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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2021

 

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

04-3145961

(State or Other Jurisdiction of

(I.R.S. Employer Identification No.)

Incorporation or Organization)

 

 

32 Wiggins Avenue, Bedford, Massachusetts 01730

(Address of Principal Executive Offices) (Zip Code)

 

(781) 457-9000

(Registrant’s Telephone Number, Including Area Code)

 

N/A

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

 

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 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 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes    No ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

As of July 26, 2021, there were 14,423,028 outstanding shares of Common Stock, par value $0.01 per share. 

 

1

 

 

 

ANIKA THERAPEUTICS, INC.

TABLE OF CONTENTS

 

   

Page

Part I

Financial Information

 

Item 1.

Financial Statements (unaudited):

3

 

Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020

3

 

Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2021 and 2020

4

 

Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2021 and 2020

5

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020

6

 

Notes to Consolidated Financial Statements

7

Item 2.

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

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25

Part II

Other Information

 

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

Item 6.

Exhibits

27

Signatures

28

 

References in this Quarterly Report on Form 10-Q to “we,” “us,” “our” and “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 Quarterly Report on Form 10-Q. For convenience, these trademarks appear in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q also contains trademarks and trade names that are the property of other companies and licensed to us. 

 

 

2

 

 

PART I:

FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

 

Anika Therapeutics, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except per share data)
(unaudited)

 

  

June 30,

  

December 31,

 

ASSETS

 

2021

  

2020

 

Current assets:

        

Cash and cash equivalents

 $97,181  $95,817 

Investments

  -   2,501 

Accounts receivable, net of reserves of $1,413 and $1,523 at June 30, 2021 and December 31, 2020, respectively

  29,426   24,102 

Inventories, net

  42,857   46,209 

Prepaid expenses and other current assets

  8,297   8,754 

Total current assets

  177,761   177,383 

Property and equipment, net

  49,540   50,613 

Right-of-use assets

  21,849   22,619 

Other long-term assets

  18,748   15,420 

Intangible assets, net

  87,084   91,157 

Goodwill

  8,149   8,413 

Total assets

 $363,131  $365,605 
         

LIABILITIES AND STOCKHOLDERS EQUITY

        

Current liabilities:

        

Accounts payable

 $8,101  $8,984 

Accrued expenses and other current liabilities

  16,396   14,793 

Contingent consideration – current portion

  16,870   13,090 

Total current liabilities

  41,367   36,867 

Other long-term liabilities

  1,710   1,244 

Contingent consideration

  70   22,320 

Deferred tax liability

  13,100   11,895 

Lease liabilities

  20,080   20,879 

Commitments and contingencies (Note 9)

          

Stockholders’ equity:

        

Preferred stock, $0.01 par value; 1,250 shares authorized, no shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

  -   - 

Common stock, $0.01 par value; 90,000 shares authorized, 14,418 and 14,329 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

  144   143 

Additional paid-in-capital

  60,699   55,355 

Accumulated other comprehensive loss

  (4,852)  (4,542

)

Retained earnings

  230,813   221,444 

Total stockholders’ equity

  286,804   272,400 

Total liabilities and stockholders’ equity

 $363,131  $365,605 

 

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

 

3

 

 

 

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share data)

(unaudited) 

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2021

   

2020

   

2021

   

2020

 

Revenue

  $ 38,145     $ 30,678     $ 72,437     $ 66,075  

Cost of revenue

    17,333       16,936       30,651       31,136  

Gross Profit

    20,812       13,742       41,786       34,939  
                                 

Operating expenses:

                               

Research and development

    7,293       4,532       13,654       10,582  

Selling, general and administrative

    17,989       14,550       36,164       28,981  

Goodwill impairment

    -       -       -       18,144  

Change in fair value of contingent consideration

    (13,650 )     4,196       (18,470 )     (20,326

)

Total operating expenses

    11,632       23,278       31,348       37,381  

Income (loss) from operations

    9,180       (9,536

)

    10,438       (2,442

)

Interest and other income (expense), net

    (50 )     (169

)

    (93 )     110  

Income (loss) before income taxes

    9,130       (9,705

)

    10,345       (2,332

)

Provision for (benefit from) income taxes

    2,599       (1,997

)

    976       (417

)

Net income (loss)

  $ 6,531     $ (7,708

)

  $ 9,369     $ (1,915

)

                                 

Net income (loss) per share:

                               

Basic

  $ 0.45     $ (0.54

)

  $ 0.65     $ (0.13

)

Diluted

  $ 0.45     $ (0.54

)

  $ 0.64     $ (0.13

)

Weighted average common shares outstanding:

                               

Basic

    14,393       14,199       14,368       14,201  

Diluted

    14,627       14,199       14,583       14,201  
                                 

Net income (loss)

  $ 6,531     $ (7,708

)

  $ 9,369     $ (1,915

)

Foreign currency translation adjustment

    199       209       (310 )     80  

Comprehensive income (loss)

  $ 6,730     $ (7,499

)

  $ 9,059     $ (1,835

)

 

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

 

4

 

 

 

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(in thousands)

(unaudited)

 

   

Six Months Ended June 30, 2021

 
                                   

Accumulated

         
   

Common Stock

           

Other

   

Total

 
   

Number of

   

$.01 Par

   

Additional Paid

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Value

   

in Capital

   

Earnings

   

Loss

   

Equity

 

Balance, January 1, 2021

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

)

