UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended SeptemberJune 30, 20202021

 

TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934

 

For the transition period from to                  

 

Commission File Number 000-21326001-14027

 

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, Massachusetts01730
(Address of Principal Executive Offices)(Zip Code)

 

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 OctoberJuly 26, 2020,2021, there were 14,214,51614,423,028 outstanding shares of Common Stock, par value $0.01 per share.

 



 

 

ANIKA THERAPEUTICS,INC.

TABLE OF CONTENTS

 

 

Page

Part I

Financial Information

 

Item 1.

Financial Statements (unaudited):

3

 

Consolidated Balance Sheets as of SeptemberJune 30, 20202021 and December 31, 20192020

3

 

Consolidated Statements of Operations and Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20202021 and 20192020

4

 

Consolidated Statements of Stockholders’ Equity for the ninesix months ended SeptemberJune 30, 20202021 and 20192020

5

 

Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20202021 and 20192020

6

 

Notes to Consolidated Financial Statements

7

Item 2.

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

2417

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

3525

Item 4.

Controls and Procedures

3525

Part II

Other Information

 

Item 1.

Legal Proceedings

3626

Item 1A.

Risk Factors

3626

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

3826

Item 6.

Exhibits

3927

Signatures

4028

 

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,Anika, Arthrosurface, Anika Therapeutics, Cingal, Hyaff, Monovisc, Orthovisc, Parcus Medical, Tactoset, Hyvisc and WRISTMOTIONWristMotion 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 additional registered marks, trademarks and trade names including ones that are the property of other companies and licensed to us.

 

 

 



 

PART I:

FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

AnikaTherapeutics,Inc.andSubsidiaries


Consolidated Balance
Sheets


(in thousands, except per share data)


(unaudited)

 

 

September 30,

 

December 31,

  

June 30,

 

December 31,

 

ASSETS

 

2020

  

2019

  

2021

  

2020

 

Current assets:

      

Cash and cash equivalents

 $104,216  $157,463  $97,181  $95,817 

Investments

 20,542  27,480  0  2,501 

Accounts receivable, net of reserves of $1,055 and $962 at September 30, 2020 and December 31, 2019, respectively

 23,009  23,079 

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

 47,882  21,995  42,857  46,209 

Prepaid expenses and other current assets

  6,226   4,289   8,297   8,754 

Total current assets

  201,875   234,306  177,761  177,383 

Property and equipment, net

 51,629  50,783  49,540  50,613 

Right-of-use assets

 22,898  22,864  21,849  22,619 

Other long-term assets

 13,226  7,478  18,748  15,420 

Intangible assets, net

 94,291  7,585  87,084  91,157 

Goodwill

  32,419   7,694   8,149   8,413 

Total assets

 $416,338  $330,710  $363,131  $365,605 
  

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

LIABILITIES AND STOCKHOLDERS EQUITY

    

Current liabilities:

      

Accounts payable

 $6,800  $3,832  $8,101  $8,984 

Accrued expenses and other current liabilities

  24,339   12,445  16,396  14,793 

Contingent consideration – current portion

  16,870   13,090 

Total current liabilities

  31,139   16,277   41,367   36,867 

Other long-term liabilities

 987  357  1,710  1,244 

Contingent consideration

 41,045  0  70  22,320 

Long-term debt

 25,000  0 

Deferred tax liability

 12,584  4,331  13,100  11,895 

Lease liabilities

 21,132  21,367  20,080  20,879 

Commitments and contingencies (Note 10)

       

Commitments and contingencies (Note 9)

       

Stockholders’ equity:

      

Common stock, $0.01 par value; 90,000 shares authorized, 14,208 and 14,308 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

 142  143 

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

 0  0 

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

 52,505  48,707  60,699  55,355 

Accumulated other comprehensive loss

 (5,296) (5,898) (4,852) (4,542

)

Retained earnings

  237,100   245,426   230,813   221,444 

Total stockholders’ equity

  284,451   288,378   286,804   272,400 

Total liabilities and stockholders’ equity

 $416,338  $330,710  $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)

 

 

For the Three Months Ended September 30,

  

For the Nine Months Ended September 30,

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 

Product revenue

 $31,694  $29,615  $97,769  $84,745 

Licensing, milestone and contract revenue

  0   82   0   93 

Total revenue

 31,694  29,697  97,769  84,838 

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:

          

Cost of product revenue

 14,351  5,951  45,487  20,098 

Research & development

 5,217  4,158  15,799  12,581 

Selling, general & administrative

 15,903  7,539  44,884  22,713 

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

 0  0  18,144  0  0  0  0  18,144 

Change in fair value of contingent consideration

  4,150   0   (16,176)  0   (13,650)  4,196   (18,470)  (20,326

)

Total operating expenses

  39,621   17,648   108,138   55,392   11,632   23,278   31,348   37,381 

Income (loss) from operations

 (7,927) 12,049  (10,369) 29,446  9,180  (9,536

)

 10,438  (2,442

)

Interest and other income (expense), net

  (228)  482   (118)  1,513   (50)  (169

)

  (93)  110 

Income (loss) before income taxes

 (8,155) 12,531  (10,487) 30,959  9,130  (9,705

)

 10,345  (2,332

)

Provision for (benefit from) income taxes

  (1,744)  3,331   (2,161)  7,817   2,599   (1,997

)

  976   (417

)

Net income (loss)

 $(6,411) $9,200  $(8,326) $23,142  $6,531  $(7,708

)

 $9,369  $(1,915

)

  

Basic net income (loss) per share:

         

Net income (loss)

 $(0.45) $0.65  $(0.59) $1.65 

Basic weighted average common shares outstanding

 14,205  14,070  14,202  14,065 

Diluted net income (loss) per share:

         

Net income (loss)

 $(0.45) $0.64  $(0.59) $1.62 

Diluted weighted average common shares outstanding

 14,205  14,387  14,202  14,266 

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)

 $(6,411) $9,200  $(8,326) $23,142  $6,531  $(7,708

)

 $9,369  $(1,915

)

Foreign currency translation adjustment

  522   (622)  602   (792)  199   209   (310)  80 

Comprehensive income (loss)

 $(5,889) $8,578  $(7,724) $22,350  $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)

 

 

For the Nine Months Ended September 30, 2020

  

Six Months Ended June 30, 2021

 
                 

Accumulated

                     

Accumulated

    
 

Common Stock

      

Other

 

Total

  

Common Stock

      

Other

 

Total

 
 

Number of

 

$.01 Par

 

Additional Paid

 

Retained

 

Comprehensive

 

Stockholders'

  

Number of

 

$.01 Par

 

Additional Paid

 

Retained

 

Comprehensive

 

Stockholders'

 
 

Shares

  

Value

  

in Capital

  

Earnings

  

Loss

  

Equity

  

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

 -  0  (207) 0  0  (207)

Retirement of common stock for minimum tax withholdings

 (4) 0  (141) 0  0  (141)

Repurchase of common stock

 (139) (1) 1  0  0  0 

Net income

 -  0  0  5,793  0  5,793 

Other comprehensive loss

  -   0   0   0   (129)  (129)

Balance, March 31, 2020

  14,198  $142  $48,360  $251,219  $(6,027) $293,694 

Balance, January 1, 2021

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

)

 $272,400 

Issuance of common stock for equity awards

 2  0  68  0  0  68  0  0  1  0  0  1 

Vesting of restricted stock units

 7  -  -  -  -  -  46  1  (1

)

 - - - 

Stock-based compensation expense

 -  0  2,240  0  0  2,240  -  0  2,259  0  0  2,259 

Retirement of common stock for minimum tax withholdings

 (3) 0  (59) 0  0  (59) (9

)

 0  (333

)

 0  0  (333

)

Net loss

 -  0  0  (7,708) 0  (7,708)

Net income

 -  0  0  2,838  0  2,838 

Other comprehensive income

  -   0   0   0   209   209   -   0   0   0   (509

)

  (509

)

Balance, June 30, 2020

  14,204  $142  $50,609  $243,511  $(5,818) $288,444 

Balance, March 31, 2021

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

)

 $276,656 

Issuance of common stock for equity awards

 18  0  640  0  0  640 

Vesting of restricted stock units

 4  -  -  -  -  -  35  0  0  0  0  0 

Stock-based compensation expense

 -  0  1,920  0  0  1,920  -  0  2,797  0  0  2,797 

Retirement of common stock for minimum tax withholdings

 -  0  (24) 0  0  (24) (1) 0  (19) 0  0  (19)

Net loss

 -  0  0  (6,411) 0  (6,411)

