our best estimate of future cash flows under a high degree of economic uncertainty that existed as of November 30, 2020. In developing the assumptions, we also considered observed trends of our industry participants. No impairment existed as the estimated fair value of the remaining IPR&D intangible assets was greater than their carrying value.

 

 Recent Accounting Pronouncements

 

A discussion of recent accounting pronouncements is included in Note 2 to the consolidated financial statements in this Annual Report on Form 10-K.

 

 

 

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 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

ANIKA THERAPEUTICS, INC. AND SUBSIDIARIES

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm

32

Consolidated Balance Sheets as of December 31, 2020 and 2019

35

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2020, 2019 and 2018

36

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018

37

Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018

38

Notes to Consolidated Financial Statements

39

  

 

 

 

 

 

 

 

 

31

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

 

To the Board of Directors and Stockholders of Anika Therapeutics, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Anika Therapeutics, Inc. and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), cash flows, and stockholders’ equity for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America (GAAP).

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

32

 

Business Combinations Refer to Note 3 to the financial statements

 

Critical Audit Matter Description

 

 

The Company completed the acquisitions of Arthrosurface, Inc. (“Arthrosurface”) on February 3, 2020 and Parcus Medical, LLC (“Parcus Medical”) on January 24, 2020. These acquisitions were accounted for under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including developed technology assets aggregating $78.1 million. The fair value of the acquired developed technology assets was estimated based on the multi-period excess earnings method for developed technology. The fair value determination of the developed technology assets required management to make significant estimates and assumptions related to projected future cash flows and the selection of the discount rates.

 

We identified the fair value of the developed technology assets as a critical audit matter because of the significant estimates and assumptions management makes to determine their fair values. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s assumptions.

 

How the Critical Audit Matter Was Addressed in the Audit

 

 

Our audit procedures related to the fair value of the developed technology assets for Arthrosurface and Parcus Medical, included the following, among others:

 

 

We tested the effectiveness of controls over the valuation of these assets, including management’s controls over projected future cash flows and the discount rates.

 

We assessed the reasonableness of management’s key estimates and assumptions by comparing these assumptions to historical results, relevant peer companies, and third-party industry reports.

 

With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) valuation assumptions by:

 

Testing the source information underlying the determination of the valuation assumptions and testing the mathematical accuracy of the calculation.

 

Developing a range of independent estimates for certain assumptions and comparing those to the assumptions selected by management.

 

 

Goodwill –Arthrosurface and Parcus Medical Reporting Unit — Refer to Notes 2 and 8 to the financial statements

 

Critical Audit Matter Description

 

 

The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of the reporting unit to its carrying value. The Company performed an interim goodwill impairment test on the Arthrosurface and Parcus Medical Reporting Unit (“Arthrosurface and Parcus Medical”) as of March 31, 2020, as a result of temporary suspension of domestic elective surgical procedures due to the COVID-19 pandemic. The Company used the discounted cash flow model to estimate fair value, which requires management to make significant estimates and assumptions related to discount rates and projected future cash flows. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. The goodwill balance related Arthrosurface and Parcus Medical, prior to any impairment, as of March 31, 2020, was $42.5 million. The Company determined the fair value of Arthrosurface and Parcus Medical was less than the carrying amount and therefore recorded an impairment charge of $18.1 million.

 

Additionally, the Company performed its annual goodwill impairment test for Arthrosurface and Parcus Medical as of November 30, 2020. The Company determined that the fair value of Arthrosurface and Parcus Medical was less than the carrying amount and therefore recorded an impairment charge of $24.4 million, reducing the goodwill to $0.  The fair value of Arthrosurface and Parcus Medical required management to make significant estimates and assumptions related to projected future cash flows and the selection of the discount rates.

 

We identified goodwill for Arthrosurface and Parcus Medical as a critical audit matter because of the significant judgments made by management to estimate the fair value of Arthrosurface and Parcus Medical as of March 31, 2020 and November 30, 2020.  This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the projected future cash flows and discount rates.

 

33

 

How the Critical Audit Matter Was Addressed in the Audit

 

 

Our audit procedures related to the projected future cash flows and discount rates used by management to estimate the fair value of Arthrosurface and Parcus Medical included the following, among others:

 

 

We tested the effectiveness of controls over management’s goodwill impairment evaluation including controls over projected future cash flows and the discount rates.

 

We evaluated the reasonableness of management’s forecasts by comparing the projected future cash flows to:

 

Historical cash flows.

 

Internal communications to management and the Board of Directors.

 

Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies.