  $ 272,400  

Issuance of common stock for equity awards

    -       -       1       -       -       1  

Vesting of restricted stock units

    46       1       (1

)

    -       -       -  

Stock-based compensation expense

    -       -       2,259       -       -       2,259  

Retirement of common stock for minimum tax withholdings

    (9

)

    -       (333

)

    -       -       (333

)

Net income

    -       -       -       2,838       -       2,838  

Other comprehensive income

    -       -       -       -       (509

)

    (509

)

Balance, March 31, 2021

    14,366     $ 144     $ 57,281     $ 224,282     $ (5,051

)

  $ 276,656  

Issuance of common stock for equity awards

    18       -       640       -       -       640  

Vesting of restricted stock units

    35       -       -       -       -       -  

Stock-based compensation expense

    -       -       2,797       -       -       2,797  

Retirement of common stock for minimum tax withholdings

    (1 )     -       (19 )     -       -       (19 )

Net income

    -       -       -       6,531       -       6,531  

Other comprehensive income

    -       -       -       -       199       199  

Balance, June 30, 2021

    14,418     $ 144     $ 60,699     $ 230,813     $ (4,852 )   $ 286,804  

 

   

Six Months Ended June 30, 2020

 
                                   

Accumulated

         
   

Common Stock

           

Other

   

Total

 
   

Number of

   

$.01 Par

   

Additional Paid

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Value

   

in Capital

   

Earnings

   

Loss

   

Equity

 

Balance, January 1, 2020

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

)

  $ 288,378  

Vesting of restricted stock units

    42       -       -       -       -       -  

Forfeiture of restricted stock awards

    (9

)

    -       -       -       -       -  

Stock-based compensation expense

    -       -       (207

)

    -       -       (207

)

Retirement of common stock for minimum tax withholdings

    (4

)

    -       (141

)

    -       -       (141

)

Repurchase of common stock

    (139

)

    (1

)

    1       -       -       -  

Net income

    -       -       -       5,793       -       5,793  

Other comprehensive loss

    -       -       -       -       (129

)

    (129

)

Balance, March 31, 2020

    14,198     $ 142     $ 48,360     $ 251,219     $ (6,027

)

  $ 293,694  

Issuance of common stock for equity awards

    2       -       68       -       -       68  

Vesting of restricted stock units

    7       -       -       -       -       -  

Stock-based compensation expense

    -       -       2,240       -       -       2,240  

Retirement of common stock for minimum tax withholdings

    (3

)

    -       (59

)

    -       -       (59

)

Net loss

    -       -       -       (7,708

)

    -       (7,708

)

Other comprehensive income

    -       -       -       -       209       209  

Balance, June 30, 2020

    14,204     $ 142     $ 50,609     $ 243,511     $ (5,818

)

  $ 288,444  

 

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

 

5

 

 

 

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

   

Six Months Ended June 30,

 
   

2021

   

2020

 

Cash flows from operating activities:

               

Net income (loss)

  $ 9,369     $ (1,915

)

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    7,011       6,459  

Non-cash operating lease cost

    912       725  

Goodwill impairment

    -       18,144  

Change in fair value of contingent consideration

    (18,470 )     (20,326

)

Loss on disposal of fixed assets

    831       265  

Loss on impairment of intangible asset

    -       1,025  

Stock-based compensation expense

    5,056       2,033  

Deferred income taxes

    1,196       (907

)

Provision (recovery) for doubtful accounts

    (26 )     (36

)

Provision for inventory

    2,404       3,259  

Amortization of acquisition related inventory step-up

    4,786       4,123  

Changes in operating assets and liabilities:

               

Accounts receivable

    (5,347 )     6,208  

Inventories

    (6,796 )     (5,410

)

Prepaid expenses, other current and long-term assets

    1,608       (373

)

Accounts payable

    (642 )     (2,462

)

Operating lease liabilities

    (849 )     (675

)

Accrued expenses, other current and long-term liabilities

    2,307       (5,135

)

Income taxes

    (1,487 )     (389

)

Net cash provided by operating activities

    1,863       4,613  
                 

Cash flows from investing activities:

               

Acquisition of Parcus Medical and Arthrosurface, net of cash acquired

    (352 )     (93,859

)

Proceeds from maturities of investments

    2,501       20,000  

Purchases of investments

    -       (20,035

)

Purchases of property and equipment

    (2,732 )     (908

)

Net cash used in investing activities

    (583 )     (94,802

)

                 

Cash flows from financing activities:

               

Payments made on finance leases

    (147 )     -  

Repayments of long term debt

    -       (351

)

Proceeds from long term debt

    -       50,000  

Cash paid for tax withheld on vested restricted stock awards

    (353 )     (200

)

Proceeds from exercises of equity awards

    643       68  

Net cash provided by financing activities

    143       49,517  
                 

Exchange rate impact on cash and cash equivalents

    (59 )     (45

)

                 

Increase (decrease) in cash and cash equivalents

    1,364       (40,717

)

Cash and cash equivalents at beginning of period

    95,817       157,463  

Cash and cash equivalents at end of period

  $ 97,181     $ 116,746  

Supplemental disclosure of cash flow information:

               

Non-cash Investing Activities:

               

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

  $ 263     $ 61  

Right of use assets

  $ 220     $ -  

Consideration for acquisitions included in accounts payable and accrued expenses

  $ -     $ 1,209  

Acquisition related contingent consideration

  $ -     $ 69,076  

Non-cash Financing Activities:

               

Operating lease liabilities

  $ 220     $ -  

 

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

 

6

 

 

ANIKA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

 

1.