Net income

 -  0  0  6,531  0  6,531 

Other comprehensive income

  -   0   0   0   522   522   -   0   0   0   199   199 

Balance, September 30, 2020

  14,208  $142  $52,505  $237,100  $(5,296) $284,451 

Balance, June 30, 2021

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

 

 

For the Nine Months Ended September 30, 2019

  

Six Months Ended June 30, 2020

 
                 

Accumulated

                     

Accumulated

    
 

Common Stock

      

Other

 

Total

  

Common Stock

      

Other

 

Total

 
 

Number of

 

$.01 Par

 

Additional Paid

 

Retained

 

Comprehensive

 

Stockholders'

  

Number of

 

$.01 Par

 

Additional Paid

 

Retained

 

Comprehensive

 

Stockholders'

 
 

Shares

  

Value

  

in Capital

  

Earnings

  

Loss

  

Equity

  

Shares

  

Value

  

in Capital

  

Earnings

  

Loss

  

Equity

 

Balance, January 1, 2019

  14,210  $142  $50,763  $218,233  $(5,526) $263,612 

Issuance of common stock for equity awards

 7  0  5  0  0  5 

Balance, January 1, 2020

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

)

 $288,378 

Vesting of restricted stock units

 42  0  0  0  0  0 

Forfeiture of restricted stock awards

 (9

)

 0  0  0  0  0 

Stock-based compensation expense

 -  0  (207

)

 0  0  (207

)

Retirement of common stock for minimum tax withholdings

 (3) 0  (124) 0  0  (124) (4

)

 0  (141

)

 0  0  (141

)

Stock-based compensation expense

 -  0  1,386  0  0  1,386 

Repurchase of common stock

 (139

)

 (1

)

 1  0  0  0 

Net income

 -  0  0  4,507  0  4,507  -  0  0  5,793  0  5,793 

Other comprehensive loss

  -   0   0   0   (315)  (315)  -   0   0   0   (129

)

  (129

)

Balance, March 31, 2019

  14,214  $142  $52,030  $222,740  $(5,841) $269,071 

Balance, March 31, 2020

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

)

 $293,694 

Issuance of common stock for equity awards

 30  1  851  0  0  852  2  0  68  0  0  68 

Forfeiture of restricted stock

 (7) -  -  -  -  - 

Vesting of restricted stock units

 7  0  0  0  0  0 

Stock-based compensation expense

 -  0  1,443  0  0  1,443  -  0  2,240  0  0  2,240 

Repurchase of common stock

 (452) (5) (29,995) 0 0  (30,000)

Net income

 -  0  0  9,435  0  9,435 

Retirement of common stock for minimum tax withholdings

 (3

)

 0  (59

)

 0  0  (59

)

Net loss

 -  0  0  (7,708

)

 0  (7,708

)

Other comprehensive income

  -   0   0   0   145   145   -   0   0   0   209   209 

Balance, June 30, 2019

  13,785  $138  $24,329  $232,175  $(5,696) $250,946 

Issuance of common stock for equity awards

 488  5  20,962  0 0  20,967 

Forfeiture of restricted stock

 (2) - - - - - 

Stock-based compensation expense

 - 0  1,311  0 0  1,311 

Retirement of common stock for minimum tax withholding

 (2) 0  (120) 0 0  (120)

Net income

 - 0 0  9,200  0  9,200 

Other comprehensive loss

  -   0   0   0   (622)  (622)

Balance, September 30, 2019

  14,269  $143  $46,482  $241,375  $(6,318) $281,682 

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)

 

 

Nine Months Ended September 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2021

  

2020

 

Cash flows from operating activities:

      

Net income (loss)

 $(8,326) $23,142  $9,369  $(1,915

)

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

      

Depreciation and amortization

 9,963  4,459  7,011  6,459 

Payment of interest expense on finance leases

 (22) 0 

Non-cash operating lease cost

 1,136  880  912  725 

Goodwill impairment

 18,144  0  0  18,144 

Change in fair value of contingent consideration

 (16,176) 0  (18,470) (20,326

)

Loss on disposal of fixed assets

 287  927  831  265 

Loss on impairment of intangible asset

 1,025  303  0  1,025 

Stock-based compensation expense

 3,953  4,140  5,056  2,033 

Deferred income taxes

 (3,302) 941  1,196  (907

)

Provision (recovery) for doubtful accounts

 (482) (450) (26) (36

)

Provision for inventory

 4,205  1,062  2,404  3,259 

Amortization of acquisition-related inventory step-up

 7,396  0 

Accretion of amortized cost of investments

 3  (1,075)

Amortization of acquisition related inventory step-up

 4,786  4,123 

Changes in operating assets and liabilities:

      

Accounts receivable

 7,811  (2,751) (5,347) 6,208 

Inventories

 (8,840) (6,600) (6,796) (5,410

)

Prepaid expenses, other current and long-term assets

 (989) 440  1,608  (373

)

Accounts payable

 (1,904) (335) (642) (2,462

)

Operating lease liabilities

 (1,286) (796) (849) (675

)

Accrued expenses, other current and long-term liabilities

 (2,340) (681) 2,307  (5,135

)

Income taxes

  222   377   (1,487)  (389

)

Net cash provided by operating activities

  10,478   23,983   1,863   4,613 
  

Cash flows from investing activities:

      

Acquisition of Parcus Medical and Arthrosurface, net of cash acquired

 (93,859) 0  (352) (93,859

)

Proceeds from maturities of investments

 27,000  87,594  2,501  20,000 

Purchases of investments

 (20,035) (86,368) 0  (20,035

)

Purchases of property and equipment

  (1,179)  (2,559)  (2,732)  (908

)

Net cash used in investing activities

  (88,073)  (1,333)  (583)  (94,802

)

  

Cash flows from financing activities:

      

Payments made on finance leases

 (155) 0  (147) 0 

Repurchases of common stock

 0  (30,000)

Repayments of long term debt

 (25,351) 0  0  (351

)

Proceeds from long term debt

 50,000  0  0  50,000 

Cash paid for tax withheld on vested restricted stock awards

 (224) (245) (353) (200

)

Proceeds from exercises of equity awards

  68   21,825   643   68 

Net cash provided by (used in) financing activities

  24,338   (8,420)

Net cash provided by financing activities

  143   49,517 
        

Exchange rate impact on cash

  10   109 

Exchange rate impact on cash and cash equivalents

  (59)  (45

)

  

(Decrease)/Increase in cash and cash equivalents

 (53,247) 14,339 

Increase (decrease) in cash and cash equivalents

 1,364  (40,717

)

Cash and cash equivalents at beginning of period

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

Cash and cash equivalents at end of period

 $104,216  $103,381  $97,181  $116,746 

Supplemental disclosure of cash flow information:

         

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

 $0  $24,110 

Non-cash Investing Activities:

      

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

 $44  $132  $263  $61 

Right of use assets

 $220  $0 

Consideration for acquisitions included in accounts payable and accrued expenses

 $1,209  $0  $0  $1,209 

Acquisition-related contingent consideration

 $69,076  $0 

Acquisition related contingent consideration

 $0  $69,076 

Non-cash Financing Activities:

 

Operating lease liabilities

 $220  $0 

 

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

 

6


 

ANIKA THERAPEUTICS, INC. AND SUBSIDIARIES

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 surgicalsports medicine and soft tissue repair, and reconstruction of ligaments and tendons, and Arthrosurface, IncorporatedInc. (“Arthrosurface”), a joint preservation technology company specializing in less invasive, bone preserving partial and total joint replacement solutions. These acquisitions broadened Anika'sthe 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.

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 impact that COVID-19may 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 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-19may 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 (the “SEC”(“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, 20192020 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, 2019.2020. The results of operations for the three- and ninesix-month periods ended SeptemberJune 30, 20202021 are not necessarily indicative of the results to be expected for the year ending December 31, 2020.2021.

7

 

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'sCompany’s chief operating decision maker is its President and Chief Executive Officer. 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 August 2018,December 2019, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting Standards Update (“ASU”) No.20182019-15,12, IntangiblesIncome Taxes (Topic 740) Goodwill and Other Internal-Use Software (Subtopic 350-40), which amends ASU No.2015-05,Customers Simplifying the Accounting for Fees in a Cloud ComputingIncome Taxes, Agreement, to help entities evaluatesimplify the accounting for fees paidincome taxes by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The most significant change aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. Accordingly, the amendments in ASU 2018-15 require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as assets relatedremoving certain exceptions to the service contractgeneral principles in Topic 740. The amendments also improve consistent application of and which costs to expense.simplify US GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 20182019-1512is effective for fiscal years and interim periods beginning after December 15, 2019.2020 and interim periods within those fiscal years. The Company adopted ASU 20182019-1512 using the prospective method as of January 1, 2020.2021. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No.2016-13,Financial Instruments - Credit Losses. The standard, including subsequently issued amendments, requires a financial asset measured at amortized cost basis, such as accounts receivable and certain other financial assets, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for fiscal years and interim periods beginning after December 15, 2019 and requires the modified retrospective approach. The Company adopted ASU 2016-13 as of January 1, 2020. The adoption primarily impacted its trade receivables. The Company assesses its customer's ability to pay by conducting a credit review which includes an assessment of the customer's creditworthiness. The Company monitors the credit exposure through active review of customer balances. The Company's expected loss methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' account balances. Concentrations of credit risks are limited due to the large number of customers and their dispersion across a number of geographic areas. The historical credit losses have not been significant due to this dispersion and the financial stability of its customers. The Company considers credit losses immaterial to its business and, therefore, has not provided all the disclosures otherwise required by the standard.