 

With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) valuation assumptions by:

 

Testing the source information underlying the determination of the valuation assumptions and testing the mathematical accuracy of the calculation.

 

Developing a range of independent estimates for certain assumptions and comparing those to the assumptions selected by management.

 

We evaluated whether the projected future cash flows were consistent with evidence obtained in other areas of the audit.

 

/s/ Deloitte & Touche LLP

 

Boston, Massachusetts
March 5, 2021
We have served as the Company’s auditor since 2017.

 

34

 

 

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except per share data)

         

  

December 31,

 

ASSETS

 

2020

  

2019

 

Current assets:

        

Cash and cash equivalents

 $95,817  $157,463 

Investments

  2,501   27,480 

Accounts receivable, net of reserves of $1,523 and $962 at December 31, 2020 and December 31, 2019, respectively

  24,102   23,079 

Inventories, net

  46,209   21,995 

Prepaid expenses and other current assets

  8,754   4,289 

Total current assets

  177,383   234,306 

Property and equipment, net

  50,613   50,783 

Right-of-use assets

  22,619   22,864 

Other long-term assets

  15,420   7,478 

Intangible assets, net

  91,157   7,585 

Goodwill

  8,413   7,694 

Total assets

 $365,605  $330,710 
         

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable

 $8,984  $3,832 

Accrued expenses and other current liabilities

  14,793   12,445 

Contingent consideration – current portion

  13,090   - 

Total current liabilities

  36,867   16,277 

Other long-term liabilities

  1,244   357 

Contingent consideration – long term portion

  22,320   - 

Deferred tax liability

  11,895   4,331 

Lease liabilities

  20,879   21,367 

Commitments and contingencies (Note 12)

 
         

Stockholders’ equity:

        

Preferred stock, $0.01 par value; 1,250 shares authorized, no shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively

  -    

Common stock, $.01 par value; 90,000 shares authorized, 14,329 and 14,308 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively

  143   143 

Additional paid-in-capital

  55,355   48,707 

Accumulated other comprehensive loss

  (4,542)  (5,898

)

Retained earnings

  221,444   245,426 

Total stockholders’ equity

  272,400   288,378 

Total liabilities and stockholders’ equity

 $365,605  $330,710 

 

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

 

 

35

 

 

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except per share data)

             

    For the Years Ended December 31,  
    2020     2019     2018
 
Product revenue   $ 130,457     $ 114,512     $ 105,531  
Licensing, milestone and contract revenue     -       98       24  
Total revenue     130,457       114,610       105,555  
Cost of revenue     61,431       28,747       31,280  
Gross profit     69,026       85,863       74,275  
                         
Operating expenses:                        
Research & development     23,431       16,665       18,190  
Selling, general & administrative     60,063       34,950       34,336  
Goodwill impairment charge     42,520       -       -  
Change in fair value of contingent consideration     (28,666 )     -       -  
Total operating expenses     97,348       51,615       52,526  
Income (loss) from operations     (28,322 )     34,248       21,749  
Interest and other (expense) income, net     (302 )     1,873       1,458  
Income before income taxes     (28,624 )     36,121       23,207  
Provision (benefit) for income taxes     (4,642 )     8,928       4,485  
Net income (loss)   $ (23,982 )   $ 27,193     $ 18,722  
                         
Net income (loss) per share:                        
Basic   $ (1.69 )   $ 1.93     $ 1.30  
Diluted   $ (1.69 )   $ 1.89     $ 1.27  
                         
Weighted average common shares outstanding:                        
Basic     14,222       14,121       14,442  
Diluted     14,222       14,374       14,689  
                         
Net income (loss)   $ (23,982 )   $ 27,193     $ 18,722  
Foreign currency translation adjustment     1,356       (372 )     (742 )
Comprehensive income (loss)   $ (22,626 )   $ 26,821     $ 17,980  

 

 

 

 

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

 

36

 

 

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(in thousands)

 

                                   

Accumulated

         
   

Common Stock

           

Other

   

Total

 
   

Number of

   

$.01 Par

   

Additional Paid

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Value

   

in Capital

   

Earnings

   

Loss

   

Equity

 

Balance, December 31, 2017

    14,688     $ 147     $ 68,617     $ 199,511     $ (4,784

)

  $ 263,491  

Issuance of common stock for equity awards

    362       4       2,882                   2,886  

Retirement of common stock for minimum tax withholdings

    (34

)

    (1

)

    (1,790

)

                (1,791

)

Stock-based compensation expense

                11,046                   11,046  

Repurchase of common stock

    (806

)