Nature of Business

 

Anika Therapeutics, Inc. (“the Company”) is a global 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, Inc. (“Arthrosurface”), a company specializing in less invasive, bone preserving partial and total joint replacement solutions. These acquisitions broadened the Company’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.

 

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

 

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.

 

 

2.

Basis of Presentation

 

The accompanying unaudited consolidated financial statements and related notes have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States (“US GAAP”). The financial statements include the accounts of Anika Therapeutics, Inc. and its subsidiaries. Inter-company transactions and balances have been eliminated. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted from this report pursuant to SEC rules and regulations relating to interim financial statements. The December 31, 2020 balances reported herein are derived from the audited consolidated financial statements. In the opinion of management, these unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the consolidated financial statements.

 

The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s annual financial statements filed with its Annual Report on Form 10-K for the year ended December 31, 2020. The results of operations for the three- and six-month periods ended June 30, 2021 are not indicative of the results to be expected for the year ending December 31, 2021.

 

Segment Information

 

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its President and Chief Executive Officer as of June 30, 2021. Based on the criteria established by Accounting Standards Codification (“ASC”) 280, Segment Reporting, the Company has one operating and reportable segment.

 

7

 

Recent Accounting Adoptions

 

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify US GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The Company adopted ASU 2019-12 as of January 1, 2021. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures.  

 

 

3.

Business Combinations

 

Parcus Medical, LLC

 

On January 24, 2020, the Company completed the acquisition of Parcus Medical pursuant to the terms of the Agreement and Plan of Merger, dated as of January 4, 2020 (the “Parcus Medical Merger Agreement”), by and among the Company, Parcus Medical, the Unitholder Representative, and Sunshine Merger Sub LLC, a Wisconsin limited liability company and a wholly-owned subsidiary of the Company. At the closing date, Parcus Medical became a wholly-owned subsidiary of the Company. Parcus Medical is a sports medicine implant and instrumentation solutions provider focused on surgical repair and reconstruction of soft tissue.

 

The acquisition of Parcus Medical has been accounted for as a business combination under ASC 805. Under ASC 805, Business Combinations, the assets acquired and liabilities assumed in a business combination must be recorded at their fair value as of the acquisition date. The Company’s consolidated financial statements include results of operations for Parcus Medical from the January 24, 2020 acquisition date.

 

Consideration Transferred

 

Pursuant to the Parcus Medical Merger Agreement, the Company acquired all outstanding equity of Parcus Medical for estimated total purchase consideration of $75.1 million, as of January 24, 2020, which consisted of:

 

Cash consideration

 $32,794 

Deferred consideration

  1,642 

Estimated fair value of contingent consideration

  40,700 

Estimated total purchase consideration

 $75,136 

 

Contingent consideration represents additional payments that the Company may be required to make in the future, which could total up to $60.0 million depending on the level of net sales of Parcus Medical products generated in 2020 through 2022. The fair value of contingent consideration related to net sales as of January 24, 2020 was determined based on a Monte Carlo simulation model in an option pricing framework at the acquisition date, whereby a range of possible scenarios were simulated. There was deferred consideration related to certain purchase price holdbacks, which was resolved within one year of the acquisition date in accordance with the Parcus Merger Agreement and was recorded in accounts payable as of December 31, 2020. The liability for contingent and deferred consideration is included in current and long-term liabilities on the consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved. See Note 4, Fair Value Measurements, for additional discussion of contingent consideration as of June 30, 2021 and December 31, 2020.

 

Acquisition-related costs are not included as a component of consideration transferred but are expensed in the periods in which the costs are incurred. The Company incurred approximately $1.9 million in transaction costs related to the Parcus Medical acquisition during the three-month period ending March 31, 2020. The transaction costs subsequent to March 31, 2020 were immaterial. The transaction costs have been included in selling, general and administrative expenses in the consolidated statements of operations.

 

Fair Value of Net Assets Acquired

 

The estimate of fair value as of the acquisition date required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable, however, actual results may differ from these estimates.

 

8

 

The allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on estimates of fair value as of January 24, 2020, and is as follows:

 

Recognized identifiable assets acquired and liabilities assumed:

    

Cash and cash equivalents

 $196 

Accounts receivable

  2,029 

Inventories

  10,968 

Prepaid expenses and other current assets

  364 

Property and equipment, net

  1,099 

Right-of-use assets

  944 

Intangible assets

  44,000 

Accounts payable, accrued expenses and other current liabilities

  (2,763

)

Other long-term liabilities

  (594

)

Lease liabilities

  (735

)

Net assets acquired

  55,508 

Goodwill

  19,628 

Estimated total purchase consideration

 $75,136 

 

Subsequent to the acquisition date, during the three-month period ended September 30, 2020, the Company completed the identification and confirmation of Parcus Medical inventory in the possession of its direct and distributor sales force, which resulted in an increase to the fair value of inventory of $1.9 million as of the January 24, 2020 acquisition date. As a result, the Company recorded this addition to inventory with a corresponding reduction to goodwill as a measurement period adjustment which was reflected to the goodwill amount included in the table above. The impact to the consolidated statement of operations related to this adjustment was not material.