 

 

3.

Business Combinations

 

Parcus Medical, LLC

On January 24, 2020, Anika Therapeutics, Inc.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. Recorded fair valuation of assets acquired and liabilities assumed related to the acquisition of Parcus Medical is preliminary and will be completed as soon as practicable, but no later than one year after the consummation of the transaction. Anika’sThe Company’s consolidated financial statements include results of operations for Parcus Medical from the January 24, 2020 acquisition date.

 

8

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 consistsconsisted 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 totalscould 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. DeferredThere was deferred consideration is related to certain purchase price holdbacks, which will bewas resolved within one year of the acquisition date in accordance with the Parcus Merger Agreement and werewas recorded in accounts payable as of September 30,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 arehave been included in selling, general and administrative expenses in the consolidated statements of operations.

 

Fair Value of Net Assets Acquired

The preliminary 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. The assessment of fair value is preliminary and is based on information that was available to management at the time the consolidated financial statements were prepared. Those estimates and assumptions are subject to change as the Company obtains additional information related to those estimates during the applicable measurement periods (up to one year from the acquisition date).

 

98


The preliminary allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on preliminary 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 

 

DuringSubsequent 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.adjustment which was reflected to the goodwill amount included in the table above. The impact to the consolidated statement of operations for the three and nine months ended September 30, 2020 related to this adjustment iswas not material.

 

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

 

Intangible assets acquired consist of:

   

Developed technology

 $41,100  $41,100 

Trade name

 1,800  1,800 

Customer relationships

  1,100   1,100 

Total intangible assets

 $44,000 

Total acquired intangible assets

 $44,000 

 

The preliminary 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 preliminary 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 preliminary 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 final fair value determination of the identified intangible assets may differ from this preliminary determination, and such differences could be material. Based on the preliminary valuation, approximately $44.0 million represents the fair value of identifiable intangible assets. Approximately $41.1 million represents the fair value of developed technology that will be amortized over a useful life of 15 years, $1.1 million represents the fair value of customer relationships that will be amortized over a useful life of 10 years, and $1.8 million represents the fair value of the trade name that will be amortized over a useful life of 5 years.

 

10

RevenueThe excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and Net Lossassigned 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.

 

The Company recorded revenue from Parcus Medical of $3.3 million and a net loss of $1.6 million in the three-month period ended September 30, 2020. The Company recorded revenue from Parcus Medical of $7.9 million and a net loss of $4.5 million in the period from January 24 through September 30, 2020.Arthrosurface, Inc.

 

Arthrosurface, Inc.

On February 3, 2020, Anika Therapeutics, Inc.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 final valuation of assets acquired and liabilities assumed related to the acquisition of Arthrosurface is expected to be completed as soon as practicable, but no later than one year after the consummation of the transaction. Anika’sCompany’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 consistsconsisted of:

 

Cash consideration

 $61,909 

Estimated fair value of contingent consideration

  28,376 

Estimated total purchase consideration

 $90,285 

 

11

ThePursuant to the Arthrosurface Merger Agreement, the Company may could be required to make future payments of up to $40.0 million depending on the achievement of regulatory milestones and the level of net sales generatedof 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 certain net sales levels fromachievement as of February 3, 2020 through 2021was determined based upon a Monte Carlo simulation approach in an option pricing framework 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 arehave been included in selling, general and administrative expenses in the consolidated statements of operations.

 

Fair Value of Net Assets Acquired

The preliminary 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 assessment of fair value is preliminary and is based on information that was available to management at the time the consolidated financial statements were prepared. Those estimates and assumptions are subject to change as the Company obtains additional information related to those estimates during the applicable measurement periods (up to one year from the acquisition date).

 

The preliminary allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on preliminary 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 

 

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.

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 

 

Intangible assets acquired consist of:    

Developed technology

 $37,000 

Trade name

  3,400 

Customer relationships

  7,900 

IPR&D

  600 

Total intangible assets

 $48,900 

10

 

The preliminary 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 preliminary 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 preliminary 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 final fair value determination of the identified intangible assets may differ from this preliminary determination, and such differences could be material. Based on the preliminary valuation, approximately $48.9 million represents the fair value of identifiable intangible assets. Approximately $37.0 million represents the fair value of developed technology that will be amortized over an estimated useful life of 15 years, $7.9 million represents the fair value of customer relationships that will be amortized over an estimated useful life of 10 years, and $3.4 million represents the fair value of the trade names that will be amortizedname over an estimated useful life of 5 years. A total of $0.6 million represents the fair value of in-process research and development (“IPR&D”)&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.

 

12

RevenueThe excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and Net Loss

assigned to the newly established reporting unit for Parcus Medical and Arthrosurface. The Company recorded revenue from Arthrosurfacegoodwill is attributable to the workforce of $7.2 millionthe 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 net loss of $1.6 million in thestock purchase for tax purposes See Note three7,-month period ended September 30, 2020. The Company recorded revenue from Arthrosurface of $15.6 million and a net loss of $8.4 million in the period from February 3 through September 30, 2020.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 Orthopedic Joint Preservation and Restoration product family, as discussed in Note 11, 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 ninesix-month periods ended SeptemberJune 30, 20202021 and 20192020 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, Therapeutics, Inc., 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 product revenue based on the preliminary fair value inventory adjustmentstep-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:

 

 

For the Three Months Ended September 30,

 

For the Nine Months Ended September 30,

  

Six Months ended June 30,

 
 

2020

  

2019

  

2020

  

2019

  

2021

  2020 

Total revenue

 $31,694  $39,912  $101,722  $115,045  $72,437  $70,028 

Net income (loss)

 (6,411) 4,909  (7,328) 7,296  9,369  (917

)

11

 

 

4.

Fair ValueMeasurements

 

The Company held investments in U.S. treasury bills of $15.0$2.5 million and certificates of deposit of $5.5 million at September 30, 2020. The Company held U.S. treasury bills of $27.5 millionas available-for-sale securities at December 31, 2019.2020. Unrealized losses and the associated tax impact on the Company’s available-for-sale securities were insignificant at December 31, 2020. There were 0 available-for-sale securities as of SeptemberJune 30, 2020 2021.and December 31, 2019, respectively.

 

The Company’s investments are all classified within Levels 1 and 2 of the fair value hierarchy. The Company’s investments classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets. Level 2 investments are based on matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. For cash, current receivables, accounts payable, long-term debt 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  $0  $0  $67,038 
                     

Other current and long-term liabilities:

                    

Contingent Consideration - Short Term

 $16,870  $0  $0  $16,870  $0 

Contingent Consideration - Long Term

  70   0   0   70   0 

Total other current and long-term liabilities

 $16,940  $0  $0  $16,940  $0 

      

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  $0  $0  $74,522 
                     

Investments:

                    

U.S. Treasury Bills

 $2,501  $2,501  $0  $0  $2,524 
                     

Other current and long-term liabilities:

                    

Contingent Consideration - Short Term

 $13,090  $0  $0  $13,090  $0 

Contingent Consideration - Long Term

  22,320   0   0   22,320   0 

Total other current and long-term liabilities

 $35,410  $0  $0  $35,410  $0 

1312

The fair value hierarchy of the Company's cash equivalents, investments and liabilities at fair value was as follows:

      

Fair Value Measurements at Reporting Date Using

     
      

Quoted Prices in

             
      

Active Markets

  

Significant Other

  

Significant

     
      

for Identical Assets

  

Observable Inputs

  

Unobservable Inputs

     
  

September 30, 2020

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Amortized Cost

 

Cash equivalents:

                    

Money Market Funds

 $56,431  $56,431  $0  $0  $56,431 
                     

Investments:

                    

Bank Certificates of Deposit

 $5,503  $0  $5,503  $0  $5,516 

U.S. Treasury Bills

  15,039   15,039   0   0   15,130 

Total Investments

 $20,542  $15,039  $5,503  $0  $20,646 
                     

Other current and long-term liabilities:

                    

Contingent Consideration - Short Term

 $11,855  $0  $0  $11,855  $0 

Contingent Consideration - Long Term

  41,045   0   0   41,045   0 

Total Other current and long-term liabilities

 $52,900  $0  $0  $52,900  $0 

      

Fair Value Measurements at Reporting Date Using

     
      

Quoted Prices in

             
      

Active Markets

  

Significant Other

  

Significant

     
      

for Identical Assets

  

Observable Inputs

  

Unobservable Inputs

     
  

December 31, 2019

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Amortized Cost

 

Cash equivalents:

                    

Money Market Funds

 $48,971  $48,971  $0  $0  $48,971 
                     

Investments:

                    

U.S. Treasury Bills

 $27,480  $27,480  $0  $0  $27,479 

 

There were no transfers between fair value levels during the nine-month period ended September 30, 2020 or in 2019.Contingent Consideration

 

14

Contingent Consideration

The following table provides a rollforward of the contingent consideration related to business acquisitions discussed in Note 3.3,Business Combinations.