    (8

)

    (29,992

)

                (30,000

)

Net income

                      18,722             18,722  

Other comprehensive income (loss)

                            (742

)

    (742

)

Balance, December 31, 2018

    14,210     $ 142     $ 50,763     $ 218,233     $ (5,526

)

  $ 263,612  

Issuance of common stock for equity awards

    551       6       22,145                   22,151  

Vesting of restricted stock units

    17                                

Forfeiture of restricted stock awards

    (13

)

                             

Stock-based compensation expense

                6,087                   6,087  

Retirement of common stock for minimum tax withholdings

    (5

)

          (293

)

                (293

)

Repurchase of common stock

    (452

)

    (5

)

    (29,995

)

                (30,000

)

Net income

                      27,193             27,193  

Other comprehensive income (loss)

                            (372

)

    (372

)

Balance, December 31, 2019

    14,308     $ 143     $ 48,707     $ 245,426     $ (5,898

)

  $ 288,378  

Issuance of common stock for equity awards

    123       1       1,523       -       -       1,524  

Vesting of restricted stock units

    54       -       -       -       -       -  

Forfeiture of restricted stock awards

    (9 )     -       -       -       -       -  

Stock-based compensation expense

    -       -       5,386       -       -       5,386  

Retirement of common stock for minimum tax withholdings

    (8 )     -       (262 )     -       -       (262 )

Repurchase of common stock

    (139 )     (1 )     1       -       -       -  

Net income (loss)

    -       -       -       (23,982 )     -       (23,982 )

Other comprehensive income (loss)

    -       -       -       -       1,356       1,356  

Balance, December 31, 2020

    14,329     $ 143     $ 55,355     $ 221,444     $ (4,542 )   $ 272,400  

 

 

 

 

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

 

37

 

 

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

 

   

For the years ended December 31,

 
   

2020

   

2019

   

2018

 

Cash flows from operating activities:

                       

Net income (loss)

  $ (23,982 )   $ 27,193     $ 18,722  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

                       

Depreciation and amortization

    13,464       5,991       5,910  

Interest expense

    (25 )     -       -  

Non-cash operating lease cost

    1,531       1,179       -  

Goodwill impairment charge

    42,520       -       -  

Change in fair value of contingent consideration

    (28,666 )     -       -  

Loss on disposal of fixed assets

    265       927       152  

Loss on impairment of intangible asset

    2,439       389       -  

Stock-based compensation expense

    5,386       6,087       11,046  

Deferred income taxes

    (3,543 )     794       (1,817

)

Provision (recovery) for doubtful accounts

    549       (499

)

    57  

Provision for inventory

    5,490       1,612       4,419  

Amortization of acquisition related inventory step-up

    11,082       -       -  

Amortization of premium and accretion of discount on investments and cash equivalents

    13       (25

)

    (371

)

Changes in operating assets and liabilities:

                       

Accounts receivable

    5,855       (1,839

)

    2,914  

Inventories

    (14,177 )     (5,585

)

    (7,577

)

Prepaid expenses, other current and long-term assets

    (1,783 )     (1,641

)

    899  

Accounts payable

    822       767       (1,671

)

Operating lease liabilities

    (1,439 )     (1,065

)

    -  

Accrued expenses, other current and long-term liabilities

    (142 )     3,805       1,313  

Income taxes

    (2,072 )     (1,085

)

    922  

Contingent consideration

    (522 )     -       -  

Net cash provided by operating activities

    13,065       37,005       34,918  
                         

Cash flows from investing activities:

                       

Acquisition of Parcus Medical and Arthrosurface, net of cash acquired

    (94,601 )     -       -  

Proceeds from maturities of investments

    45,000       146,366       46,000  

Purchases of investments

    (20,035 )     (103,848

)

    (91,601

)

Purchases of property and equipment

    (1,628 )     (2,827

)

    (4,656

)

Net cash provided by (used in) investing activities

    (71,264 )     39,691       (50,257

)

                         

Cash flows from financing activities:

                       

Payments made on finance leases

    (208 )     -       -  

Proceeds from long term debt

    50,000       -       -  

Repayments of long term debt

    (50,350 )     -       -  

Repurchases of common stock

    -       (30,000

)

    (30,000

)

Cash paid for tax withheld on vested restricted stock awards

    (262 )     (293

)

    (1,790

)

Proceeds from exercises of equity awards

    1,524       22,151       2,886  

Contingent consideration paid

    (4,478 )     -       -  

Net cash provided by (used in) provided by financing activities

    (3,774 )     (8,142

)