 

The acquired intangible assets based on estimates of fair value as of January 24, 2020 are as follows:

 

Developed technology

 $41,100 

Trade name

  1,800 

Customer relationships

  1,100 

Total acquired intangible assets

 $44,000 

 

The fair value of the developed technology intangible assets has been estimated using the multi-period excess earnings method, which is based on the principle that the value of an intangible asset is equal to the present value of the incremental after-tax cash flow attributable to the asset, after charges for other assets employed by the business. The fair value of the customer relationships has been estimated using the avoided costs/lost profits method, which is based on the principle that the value of an intangible asset is based on consideration of the total costs that would be avoided by having this asset in place. The fair value of the trade name has been estimated using the relief from royalty method of the income approach, which is based on the principle that the value of an intangible asset is equal to the present value of the after-tax royalty savings attributable to owning the intangible asset. Key estimates and assumptions used in these models are projected revenues and expenses related to the asset, estimated contributory asset charges, estimated costs to recreate the asset, and a risk-adjusted discount rate used to calculate the present value of the future expected cash inflows or cash outflows avoided from the asset.

 

The fair value of developed technology will be amortized over a useful life of 15 years, the fair value of customer relationships over 10 years, and the fair value of the trade name over 5 years.

 

The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and assigned to the newly established reporting unit for Parcus Medical and Arthrosurface. The goodwill is attributable to the workforce of the business and the value of future technologies expected to arise after the acquisition. Goodwill will not be amortized and is expected to be deductible for income tax purposes as the acquisition of the limited liability company is an asset purchase for tax purposes. See Note 7, Goodwill, for further discussion.

 

Arthrosurface, Inc.

 

On February 3, 2020, the Company completed the acquisition of Arthrosurface, pursuant to the terms of the Agreement and Plan of Merger, dated as of January 4, 2020 (the “Arthrosurface Merger Agreement”), by and among the Company, Arthrosurface, the Stockholder Representative, and Button Merger Sub, a Delaware corporation and a wholly-owned subsidiary of the Company. At the closing date, Arthrosurface became a wholly-owned subsidiary of the Company. Arthrosurface is a joint preservation technology company specializing in less invasive, bone-preserving partial and total joint replacement solutions.

 

9

 

The acquisition of Arthrosurface has been accounted for as a business combination under ASC 805. Under ASC 805, assets acquired and liabilities assumed in a business combination must be recorded at their fair values as of the acquisition date. The Company’s consolidated financial statements include results of operations for Arthrosurface from the February 3, 2020 acquisition date. 

 

Consideration Transferred

 

Pursuant to the Arthrosurface Merger Agreement, the Company acquired all outstanding equity of Arthrosurface for estimated total purchase consideration of $90.3 million, as of February 3, 2020, which consisted of:

 

Cash consideration

 $61,909 

Estimated fair value of contingent consideration

  28,376 

Estimated total purchase consideration

 $90,285 

 

Pursuant to the Arthrosurface Merger Agreement, the Company could be required to make future payments up to $40.0 million depending on the achievement of regulatory milestones and the level of net sales of Arthrosurface products in 2020 through 2021. The fair value of contingent consideration related to regulatory milestones as of February 3, 2020 was determined through a scenario-based discounted cash flow analysis using scenario probabilities and regulatory milestone dates. The fair value of contingent consideration related to net sales achievement as of February 3, 2020 was determined based upon a Monte Carlo simulation approach at acquisition date, whereby a range of possible scenarios were simulated. In October 2020 and July 2021, based upon the achievement of two distinct regulatory milestones, the Company paid $5.0 million and $10.0 million, respectively. The liability for contingent consideration is included in current and long-term liabilities on the consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved. See Note 4, Fair Value Measurements, for additional discussion of contingent consideration as of June 30, 2021 and December 31, 2020.

 

Acquisition-related costs are not included as a component of consideration transferred but are expensed in the periods in which the costs are incurred. The Company incurred approximately $2.2 million in transaction costs related to the Arthrosurface acquisition during the three-month period ending March 31, 2020. The transaction costs subsequent to March 31, 2020 were immaterial. The transaction costs have been included in selling, general and administrative expenses in the consolidated statements of operations.

 

Fair Value of Net Assets Acquired

 

The estimate of fair value required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable. However, actual results may differ from these estimates.

 

The allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on estimates of fair value as of February 3, 2020, as follows:

 

Recognized identifiable assets acquired and liabilities assumed:

    

Cash and cash equivalents

 $1,072 

Accounts receivable

  5,368 

Inventories

  15,652 

Prepaid expenses and other current assets

  535 

Property, plant and equipment

  3,394 

Other long-term assets

  7,548 

Intangible assets

  48,900 

Accounts payable, accrued expenses and other liabilities

  (3,929

)

Deferred tax liabilities

  (11,147

)

Net assets acquired

  67,393 

Goodwill

  22,892 

Estimated total purchase consideration

 $90,285 

 

Intangible assets acquired consist of:

    

Developed technology

 $37,000 

Trade name

  3,400 

Customer relationships

  7,900 

IPR&D

  600 

Total acquired intangible assets

 $48,900 

 

10

 

The fair value of the developed technology intangible assets has been estimated using the multi-period excess earnings method, which is based on the principle that the value of an intangible asset is equal to the present value of the incremental after-tax cash flow attributable to the asset, after charges for other assets employed by the business. The fair value of the customer relationships has been estimated using the avoided costs/lost profits method, which is based on the principle that the value of an intangible asset is based on consideration of the total costs that would be avoided by having this asset in place. The fair value of the trade name has been estimated using the relief from royalty method of the income approach, which is based on the principle that the value of an intangible asset is equal to the present value of the after-tax royalty savings attributable to owning the intangible asset. Key estimates and assumptions used in these models are projected revenues and expenses related to the asset, estimated contributory asset charges, estimated costs to recreate the asset, and a risk-adjusted discount rate used to calculate the present value of the future expected cash inflows or cash outflows avoided from the asset.