 

 

Nine Months Ended

  

Three Months Ended

June 30, 2021

  

Six Months Ended

June 30, 2021

 
 

September 30, 2020

 

Balance, beginning January 1, 2020

 $0 

Balance, beginning

 $30,590  $35,410 

Additions

 69,076  0  0 

Payments

 0  0  0 

Change in fair value

  (16,176)  (13,650

)

  (18,470

)

Balance, ending September 30, 2020

 $52,900 

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 and regulatory earn-out milestones ranged from 2.0%2.2% - 2.5%. The probability of successful achievement of2.3%, and for the regulatory earn-out milestones range from 60%-90% for Arthrosurface, which remained unchanged from the acquisition date to September 30, 2020. discount rate was 2.7%. The key variables that led to a decrease in contingent consideration versus the acquisition date are the decrease in near term revenues due to the COVID-19 pandemic and an increase in the weighted average cost of capital from 11.5% to 13.0% for Arthrosurface and 14.5% Parcus increased from 11.4% as of December 31, 2020 to 15.0% for Parcus Medical. Increases or decreases in any11.8% as of the probabilities of success in which milestones are expected to be achieved would result in a higher or lower fair value measurement, respectively. 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. The fair value of contingent consideration increased by $4.2 million for the

In three- month period ended September 30, 2020 due primarily to the passage of time, higher than forecasted revenues during the third quarter, and a reduction in market-based borrowing rates. The fair value of the contingent consideration increased by $16.2 million for the nine-month period ended September 30, 2020 due to a decrease in the revenue due to the COVID-19 pandemic. On October 15, 2020, the Company received regulatory clearance for its WRISTMOTION Total Arthroplasty System, triggeringmade a $5 million 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:

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Raw materials

 $12,973  $12,058 

Work-in-process

  12,372   8,330 

Finished goods

  35,259   8,777 

Total

 $60,604  $29,165 
         

Inventories

 $47,882  $21,995 

Other long-term assets

  12,722   7,170 

15

The increase in inventories for the nine months ended September 30, 2020 is due to the acquisitions of Parcus Medical and Arthrosurface in January and February 2020, as discussed in Note 3.

  

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 $1.9$2.5 million during the three-month period ended June 30, 20202021, asof which $0.4 million was associated with the Company determined it would not pursue CE mark renewals for certain legacy products, primarily for certain advanced wound care products,acquisition related inventory step-up, as a result of the Company's product rationalization efforts. The additional inventory reserve represents excess inventory which will

not13 be sold prior to expiration of the applicable CE mark based on current projections.


 

 

6.

Intangible Assets

 

Intangible assets as of SeptemberJune 30, 20202021 and December 31, 20192020 consisted of the following:

 

      

Nine Months Ended September 30, 2020

 
  

Gross Value

  

Less: Accumulated

Currency Translation

Adjustment

  

Less: Current Period

Impairment Charge

  

Less: Accumulated

Amortization

  

Net Book Value

  

Weighted

Average Useful

Life

 

Developed technology

 $93,953  $(2,766) $(1,025) $(12,919) $77,243  15 

In-process research & development

  5,006   (1,120)  0   0   3,886  

Indefinite

 

Customer relationships

  9,000   0   0   (568)  8,432  10 

Distributor relationships

  4,700   (415)  0   (4,285)  0  5 

Patents

  1,000   (167)  0   (602)  231  16 

Tradenames

  5,200   0   0   (701)  4,499  5 

Total

 $118,859  $(4,468) $(1,025) $(19,075) $94,291  13 

     

Year Ended December 31, 2019

      

Six Months Ended June 30, 2021

  

December 31,

2020

     
 

Gross Value

  

Less: Accumulated

Currency Translation

Adjustment

  

Less: Current Period

Impairment Charge

  

Less: Accumulated

Amortization

  

Net Book Value

  

Weighted

Average Useful

Life

  

Gross
Value

  

Less: Accumulated
Currency Translation
Adjustment

  

Less:
Accumulated
Amortization

  

Net Book
Value

  

Net Book
Value

  

Weighted
Average Useful
Life

 

Developed technology

 $17,100  $(2,934) $(389) $(9,657) $4,120  15  $89,580  $(1,506) $(14,975) $73,099  $75,899  15 

In-process research & development

 4,406  (1,234) 0  0  3,172  

Indefinite

 

IPR&D

 3,256  (926) 0  2,330  2,587  

Indefinite

 

Customer relationships

 9,000  0  (1,277) 7,723  8,173  10 

Distributor relationships

 4,700  (415) 0  (4,285) 0  5  4,700  (415) (4,285) 0  0  5 

Patents

 1,000  (176) 0  (531) 293  16  1,000  (180) (607) 213  259  16 

Elevess Tradename

  1,000   0   0   (1,000)  0  9 

Tradenames

  5,200   0   (1,481)  3,719   4,239   5 

Total

 $28,206  $(4,759) $(389) $(15,473) $7,585  11  $112,736  $(3,027) $(22,625) $87,084  $91,157   13 

 

The aggregate amortization expense related to intangible assets was $1.9$2.0 million and $0.3$2.2 million for the three-month periods ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and $5.4$3.9 million and $0.8$3.5 million for the ninesix-month periods ended SeptemberJune 30, 20202021 and 2019,2020, respectively.

In the first quarter of 2020, the Company acquired Parcus Medical and Arthrosurface as discussed in Note 3, which resulted in an increase of $92.9 million of gross value in intangible assets. During the six-month period ended June 30, 2020, the Company determined that it would not pursue CE Mark renewals for certain of its legacy products, which resulted in an impairment of $1.0 million. The impairments are included in the selling, general and administrative expenses on the Company's consolidated statements of operations.

For the quarter ended September 30, 2020, the Company did not identify any impairment triggers. 

 

 

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 on each reporting unit. In connection with the evaluation of goodwill for impairment, the Company may first consider qualitative factors to assess whether there are any indicators to suggest it is more likely than not that the fair value of a reporting unit may not exceed its carrying amount. If after assessing such factors or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then a quantitative assessment is not required. If the Company chooses to bypass the qualitative assessment, or if it chooses to perform a qualitative assessment but is unable to qualitatively conclude that no impairment has occurred, then the Company will perform a quantitative assessment. If the estimated fair value of a reporting unit is less than its carrying value, an impairment charge is recognized for the excess of the reporting unit’s carrying value over its fair value.

16

As of December 31, 2019, the Company concluded that it operated as a single reporting unit and performed the 2019 goodwill impairment test using a single reporting unit.

  

Nine Months Ended

September 30, 2020

  

Year Ended

December 31, 2019

 

Balance, beginning

 $7,694  $7,851 

Effect of foreign currency adjustments

  349   (157)

Acquisitions

  42,520   0 

Impairment

  (18,144)  0 

Balance, ending

 $32,419  $7,694 

The increase in goodwill for the nine months ended September 30, 2020 is related to the acquisitions of Parcus Medical and Arthrosurface in January and February 2020 as further discussed in Note 3. As a result of the acquisitions, the Company now has 2 reporting units. The newly formed reporting unit includes Parcus Medical and Arthrosurface, which share similar economic and qualitative characteristics. This reporting unit produces soft tissue repair surgical tools, instruments and joint implants. The legacy Anika business remains in one reporting unit, which specializes in therapies based on its hyaluronic acid, or HA, technology platform.impairment.