    (28,904

)

                         

Exchange rate impact on cash

    327       (133

)

    29  
                         

Increase (decrease) in cash and cash equivalents

    (61,646 )     68,421       (44,214

)

Cash and cash equivalents at beginning of period

    157,463       89,042       133,256  

Cash and cash equivalents at end of period

  $ 95,817     $ 157,463     $ 89,042  

Supplemental disclosure of cash flow information:

                       

Cash paid for income taxes

  $ 993     $ 9,257     $ 5,560  

Right-of-use assets obtained in exchange for operating lease liabilities as of January 1, 2019

  $ -     $ 24,110     $ -  

Non-cash investing activities:

                       

Purchases of property and equipment included in accounts payable and accrued expenses

  $ 17     $ 137     $ 351  

Consideration for acquisitions included in accounts payable and accrued expenses

  $ 476     $ -     $ -  

Contingent consideration fair value on acquisition date

  $ 69,076     $ -     $ -  

 

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

 

 

38

 

Anika Therapeutics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

 

 

1. Nature of Business

 

Anika Therapeutics, Inc. (“the Company”) is a global joint preservation company that creates and delivers meaningful advancements in early intervention orthopedic care, including in the areas of osteoarthritis (“OA”) pain management, regenerative solutions, soft tissue repair and bone preserving joint technologies.

 

In early 2020, the Company expanded its overall technology platform through its strategic acquisitions of Parcus Medical, LLC (“Parcus Medical”), a sports medicine implant and instrumentation solutions provider focused on sports medicine and soft tissue repair, and Arthrosurface Incorporated (“Arthrosurface”), a company specializing in less invasive, bone preserving partial and total joint replacement solutions. These acquisitions broadened Anika's product portfolio, developed over its nearly 30 years of expertise in hyaluronic acid technology, into joint preservation and restoration, added high-growth revenue streams, increased its commercial capabilities, diversified its revenue base, and expanded its product pipeline and research and development expertise.

 

There continue to be uncertainties regarding the pandemic of the novel coronavirus (“COVID-19”), and the Company is closely monitoring the impact of COVID-19 on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, and business partners. The Company is unable to predict the specific impact that COVID-19 may have on its financial position and operations moving forward due to the numerous uncertainties. Any estimates made herein may change as new events occur and additional information is obtained, and actual results could differ materially from any estimates made herein under different assumptions or conditions. The Company will continue to assess the evolving impact of COVID-19.

 

The Company is also 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. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Anika Therapeutics, Inc. and its wholly owned subsidiaries, Anika Securities, Inc., Anika Therapeutics S.r.l. (“Anika S.r.l.”), Anika Therapeutics Limited, Parcus Medical and Arthrosurface. All intercompany balances and transactions have been eliminated in consolidation.

 

39

 

Foreign Currency Translation

 

The functional currency of Anika S.r.l. is the Euro, and the functional currency of Anika Therapeutics Limited is the British Pound Sterling. Assets and liabilities of the foreign subsidiaries are translated using the exchange rate existing on each respective balance sheet date. Revenues and expenses are translated using the average exchange rates for the period. The translation adjustments resulting from this process are included in stockholders’ equity as a component of accumulated other comprehensive income (loss) which resulted in a gain (loss) from foreign currency translation of $1.3 million, ($0.4) million, and ($0.7) million for the years ended December 31, 2020, 2019, and 2018, respectively.

 

Gains and losses resulting from foreign currency transactions are recognized in the consolidated statements of operations. Recorded balances that are denominated in a currency other than the functional currency are remeasured to the functional currency using the exchange rate at the balance sheet date and gains or losses are recorded in the statements of operations. The Company recognized a gain (loss) from foreign currency transactions of $0.3 million, ($0.3) million, and ($0.4) million during the years ended December 31, 2020, 2019, and 2018, respectively.

 

Allowance for Doubtful Accounts

 

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. In determining the adequacy of the allowance for doubtful accounts, management specifically analyzes individual accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current and reasonable and supportable forecasts of future economic conditions, accounts receivable aging trends, and changes in the Company’s customer payment terms. A summary of activity in the allowance for doubtful accounts is as follows:

 

  

December 31,

 
  

2020

  

2019

  

2018

 

Balance, beginning of the year

 $962  $1,525  $1,914 

Amounts provided

  635   6   57 

Amounts recovered

  (86)  (505

)

  (360

)

Amounts written off

  (78)  (33

)

   

Translation adjustments

  90   (31

)

  (86

)

Balance, end of the year

 $1,523