 

The fair value of developed technology will be amortized over an estimated useful life of 15 years, the fair value of customer relationships over 10 years, and the fair value of the trade name over 5 years. A total of $0.6 million represents the fair value of IPR&D with an indefinite useful life that will be evaluated for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

 

The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and assigned to the newly established reporting unit for Parcus Medical and Arthrosurface. The goodwill is attributable to the workforce of the business and the value of future technologies expected to arise after the acquisition. Goodwill will not be amortized and is not expected to be deductible for income tax purposes as the acquisition of the corporation is a stock purchase for tax purposes See Note 7, Goodwill, for further discussion.

 

Pro forma Information

 

The Parcus Medical and Arthrosurface acquisitions were both completed in the first quarter of 2020. Both acquired companies have similar businesses with all of their products in the Joint Preservation and Restoration product family, serving orthopedic surgeons, ambulatory surgical centers and hospitals. The Company has combined legacy Anika, Parcus Medical and Arthrosurface pro forma supplemental information as follows.

 

The unaudited pro forma information for the three- and six-month periods ended June 30, 2021 and 2020 was calculated after applying the Company’s accounting policies and the impact of acquisition date fair value adjustments. The pro forma financial information presents the combined results of operations of Anika, Parcus Medical and Arthrosurface as if the acquisitions had occurred on January 1, 2019 after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are factually supportable and directly attributable to the acquisitions.

 

These pro forma adjustments include: (i) a net increase in amortization expense to record amortization expense for the aforementioned acquired identifiable intangible assets, (ii) an adjustment to cost of revenue based on the preliminary inventory step-up and the anticipated inventory turnover, (iii) a net decrease in interest expense as a result of eliminating interest expense and interest income related to borrowings that were settled in accordance with the respective Parcus Medical Merger Agreement and Arthrosurface Merger Agreement, (iv) an adjustment to record the acquisition-related transaction costs in the period required, and (v) the tax effect of the pro forma adjustments using the anticipated effective tax rate. The effective tax rate of the combined company could be materially different from the effective rate presented in this unaudited pro forma combined financial information. As a result of the transaction, the combined company may be subject to annual limitations on its ability to utilize pre-acquisition net operating loss carryforwards to offset future taxable income. The amount of the annual limitation is determined based on the value of Anika immediately prior to the acquisition. As further information becomes available, any such adjustment described above could be material to the amounts presented in the unaudited pro forma combined financial statements. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred at the beginning of each period presented, or of future results of the consolidated entities.

 

The following table presents unaudited supplemental pro forma information:

 

  

Six Months ended June 30,

 
  

2021

  2020  

Total revenue

 $72,437  $70,028 

Net income (loss)

  9,369   (917

)

 

11

 

 

4.

Fair Value Measurements

 

The Company held investments in U.S. treasury bills of $2.5 million as available-for-sale securities at December 31, 2020. Unrealized losses and the associated tax impact on the Company’s available-for-sale securities were insignificant at December 31, 2020. There were no available-for-sale securities as of June 30, 2021.

 

The Company’s investments are all classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets. For cash, current receivables, accounts payable, and interest accrual, the carrying amounts approximate fair value, because of the short maturity of these instruments, and therefore fair value information is not included in the table below. Contingent consideration related to the previously described business combinations are classified within Level 3 of the fair value hierarchy as the determination of fair value uses considerable judgement and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability.

 

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

 

      

Active Markets

  

Significant Other

  

Significant

     
  

June 30,

2021

  

for Identical Assets

(Level 1)

  

Observable Inputs

(Level 2)

  

Unobservable Inputs

(Level 3)

  

Amortized Cost

 

Cash equivalents:

                    

Money Market Funds

 $67,038  $67,038  $-  $-  $67,038 
                     

Other current and long-term liabilities:

                    

Contingent Consideration - Short Term

 $16,870  $-  $-  $16,870  $- 

Contingent Consideration - Long Term

  70   -   -   70   - 

Total other current and long-term liabilities

 $16,940  $-  $-  $16,940  $- 

 

      

Active Markets

  

Significant Other

  

Significant

     
  

December 31,

2020

  

for Identical Assets

(Level 1)

  

Observable Inputs

(Level 2)

  

Unobservable Inputs

(Level 3)

  

Amortized Cost

 

Cash equivalents:

                    

Money Market Funds

 $74,522  $74,522  $-  $-  $74,522 
                     

Investments:

                    

U.S. Treasury Bills

 $2,501  $2,501  $-  $-  $2,524 
                     

Other current and long-term liabilities:

                    

Contingent Consideration - Short Term

 $13,090  $-  $-  $13,090  $- 

Contingent Consideration - Long Term

  22,320   -   -   22,320   - 

Total other current and long-term liabilities

 $35,410  $-  $-  $35,410  $- 

 

 

12

 

Contingent Consideration

 

The following table provides a rollforward of the contingent consideration related to business acquisitions discussed in Note 3, Business Combinations.