 

The widespread economic volatility resulting from the COVID-19 pandemic triggered impairment testingChanges in the first quarter of 2020, and accordingly, the Company performed interim impairment testing on the goodwill balances of its reporting units. For the legacy Anika reporting unit, the Company performed a qualitative assessment 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. The Company 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. Through September 30, 2020, there have been no events or changes in circumstances that indicate that the carrying value of goodwill for the may notsix be recoverable.months ended June 30, 2021 were as follows:

 

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, the Company performed a quantitative assessment of goodwill impairment related to the Parcus Medical and Arthrosurface reporting unit as of March 31, 2020. The Company then estimated the fair value of the Parcus Medical and Arthrosurface reporting unit 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. The Company determined that a discounted cash flow model provided the best approximation of fair value of the reporting unit for the purpose of performing the interim 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. While assumptions utilized are subject to a high degree of judgment and complexity, the Company made its best estimate of future cash flows under a high degree of economic uncertainty that existed as of March 31, 2020. In developing its assumptions, the Company also considered observed trends of its industry participants.

17

The results of the interim impairment test indicated that the estimated fair value of the Parcus and Arthrosurface 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 Parcus and Arthrosurface reporting unit. Consequently, a non-cash goodwill impairment charge was recorded as reflected in the table above as of March 31, 2020. For the quarter ended September 30, 2020, there have been no events or changes in circumstances that indicate that the carrying value of goodwill as determined on March 31, 2020 may not be recoverable. If the pandemic's economic impact is more severe, or if the economic recovery takes longer to materialize or does not materialize as strongly as anticipated, this could result in further goodwill impairment charges.

  

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.

LeasesAccrued Expenses and Other Liabilities

 

The components of lease expenseAccrued expenses and other information are as follows:liabilities consist of the following:

 

  

For the Three Months Ended

  

For the Nine Months Ended

 
  

September 30, 2020

  

September 30, 2019

  

September 30, 2020

  

September 30, 2019

 

Amortization of right-of-use assets

 $50  $0  $136  $0 

Interest on finance lease liabilities

  7   0   22   0 

Finance lease expense

 $57  $0  $158  $0 

Operating lease expense

  590   525   1,759   1,568 

Short-term lease expense

  0   0   0   6 

Variable lease expense

  67   43   204   155 

Total lease expense

 $714  $568  $2,121  $1,729 

  

For the Three Months Ended

  

For the Nine Months Ended

 
  

September 30, 2020

  

September 30, 2019

  

September 30, 2020

  

September 30, 2019

 

Weighted Average Remaining Lease Term (in years)

                

Operating leases

  15.9   17.1   15.9   17.1 

Financing leases

  3.3   -   3.3   - 

Weighted Average Discount Rate

                

Operating leases

  4.1%  4.1%  4.1%  4.1%

Financing leases

  5.0%  0   5.0%  0 

Other information

                

Operating cash flows from operating leases

 $603  $488  $1,739  $1,482 

Operating cash flows from financing leases

 $59  $0  $110  $0 
  

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 

 

Future commitments due under these lease agreements as of

September 30, 2020 14are as follows:

Years ended December 31,

 

Operating Leases

  

Financing Leases

  

Total

 

2020 (Remaining 3 months)

 $598  $59  $657 

2021

  2,304   170   2,474 

2022

  2,240   166   2,406 

2023

  2,123   160   2,283 

2024

  2,059   44   2,103 

2025

  1,924   -   1,924 

Thereafter

  19,450   0   19,450 

Present value adjustment

  (8,103)  (44)  (8,147)

Present value of lease payments

  22,595   555   23,150 

Less current portion included in accrued expenses and other current liabilities

  (1,463)  (164)  (1,627)

Total lease liabilities

 $21,132  $391  $21,523 

 

 

9.

Accrued Expenses

Accrued expenses consist of the following:

  

September 30,
2020

  

December 31,
2019

 
         

Compensation and related expenses

 $6,559  $5,830 

Professional fees

  2,358   3,850 

Operating lease liability - current

  1,463   1,141 

Clinical trial costs

  910   788 

Current portion of acquisition-related contingent consideration (Note 4)

  11,855   0 

Finance lease liability - current

  163   0 

Other

  1,031   836 

Total

 $24,339  $12,445 

18

10.

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 0 accrued warranties as of SeptemberJune 30, 20202021 orand December 31, 20192020 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 flow.flows.

 

 

11.10.

Revenue

 

The Company receivesRevenue 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 itsour 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 the Company performs itswe perform our obligations under these arrangements. Amounts are recorded as accounts receivable when the Company’sour right to consideration is unconditional. AsDeferred revenue was $0.9 million and $0.2 million as of SeptemberJune 30, 2021 and December 31, 2020, deferred revenue was immaterial.respectively.

 

The Company has agreements with DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopaedics, Inc. (“Mitek”) that include the grant of certain licenses, performance of development services, and supply of product. Revenues from the agreements with Mitek represent 48% and 52% of total Company revenues for the three- and nine-month periods ended September 30, 2020, respectively. Revenues from the agreements with Mitek represented 71% and 70% of total Company revenues for the three- and nine-month periods ended September 30, 2019, respectively. The Company has agreements with other customers that may include the delivery of a license and supply of product.

Revenue Recognition Associated with Acquired Businesses:

Pursuant to ASC 606, the Company recognizes revenue from Arthrosurface and Parcus Medical product sales when a customer obtains control of promised goods. The amount of revenue that is recorded reflects the consideration that is expected to be received in exchange for those goods.

Arthrosurface and Parcus Medical products are sold through two principal channels: (i) direct to hospitals and surgery centers, referred to as direct channel accounts and (ii) through stocking distributors.

In direct channel accounts, 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 the Company retains the ability to control the inventory. Revenue is recognized as of the date of surgical implantation of the product.

With sales to stocking distributors revenue is generally recognized when control of Arthrosurface and Parcus Medical product passes to the customer, which is typically upon shipment of the product. It is our accounting policy to account for shipping and handling activities as a fulfillment cost rather than as an additional promised service.

The payment terms with respect to sales through both channels are consistent with prevailing practice in the respective markets in which the Company does business. Payment terms align with the one-year guidance for the practical expedient, which allows the Company to forgo adjustment of the contractual payment amount of consideration for the effects of a significant financing component.            

Product and Total Revenue

Historically, the Company categorized its product offerings into four product families: Orthobiologics, Dermal, Surgical, and Other, which included its ophthalmic and veterinary products. As a result of the Company’s acquisitions of Parcus Medical and Arthrosurface during the first quarter of 2020, the Company now divides the product portfolio into three product families: Joint Pain Management, Orthopedic Joint Preservation and Restoration, and Other. Anika’s consolidated financial statements include results of operations for Parcus Medical from the January 24, 2020 acquisition date and Arthrosurface from the February 3, 2020 acquisition date.

Product revenue by product family was as follows:

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Joint Pain Management

 $18,439  $27,581  $66,168  $77,063 

Orthopedic Joint Preservation and Restoration

  11,715   544   26,233   1,510 

Other

  1,540   1,490   5,368   6,172 
  $31,694  $29,615  $97,769  $84,745 

19

Total revenue by geographic location was as follows:

 

 

Three Months Ended September 30,

  

Three Months Ended June 30,

 
 

2020

  

2019

  

2021

  

2020

 
 

Total

 

Percentage of

 

Total

 

Percentage of

  

Total

 

Percentage of

 

Total

 

Percentage of

 
 

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

 

Geographic Location:

                        

United States

 $26,409  84% $23,512  79% $30,069  79

%

 $25,133  82%

Europe

 2,954  9% 3,943  13% 5,089  13

%

 2,910  9%

Other

  2,331   7%  2,242   8%  2,987   8

%

  2,635   9%

Total

 $31,694   100% $29,697   100% $38,145   100

%

 $30,678   100%

 

 

Nine Months Ended September 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2021

  

2020

 
 

Total

 

Percentage of

 

Total

 

Percentage of

  

Total

 

Percentage of

 

Total

 

Percentage of

 
 

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

 

Geographic Location:

                        

United States

 $77,848  80% $66,538  78% $55,074  76

%

 $51,438  78%

Europe

 11,140  11% 11,396  14% 10,570  15

%

 8,186  12%

Other

  8,781   9%  6,904   8%  6,793   9

%

  6,451   10%

Total

 $97,769   100% $84,838   100% $72,437   100

%

 $66,075   100%

15

 

 

12.11.

Equity Incentive PlanStock-Based Compensation

 

The Company estimates the fair value of stock options and stock appreciation rights (“SARs”) using the Black-Scholes valuation model, and estimates the fair value of the total shareholder return options (“TSRs”) using a Monte-Carlo simulation model as of the grant date. Fair value of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) is measured by the grant-date price of On June 16, 2021, the Company’s shares. Fair value of performance restricted stock units (“PSUs”) is measured by the grant-date price of the Company’s shares with corresponding compensation cost recognized over the requisite service period. Compensation cost of PSUs is recognized based on the estimated probabilities of achieving the performance goals. Changesstockholders approved an amendment to the probability assessment and2017 Plan. The amendment increased the estimatednumber of shares expectedof common stock reserved under the 2017 Plan by 1.1 million shares from 3.5 million shares to vest will result in adjustments to the related compensation cost that will be recorded in the period of the change. If the performance targets are not achieved, no compensation cost is recognized, and any previously recognized compensation cost is reversed. Compensation cost of the TSRs is recognized on a straight-line basis over the vesting period, regardless of whether the market condition for vesting is ultimately achieved.4.6 million shares.

 

The fair value of each stock option award during the nine-month periods ended September 30, 2020 and 2019 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

  

Nine months ended
September 30,

  

2020

  

2019

 

Risk free interest rate

 0.21%-1.59% 1.41%-2.54%

Expected volatility

 46.48%-52.99% 44.27%-46.21%

Expected life (years)

 4.0-6.3  3.5 

Expected dividend yield

  0.00%   0.00% 

20

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 September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Cost of product revenue

 $202  $114  $564  $288 

Research & development

  206   50   558   318 

Selling, general & administrative

  1,512   1,147   2,832   3,534 

Total stock-based compensation expense

 $1,920  $1,311  $3,954  $4,140 

The Company’s former President and Chief Executive Officer, Joseph Darling, passed unexpectedly in January 2020. According to the terms of Mr. Darling’s equity award grants and the Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan (the “2017 Plan”), the unvested portion of his stock-based compensation was forfeited upon his death, resulting in a one-time benefit of $1.8 million that was fully recognized during the three-month period ended March 31, 2020 within selling, general and administrative expenses.

The following table sets forth share information for stock-based compensation awards granted and exercised during the three- and nine-month periods ended September 30, 2020 and 2019:

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Grants:

                

Stock options

  85,345   87,250   402,558   218,867 

RSUs

  34,697   9,000   218,804   185,507 

PSUs

  16,077   9,000   162,297   123,500 

TSRs

  0   0   104,638   0 

Exercises:

                

Stock options

  0   488,586   2,146   511,486 

Forfeitures:

                
Stock options  32,629   42,566   86,732   81,638 

RSAs

  0   1,975   8,574   12,533 

RSUs

  17,937   7,500   90,103   19,100 

PSUs

  19,000   4,500   90,000   13,500 

Expirations:

                

Stock options

  3,083   25,697   3,646   44,829 

During the three- and nine-month periods ended September 30, 2020, the Company granted stock-based compensation awards in the form of stock options, PSUs, TSRs, and RSUs to employees and RSUs to non-employee directors, the majority of which become exercisable or vest ratably over a three-year period. The PSUs granted to employees contained performance conditions with business and financial targets. The business target, amounting to 40% of the total performance conditions, will be measured based on achievement in the 2020-2022 fiscal years, while the financial targets, amounting to 60% of the total performance conditions, will ultimately be measured with respect to the Company’s operating results in the 2020-2022 fiscal years. The Company recorded $0.2 million and less than $0.1 million of stock-based compensation expense associated with PSUs for the three- and nine-month periods ended September 30, 2020.

During the second quarter of 2020, the initial equity grants to the Company’s current President and Chief Executive Officer contained a TSR option award at 104,638 targeted options, with market and service conditions. The actual number of options that may be earned ranges from 0% to 150% of the target number, depending on the total shareholder return of the Company relative to the peer group over the vesting period of 2.7 years. The grant-date fair value of the TSRs is recorded as stock- based compensation expense on a straight-line basis over the period from the date of grant to the settlement date. The Company recorded $0.2 million and $0.4 million of stock-based compensation expense associated with TSRs for the three and nine-month periods ended September 30, 2020, respectively.

21

13.

Earnings Per Share (“EPS”)

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

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

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Shares used in the calculation of basic earnings per share

  14,205   14,070   14,202   14,065 

Effect of dilutive securities:

                

Share-based payment awards

  0   317   0   201 

Diluted shares used in the calculation of earnings per share

  14,205   14,387   14,202   14,266 

For the three- and nine-month periods ended September 30, 2020, the net loss available to common shareholders is divided by the weighted average number of common shares outstanding during the period to calculate basic earnings per share. The assumed exercise of stock options would have been anti-dilutive. Stock options of 1.0 million shares and 0.4 million shares were outstanding for the three-month periods ended September 30, 2020 and 2019 and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive. Stock options of 0.8 million and 0.7 million shares were outstanding for the nine-month periods ended September 30, 2020 and 2019 and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive.

  

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 

 

 

14.

Accelerated Share Repurchase

In May 2019, the Company’s Board of Directors authorized a repurchase program of up to $50.0 million shares of the Company’s common stock with $30.0 million to be repurchased through an accelerated share repurchase program and up to $20.0 million to be potentially repurchased on the open market from time-to-time. On May 7, 2019, the Company entered into an accelerated share repurchase agreement with Morgan Stanley & Co. LLC (“Morgan Stanley”) pursuant to a Fixed Dollar Accelerated Share Repurchase Transaction (“ASR Agreement") to purchase $30.0 million of shares of its common stock. Pursuant to the terms of the ASR Agreement from May 2019 to January 2020, the Company repurchased 0.6 million shares under the ASR Agreement at an average repurchase price of $50.78 per share. The ASR Agreement settled on January 14, 2020. Through September 30, 2020, no open market repurchases had been executed.

15.12.

Income Taxes

 

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The CARES Act includes several provisions that provide economic relief for individuals and businesses. The Company will continue to evaluate the impactrecorded an income tax provision of the CARES Act, but does not expect it to result in a material impact.

The benefit from income taxes was $1.7$2.6 million and $2.2$1.0 million for the three- and ninesix-month periods ended SeptemberJune 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 21.4%20.6% and 20.6%17.9%, respectively. The provision for income taxes was $3.3 million and $7.8 millionnet increase in the effective tax rate for the three- and nine-month periodsperiod ended SeptemberJune 30, 2019,2021, basedas 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 effective tax ratesthe change in the fair value of 26.6% and 25.3%, respectively. Thethe contingent consideration, in the amount of $1.1 million, resulted in a net decrease in the effective tax rate for the three- and ninesix-month periodsperiod ended SeptemberJune 30, 2020,2021, as compared to the same periodsperiod in 2019, was primarily due to the $1.9 million tax expense on the impairment of non-tax deductible goodwill offset by the $1.5 million tax benefit on the decrease in the fair value of the contingent consideration. The Company recognized a net deferred tax liability of $11.2 million primarily due to intangible assets and inventory step up offset by net operating losses and research and development tax credits associated with the Arthrosurface acquisition discussed in Note 3.2020.

22

 

The Company files income tax returns in the United States on a federal basis, in certain U.S. states, and in Italy.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 assessesassessed whether it wasis more likely than not that it wouldwill be able to utilize, in future periods, the netdeferred 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 associated with its net operating loss carry-forward. Aswill be realized through consideration of September 30, 2020, both the Company has recorded a valuation allowance in the amount of $0.5 million against the portion of the deferred tax asset balance for which it is “more likely than not” that a tax benefit will not be realized.positive and negative evidence.  

 

 

16.13.

Revolving Credit AgreementEarnings Per Share (EPS)

 

OnBasic 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 April 8, 2020, notthe Company submitted a loan notice to draw down the $50.0 million available under its existing credit facility, with an initial applicable interest of 2.08%. Interest expense for the three- and nine-month period ended September 30, 2020 was $0.3 million and $0.5 million, respectively, associated with Credit Agreement, as defined below. During the three-months ended September 30, 2020, the Company repaid $25.0 million of the considered outstanding balance. Consequently, as of September 30, 2020, the Company had outstanding borrowings of $25.0 million under the credit facility. The credit facility will mature in October 2022, and the Company may prepay the credit facility at any time without penalty. Proceeds from the borrowing may be used for purposes permitted underof calculating basic EPS. Diluted EPS is calculated by dividing net income by the Credit Agreement, as defined below, including for working capital and general corporate purposes.weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding share-based awards using the treasury stock method.