 

  

Three Months Ended

June 30, 2021

  

Six Months Ended

June 30, 2021

 

Balance, beginning

 $30,590  $35,410 

Additions

  -   - 

Payments

  -   - 

Change in fair value

  (13,650

)

  (18,470

)

Balance, ending

 $16,940  $16,940 

 

Under the Parcus Medical Merger Agreement and Arthrosurface Merger Agreement, 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 annually 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. The unobservable inputs used in the fair value measurement of the Company’s contingent consideration are the probabilities of successful achievement, the net sales estimates, the weighted average cost of capital used for the Monte Carlo simulation, discount rate and the periods in which the milestones are expected to be achieved. The discount rates used for the net sales milestones ranged from 2.2% - 2.3%, and for the regulatory earn-out milestones the discount rate was 2.7%. The weighted average cost of capital for Arthrosurface and Parcus increased from 11.4% as of December 31, 2020 to 11.8% as of June 30, 2021. Increases or decreases in the discount rate would result in a lower or higher fair value measurement, respectively. As of December 31, 2020, the probability of successful achievement of the regulatory earn-out milestones was determined to be in a range of 60%-75%. As of June 30, 2021, the probability of successful achievement of one of the regulatory earn-out milestones was determined to be 100% as the Company achieved a regulatory milestone prior to June 30, 2021. The probability of successful achievement of the remaining regulatory milestone was determined to be 0% as of June 30, 2021.

 

The overall fair value of the contingent consideration decreased by $13.7 million and $18.5 million during the three- and six-month periods ended June 30, 2021, respectively, to $16.9 million, due primarily to the decrease in the likelihood that certain contingent milestones would be achieved and result in payment. The fair value of remaining contingent consideration is assessed on a quarterly basis.

 

In October 2020, the Company made a regulatory-based milestone payment of $5.0 million pursuant to the terms of the Arthrosurface Merger Agreement as a result of regulatory clearance for the WristMotion Total Arthroplasty System. In June 2021, the Company received regulatory clearance for a reverse shoulder implant system, which triggered a $10.0 million regulatory milestone payment per the terms of the Arthrosurface Merger Agreement. This amount is included as contingent consideration in current liabilities in the Company’s consolidated balance sheet as of June 30, 2021 and was paid in July 2021.

 

 

5.

Inventories

 

Inventories consist of the following:

 

  

June 30,

  

December 31,

 
  

2021

  

2020

 

Raw materials

 $14,892  $14,852 

Work-in-process

  11,818   12,811 

Finished goods

  33,876   33,347 

Total

 $60,586  $61,010 
         

Inventories

 $42,857  $46,209 

Other long-term assets

  17,729   14,801 

 

The Company recorded an inventory reserve of $2.5 million during the three-month period ended June 30, 2021, of which $0.4 million was associated with the acquisition related inventory step-up, as a result of the Company's product rationalization efforts.

 

13

 

 

6.

Intangible Assets

 

Intangible assets as of June 30, 2021 and December 31, 2020 consisted of the following:

 

      

Six Months Ended June 30, 2021

  

December 31,

2020

     
  

Gross
Value

  

Less: Accumulated
Currency Translation
Adjustment

  

Less:
Accumulated
Amortization

  

Net Book
Value

  

Net Book
Value

  

Weighted
Average Useful
Life

 

Developed technology

 $89,580  $(1,506) $(14,975) $73,099  $75,899   15 

IPR&D

  3,256   (926)  -   2,330   2,587  

Indefinite

 

Customer relationships

  9,000   -   (1,277)  7,723   8,173   10 

Distributor relationships

  4,700   (415)  (4,285)  -   -   5 

Patents

  1,000   (180)  (607)  213   259   16 

Tradenames

  5,200   -   (1,481)  3,719   4,239   5 

Total

 $112,736  $(3,027) $(22,625) $87,084  $91,157   13 

 

The aggregate amortization expense related to intangible assets was $2.0 million and $2.2 million for the three-month periods ended June 30, 2021 and 2020, respectively, and $3.9 million and $3.5 million for the six-month periods ended June 30, 2021 and 2020, respectively. 

 

 

7.

Goodwill

 

The Company assesses goodwill for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment.

 

Changes in the carrying value of goodwill for the six months ended June 30, 2021 were as follows:

 

  

Six Months Ended

June 30, 2021

 

Balance, beginning January 1, 2021

 $8,413 

Effect of foreign currency adjustments

  (264)

Balance, ending June 30, 2021

 $8,149 

 

 

8.

Accrued Expenses and Other Liabilities

 

Accrued expenses and other liabilities consist of the following:

 

  

June 30,
2021

  

December 31,
2020

 
         

Compensation and related expenses

 $7,754  $7,345 

Professional fees

  2,542   3,438 

Operating lease liability - current

  1,524   1,437 

Clinical trial costs

  2,604   1,429 

Other

  1,972   1,144 

Total

 $16,396  $14,793 

 

14

 

 

9.