 

The existing credit facility was entered into on October 24, 2017. The Company, as borrower, entered into a new five-year agreement with Bank of America, N.A., as administrative agent, swingline lender and issuer of letters of credit, for a $50.0 million senior revolving line of credit (the “Credit Agreement”). Subject to certain conditions, the Company may request up to an additional $50.0 million in commitments for a maximum aggregate commitment of $100.0 million, which requests must be approved by the Revolving Lenders (as definedfollowing table provides share information used in the Credit Agreement). Loans under the Credit Agreement generally bear interest equal to, at the Company’s option, either: (i) LIBOR plus the Applicable Margin, as defined below, or the (ii) Base Rate, defined as the highest of: (a) the Federal Funds Rate plus 0.50%, (b) Bank of America, N.A.’s prime rate and (c) the one month LIBOR adjusted daily plus 1.0%, plus the Applicable Margin. The Applicable Margin ranges from 0.25% to 1.75% based on the Company’s consolidated leverage ratios at the timecalculation of the borrowings under the Credit Agreement. The Company has agreed to pay a commitment fee in an amount that is equal to 0.25% per annum on the actual daily unused amountCompany'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   0   215   0 

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 credit facility three-month periods ended June 30, 2021 and that is due2020 and payable quarterly in arrears. Loan origination costs arewere not included in Other long-term assetsthe computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive. Stock options of 1.1 million and are being amortized over0.9 million shares were outstanding for the fivesix-year term of the Credit Agreement. As of-month periods ended December 31, 2019June 30, 2021 and 2018,2020 thereand were 0 outstanding borrowings under the Credit Agreement and the Company was in compliance with the terms of the Credit Agreement. The Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including financial covenants, events of default, and indemnification provisions in favor of the Lenders. These include restrictive covenants that require the Company not to exceed certain maximum leverage and interest coverage ratios, limit its incurrenceincluded in the computation of liens and indebtedness, and its entry into certain merger and acquisition transactions or dispositions and place additional restrictionsdiluted EPS because the awards’ impact on other matters, all subject to certain exceptions. The Lender hasEPS would have been granted a first priority lien and security interest in substantially all of the Company’s assets, except for certain intangible assets.

17.

Subsequent Events

On October 15, 2020, the Company received FDA clearance for its WRISTMOTION Total Arthroplasty System, triggering a $5 million regulatory-based milestone payment per the Arthrosurface Merger Agreement. The milestone payment was paid shortly thereafter.anti-dilutive. 

 

2316

 

 

ITEM 2.

MANAGEMENT’S

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.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, ("SEC")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 Annual Report on2020 Form 10-K for the year ended December 31, 2019 and in Part II, Item 1A “Risk Factors” of this report and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 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. We partnerBased on our collaborations with physiciansclinicians to understand what they need most to treat their patients, and 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.

 

As we look towards the future, our business is uniquely positioned to capture value within our target market. Our success is driven by our focusWe have nearly thirty years of global expertise developing, manufacturing and commercializing products based on our talenthyaluronic acid, or HA, technology platform. HA is a naturally occurring polymer found throughout the body that is vital for proper joint health and culture, investment in innovative researchtissue 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 development programs to feedcreating a solid form of HA called HYAFF, which is the platform for our product pipeline, expanding our commercial footprint domestically and internationally, and pursuing strategic inorganic growth opportunities. We intend to continue to accelerate our commercial capabilities as we transform into a customer-centric company dedicated to advancing the orthopedic early intervention continuum of care. We believe that this commitment, along with our financial resources and operating history, have positioned us well to deliver sustained value to our shareholders.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 surgicalsports medicine and soft tissue repair, and reconstruction of ligaments and tendons, and Arthrosurface, Inc., or Arthrosurface, a joint preservation technology company specializing in less invasive, bone preserving partial and total joint replacement solutions. These acquisitions: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:

 

 

BroadenedDecades 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 product portfolio further into the sports medicine joint preservation and restoration space;customers;

 

Added higher-growth potential revenue streams;Robust network of stakeholders in our target markets to identify evolving unmet patient treatment needs;

 

Expanded our commercial capabilities;Prioritized investment in differentiated pipeline of regenerative solutions, bone preserving implants and soft tissue solutions;

 

Diversified our revenue base; andLeveraging global commercial expertise to drive growth across the portfolio;

 

ExpandedOpportunity to pursue strategic inorganic growth opportunities, including potential partnerships and tuck-in acquisitions, leveraging our product pipelinestrong financial foundation and researchoperational capabilities; and development expertise.

 

In addition, we believe that our historical hyaluronic acid (“HA”) and regenerative medicine expertise will be highly complementary to the soft tissue repair and instrumentation expertise of Parcus Medical and the partial and total joint replacement expertise of Arthrosurface. We believe that the combination of these three businesses positions us to provide innovative solutions along the early-intervention orthopedic continuum of care and build significant value for patients, physicians, and key healthcare system stakeholders.

From our inception in 1992 through mid-2019, we utilized a commercial partnership model for the distribution of our products to end-users. Our strong, worldwide network of distributors has historically provided, and continues to provide, a solid foundation for our revenue growth and territorial expansion. In 2019, we implemented a hybrid commercial approach that comprises a small direct model with a network of independent distributor partners in the U.S. market, and we utilized this hybrid approach for the launch of TACTOSET in the second half of 2019. The acquisitions of Arthrosurface and Parcus Medical each added to our commercial infrastructure, especially in the United States. In total, we have over 30 direct sales representatives working with over 150 independent distributors to focus on each of our target markets.

For products in our Orthopedic Joint Preservation and Restoration family, including those currently in research and development or those not yet developed, we intend to leverage the expanded hybrid-direct sales infrastructure of the consolidated entity. This framework pairs an internal direct sales team with external sales agent partners to maximize territorial coverage and sales generation. Generally, products within this family are sold into surgical environments, such as hospitals or ambulatory surgery centers, and we believe that we have a strong infrastructure now in place to service these customers. We completed the integration of our U.S. commercial organization including cross-training the sales staffs to sell the consolidated product portfolio. We assessed each selling territory to maximize our coverage and reach as many customers and patients as possible.

For longer-term future products in the U.S. market within our Joint Pain Management or Other families, we intend to evaluate our commercial model and possible alternatives or augmentations in each instance on a case-by-case basis, based on market dynamics and other factors. These models could include direct sales, distribution partnerships, or a hybrid of those forms. For current products in the U.S. market, we intend to retain our current distribution relationships, including with DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopaedics, or Mitek, as they continue to provide meaningful revenue and growth opportunities.

Please see the section captioned “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Management Overview” in our Annual Report on Form 10-K for the year ended December 31, 2019, for a description of each of the above therapeutic areas, including the individual products.

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

 

2417


 

Key Developments during the Quarter Ended September 30, 2020

We further strengthened our leadership team and board of directors with industry veterans.

We completed the launch activities for six sports medicine 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. The products were commercialized through our recently expanded sales and marketing team during the third quarter of 2020. 

We restarted our CINGAL Pilot Study as planned in September 2020, and the first patient has been enrolled in the study. There are currently nine active sites. We restarted patient enrollment in our HYALOFAST Phase III trial. We have activated two sites in Indonesia and intend to activate sites in the Philippines and Mexico by early 2021.

We prepaid $25.0 million of the $50.0 million that we initially drew down from our credit facility in April 2020.

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. We cannot at this time predictThere 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 that the COVID-19 pandemic will have on our full year financial condition and operations, although we are continuing to monitor our operations for COVID-19 pandemic related changes. In the second and third quarters of 2020, we experienced product demand above our initial expectations determined in light of COVID-19, astimelines associated with certain clinical studies. While elective procedure volume had a limited recovery after the initial pandemic impacts seen in the second halfearly parts of the second quarter and through the third quarterof 2020 due to the easing of COVID-19 related restrictions in certain jurisdictions. However, certainjurisdictions, areas of the United States and certain other countries have recently seen, and continue to see, increasingfluctuating infection rates which makesincreasing as the result of emerging variants of COVID-19. These fluctuations make future results difficult to predict. Please seepredict despite recent advances in the section captioned “Part II, Item 1A. Risk Factors”vaccination rates of this report and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 for additional information with respect to the risks faced by our business in lightcertain parts of the COVID-19 pandemic.population. In this time of uncertainty as a result of the COVID-19 pandemic, we are focused on serving our customers while taking every precautionhave taken many precautions to provide a safe work environment for our employees and customers. We have establishedcustomers, including the establishment and implementedimplementation 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.restrictions in certain jurisdictions. The impact of these restrictions on our operations, if implemented, is currently unknown, but could be significant.

Products

 

Research and DevelopmentJoint Pain Management

Our research and development efforts primarily consist of the development of new medical applications for our technology platform, the development of intellectual property with respect to our technology platform, the management of clinical trials for certain product candidates, the preparation and processing of applications for regulatory approvals, and process development and scale-up manufacturing activities for our existing and new products. Our development efforts focus on products in four large and growing orthopedic markets to drive long-term growth: osteoarthritis pain management, regenerative solutions, soft tissue repair and bone preserving joint technologies. We routinely interact with key external stakeholders to leverage customer and patient insights in our development process to ensure that we bring needed therapies to the market. We anticipate that we will continue to commit significant resources in the near future to research and development activities, including in relation to preclinical activities and clinical trials. These activities are aimed at the delivery of a steady cascade of new product development and launches over the next several years. The COVID-19 pandemic, however, has resulted in a significant decline in elective procedures worldwide. This decline has impacted our ability to enroll patients in our clinical trials. Given the uncertainty around the scale and duration of the COVID-19 pandemic, it is difficult to predict the precise impact on our clinical activities.