Commitments and Contingencies

 

In certain of its contracts, the Company warrants to its customers that the products it manufactures conform to the product specifications as in effect at the time of delivery of the specific product. The Company may also warrant that the products it manufactures do not infringe, violate, or breach any U.S. or international patent or intellectual property right, trade secret, or other proprietary information of any third party. On occasion, the Company contractually indemnifies its customers against any and all losses arising out of, or in any way connected with, any claim or claims of breach of its warranties or any actual or alleged defect in any product caused by the negligent acts or omissions of the Company. The Company maintains a products liability insurance policy that limits its exposure to these risks. Based on the Company’s historical activity, in combination with its liability insurance coverage, the Company believes the estimated fair value of these indemnification agreements is immaterial. The Company had no accrued warranties as of June 30, 2021 and December 31, 2020 and has no history of claims paid.

 

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

 

 

10.

Revenue

 

Revenue by product family was as follows: 

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Joint Pain Management

 $24,321  $22,247  $43,637  $47,730 

Joint Preservation and Restoration

  11,884   6,622   24,103   14,518 

Other

  1,940   1,809   4,697   3,827 
  $38,145  $30,678  $72,437  $66,075 

 

Revenue from the Company’s sole significant customer, DePuy Synthes Mitek Sports Medicine (“Mitek”), part of the Johnson & Johnson Medical Companies, as a percentage of the Company’s total revenue was 46% and 54% for the three months ended June 30, 2021 and 2020, respectively, and 44% and 54% for the six months ended June 30, 2021 and 2020, respectively

 

We receive payments from our customers based on billing schedules established in each contract. Up-front payments 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 $0.9 million and $0.2 million as of June 30, 2021 and December 31, 2020, respectively.

 

Total revenue by geographic location was as follows:

 

  

Three Months Ended June 30,

 
  

2021

  

2020

 
  

Total

  

Percentage of

  

Total

  

Percentage of

 
  

Revenue

  

Revenue

  

Revenue

  

Revenue

 

Geographic Location:

                

United States

 $30,069   79

%

 $25,133   82%

Europe

  5,089   13

%

  2,910   9%

Other

  2,987   8

%

  2,635   9%

Total

 $38,145   100

%

 $30,678   100%

 

  

Six Months Ended June 30,

 
  

2021

  

2020

 
  

Total

  

Percentage of

  

Total

  

Percentage of

 
  

Revenue

  

Revenue

  

Revenue

  

Revenue

 

Geographic Location:

                

United States

 $55,074   76

%

 $51,438   78%

Europe

  10,570   15

%

  8,186   12%

Other

  6,793   9

%

  6,451   10%

Total

 $72,437   100

%

 $66,075   100%

 

15

 

 

11.

Stock-Based Compensation

 

On June 16, 2021, the Company’s stockholders approved an amendment to the 2017 Plan. The amendment increased the number of shares of common stock reserved under the 2017 Plan by 1.1 million shares from 3.5 million shares to 4.6 million shares.

 

The Company presents the expenses related to stock-based compensation awards in the same expense line items as cash compensation paid to each of its employees as follows:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2021

  

2020

  

2021

  

2020

 

Cost of revenue

 $214  $216  $343  $362 

Research and development

  402   156   643   352 

Selling, general and administrative

  2,181   1,868   4,070   1,319 

Total stock-based compensation expense

 $2,797  $2,240  $5,056  $2,033 

 

 

12.

Income Taxes

 

The Company recorded an income tax provision of $2.6 million and $1.0 million for the three- and six-month periods ended June 30, 2021, resulting in effective tax rates of 28.5% and 9.4%, respectively. The benefit from income taxes was $2.0 million and $0.4 million for the three- and six-month periods ended June 30, 2020, based on effective tax rates of 20.6% and 17.9%, respectively. The net increase in the effective tax rate for the three-month period ended June 30, 2021, as compared to the same period in 2020, was primarily due to $0.7 million recorded as tax expense for the change in the fair value of the contingent consideration, recognized as a discrete charge in the second quarter of 2021. The year to date net tax benefit on the change in the fair value of the contingent consideration, in the amount of $1.1 million, resulted in a net decrease in the effective tax rate for the six-month period ended June 30, 2021, as compared to the same period in 2020.

 

The Company files income tax returns in the United States on a federal basis, in certain U.S. states, and in certain foreign jurisdictions. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate.

 

In connection with the preparation of the financial statements, the Company assessed whether it is more likely than not that it will be able to utilize, in future periods, the deferred income taxes to offset future taxable income. The Company has concluded that it is more likely than not that the majority of its deferred tax assets will be realized through consideration of both the positive and negative evidence.  

 

 

13.

Earnings Per Share (EPS)

 

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

 

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

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2021

  

2020

  

2021

  

2020

 

Shares used in the calculation of basic EPS

  14,393   14,199   14,368   14,201 

Effect of dilutive securities:

                

Share based awards

  234   -   215   - 

Diluted shares used in the calculation of EPS

  14,627   14,199   14,583   14,201 

 

Stock options of 1.0 million shares were outstanding for each of the three-month periods ended June 30, 2021 and 2020 and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive. Stock options of 1.1 million and 0.9 million shares were outstanding for the six-month periods ended June 30, 2021 and 2020 and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive. 

 

16

 

 

 

ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion in conjunction with our financial statements and related notes appearing elsewhere in this report and our audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2020, or our 2020 Form 10-K. In addition to historical information, this report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning our business, consolidated financial condition, and results of operations. The Securities and Exchange Commission, or the SEC, encourages companies to disclose forward-looking statements so that investors can better understand a company’s prospects and make informed investment decisions. Forward-looking statements are subject to risks and uncertainties, many of which are outside our control, which could cause actual results to differ materially from these statements. Therefore, you should not rely on any of these forward-looking statements. Forward-looking statements can be identified by such words as "will," "likely," "may," "believe," "expect," "anticipate," "intend," "seek," "designed," "develop," "would," "future," "can," "could," “estimate,” “potential,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters. All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, operations, costs, plans, and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements regarding the effect of COVID-19 and related impacts on our business, operations, and financial results, expected future operating results, expectations regarding the timing and receipt of regulatory results, anticipated levels of capital expenditures, and expectations of the effect on our financial condition of claims, litigation, and governmental and regulatory proceedings.

 

Please also refer to those factors described in “Part I, Item 1A. Risk Factors” of our 2020 Form 10-K and in Part II, Item 1A “Risk Factors” of this report for important factors that we believe could cause actual results to differ materially from those in our forward-looking statements. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

 

Management Overview

 

We are a global joint preservation company that creates and delivers meaningful advancements in early intervention orthopedic care. Based on our collaborations with clinicians to understand what they need most to treat their patients, we develop minimally invasive products that restore active living for people around the world. We are committed to leading in high opportunity spaces within orthopedics, including osteoarthritis, or OA, pain management, regenerative solutions, 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 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 seasoned leadership 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 pipeline of regenerative solutions, bone preserving implants and soft tissue solutions;

 

 

Leveraging global commercial expertise to drive growth across the portfolio;

 

 

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

 

 

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

 

17

 

COVID-19 Pandemic

 

In March 2020, the World Health Organization declared the spread of the COVID-19 virus a global 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 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 increasing as the result of emerging variants of COVID-19. These fluctuations make future results difficult to predict despite recent advances in the vaccination rates of certain parts of the population. 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 of a work from home policy, where possible. While increasing vaccination rates and the loosening of restrictions, especially in the United States, have resulted in a return to a more normalized business environment, the pandemic continues to have an impact on our business in certain jurisdictions and a resurgence of COVID-19 as a result of emerging variants or other factors, as is currently occurring in certain jurisdictions, could result in additional government lockdowns, quarantine requirements, or other restrictions that could impact our business and operations. We may also 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. 

 

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 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 and is not available for commercial sale.

 

 

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., 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 the patients to retain an active lifestyle, when early surgical intervention becomes preferable. We commercialize these products in the United States by directly selling to hospitals and surgery centers 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 technologies based on HA and Hyaff, 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 and is not available for commercial sale.

 

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.

 

18

 

Results of Operations

 

Three and Six Months Ended June 30, 2021 Compared to Three and Six Months Ended June 30, 2020

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2021

   

2020

   

$ Change

   

% Change

   

2021

   

2020

   

$ Change

   

% Change

 
   

(in thousands, except percentages)

   

(in thousands, except percentages)

 

Revenue

  $ 38,145     $ 30,678     $ 7,467       24 %   $ 72,437     $ 66,075     $ 6,362       10 %

Cost of revenue

    17,333       16,936       397       2 %     30,651       31,136       (485

)

    (2 )%

Gross profit

    20,812       13,742       7,070       51 %     41,786       34,939       6,847       20 %

Gross margin

    55

%

    45

%

                    58

%

    53

%

               

Operating expenses:

                                                               

Research and development

    7,293       4,532       2,761       61 %     13,654       10,582       3,072       29 %

Selling, general and administrative

    17,989       14,550       3,439       24 %     36,164       28,981       7,183       25 %

Goodwill impairment

    -       -       -       -       -       18,144       (18,144

)

    (100 %)

Change in fair value of contingent consideration

    (13,650

)

    4,196       (17,846

)

    (425 %)     (18,470

)

    (20,326

)

    1,856       (9 %)

Total operating expenses

    11,632       23,278       (11,646

)

    (50 %)     31,348       37,381       (6,033

)

    (16 %)

Income (loss) from operations

    9,180       (9,536

)

    18,716       196 %     10,438       (2,442

)

    12,880       527 %

Interest and other income (expense), net

    (50

)

    (169

)

    119       (70 %)     (93

)

    110       (203 )     (185 %)

Income (loss) before income taxes

    9,130       (9,705

)

    18,835       194 %     10,345       (2,332

)

    12,677       544 %

Provision for (benefit from) income taxes

    2,599       (1,997

)

    4,596       230 %     976       (417

)

    1,393       334 %

Net income (loss)

  $ 6,531     $ (7,708

)

  $ 14,239       185 %   $ 9,369     $ (1,915

)

  $ 11,284       589 %

 

Revenue

 

Revenue for the three-month period ended June 30, 2021 was $38.2 million, an increase of $7.5 million as compared to $30.7 million for the three-month period ended June 30, 2020. Revenue for the six-month period ended June 30, 2021 was $72.4 million, an increase of $6.4 million as compared to $66.1 million for the six-month period ended June 30, 2020. For the three- and six-month periods ended June 30, 2021, the increases in revenue were primarily driven by recovery from the initial impact of COVID on prior year sales volumes. The increase for the six-month period ended June 30, 2021, was also in part due to inclusion of full first quarter results of Parcus Medical and Arthrosurface, which we acquired on January 24, 2020 and February 3, 2020, respectively. 

 

The following tables present product revenue by product family:

 

   

Three Months Ended June 30,

 
   

2021

   

2020

   

$ change

   

% change