 

Our third-generation, single-injection osteoarthritisJoint Pain Management product under development in the United States, CINGAL, is an osteoarthritis pain management therapy composedfamily 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 proprietary cross-linked HA material combinedother 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 an approved steroid, is designed to provide both short-the treatment of ears, nose and long-term pain relief to patients,throat disorders, and is a main pipeline product and a component of our growth strategy. In pursuing a U.S. regulatory pathway for CINGAL, we have conducted two Phase III clinical trials and two follow-up studies, and the United States Food and Drug Administration, or FDA, has indicated an additional Phase III trial is necessary to support U.S. approval. We are currently working to initiate a pilot study to confirm our trial design, 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 the third quarter of 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. Given the evolving environment, we will continue update product development and clinical trial timelines after we have more visibility with respect to the length and regional impacts of the COVID- 19 pandemic.

We have several research and development programs underway for newophthalmic products, including for HYALOFAST (in the United States), an innovative product for cartilage tissue repair,injectable, high molecular weight HA products used as viscoelastic agents in ophthalmic surgical procedures such as cataract extraction and other early stage regenerative solutions development programs. We commenced patient enrollment in a Phase III clinical trial in December 2015 and advanced site initiations and patient enrollment activities. Given the changing medical landscape with respect to the randomization arm for this trial, the microfracture procedure, we are also actively pursuing other alternative strategies to accelerate patient enrollment, including initiating sites in Indonesia, Mexico, and the Philippines. After delays due to the COVID-19 pandemic, we were able to resume enrollment in the third quarter of 2020. We also have several other research and development programs underway focused on expanding product portfolio across all four development focus areas previously mentioned.intraocular lens implantation.

 

2518


 

Results of Operations

 

Three and NineSix Months Ended SeptemberJune 30, 20202021 Compared to Three and NineSix Months Ended SeptemberJune 30, 20192020

  

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

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

$ Inc/(Dec)

  

% Inc/(Dec)

  

2020

  

2019

  

$ Inc/(Dec)

  

% Inc/(Dec)

 
  

(in thousands, except percentages)

      

(in thousands, except percentages)

     

Product revenue

 $31,694  $29,615  $2,079   7% $97,769  $84,745  $13,024   15%

Licensing, milestone and contract revenue

  -   82   (82)  (100%)  -   93   (93)  (100%)

Total revenue

  31,694   29,697   1,997   7%  97,769   84,838   12,931   15%
                                 

Operating expenses:

                                

Cost of product revenue

  14,351   5,951   8,400   141%  45,487   20,098   25,389   126%

Research & development

  5,217   4,158   1,059   25%  15,799   12,581   3,218   26%

Selling, general & administrative

  15,903   7,539   8,364   111%  44,884   22,713   22,171   98%

Goodwill impairment

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

Change in fair value of contingent consideration

  4,150   -   4,150   -   (16,176)  -   (16,176)  - 

Total operating expenses

  39,621   17,648   21,973   125%  108,138   55,392   52,746   95%

Income (loss) from operations

  (7,927)  12,049   (19,976)  (166%)  (10,369)  29,446   (39,815)  (135%)

Interest and other income (expense), net

  (228)  482   (710)  (147%)  (118)  1,513   (1,631)  (108%)

Income (loss) before income taxes

  (8,155)  12,531   (20,686)  (165%)  (10,487)  30,959   (41,446)  (134%)

Provision for (benefit from) income taxes

  (1,744)  3,331   (5,075)  (152%)  (2,161)  7,817   (9,978)  (128%)

Net income (loss)

 $(6,411) $9,200  $(15,611)  (170%) $(8,326) $23,142  $(31,468)  (136%)

Product gross profit

 $17,343  $23,664  $(6,321)  (27%) $52,282  $64,647  $(12,365)  (19%)

Product gross margin

  55%  80%          53%  76%        

Anika’s consolidated financial statements include results of operations for Parcus Medical from the January 24, 2020 acquisition date and Arthrosurface from the February 3, 2020 acquisition date.

 

Product Revenue

Product revenue for the three-month period ended SeptemberJune 30, 20202021 was $31.7$38.2 million, an increase of $2.1$7.5 million as compared to $29.6$30.7 million for the three-month period ended SeptemberJune 30, 2019. Product revenue2020. Revenue for the nine-monthsix-month period ended SeptemberJune 30, 20202021 was $97.8$72.4 million, an increase of $13.0$6.4 million as compared to $84.7$66.1 million for the nine-monthsix-month period ended SeptemberJune 30, 2019.2020. For the three- and nine-monthsix-month periods ended SeptemberJune 30, 2020,2021, the increaseincreases in product revenue waswere primarily driven by growthrecovery 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 our Orthopedic Joint Preservation and Restoration product family, as a resultpart due to inclusion of the early 2020 acquisitionsfull first quarter results of Parcus Medical and Arthrosurface, offset by a decrease in revenue from our Joint Pain Management product family due to the COVID-19 pandemic.

Historically,which we categorized our product offerings into four product families: Orthobiologics, Dermal, Surgical,acquired on January 24, 2020 and Other, which included our ophthalmic and veterinary products. As a result of our acquisitions of Parcus Medical and Arthrosurface in earlyFebruary 3, 2020, we now divide our product portfolio into three product families: Joint Pain Management, Orthopedic Joint Preservation and Restoration, and Other.respectively. 

26

 

The following tables present product revenue by product group (dollars in thousands):family:

 

 

Three Months Ended September 30,

  

Three Months Ended June 30,

 
 

2020

  

2019

  

$ Inc/(Dec)

  

% Inc/(Dec)

  

2021

  

2020

  

$ change

  

% change

 
  

(in thousands, except percentages)

 

Joint Pain Management

 $18,439  $27,581  $(9,142) (33%) $24,321  $22,247  $2,074  9%

Orthopedic Joint Preservation and Restoration

 11,715  544  11,171  2,053%

Joint Preservation and Restoration

 11,884  6,622  5,262  79%

Other

  1,540   1,490   50   3% ��1,940   1,809   131   7%
 $31,694  $29,615  $2,079   7% $38,145  $30,678  $7,467   24%

 

 

Nine Months Ended September 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

$ Inc/(Dec)

  

% Inc/(Dec)

  

2021

  

2020

  

$ change

  

% change

 
  

(in thousands, except percentages)

 

Joint Pain Management

 $66,168  $77,063  $(10,895) (14%) $43,637  $47,730  $(4,093

)

 (9%)

Orthopedic Joint Preservation and Restoration

 26,233  1,510  24,723  1,637%

Joint Preservation and Restoration

 24,103  14,518  9,585  66%

Other

  5,368   6,172   (804)  (13%)  4,697   3,827   870   23%
 $97,769  $84,745  $13,024   15% $72,437  $66,075  $6,362   10%

19

 

OurRevenue from our Joint Pain Management product family consistsincreased 9% for the three-month period ended June 30, 2021 as compared to the same period in 2020 due primarily to recovery from the initial impact of injectable viscosupplement products that provide pain reliefthe COVID-19 pandemic on sales volumes. For the six-month period ended June 30, 2021, revenue decreased 9% as compared to the same period in 2020 primarily due to the overall unfavorable impact of the COVID-19 pandemic in the same period of 2020. 

Revenue from osteoarthritis, or OA, conditions. These products include MONOVISC, ORTHOVISC,our Joint Preservation and CINGAL, all widely-used, HA-based viscosupplements utilized to treat OA pain in humans, as well as HYVISC, an HA-based treatment for equine osteoarthritis pain. Overall, revenue from joint pain management therapies decreased 33%Restoration product family increased 79% and 14%66% for the three- and nine-monthsix-month periods ended SeptemberJune 30, 2020,2021, respectively, as compared to the same periods in 2019,2020 primarily due to the impact of COVID-19 and customer ordering patterns that delayed a portion oforganic growth as the impact of the COVID-19 pandemic on thiselective procedures begins to lift in various worldwide jurisdictions, especially in the United States, and for the six-month period, due also to the inclusion of full quarter results from Parcus Medical and Arthrosurface in the first quarter.

Revenue from our Other product family from the second quarter to the third quarter of 2020.

Our Orthopedic Joint Preservation and Restoration product family consists of the following key products:

Arthrosurface’s catalogue of over 150 partial and total joint surface implants and preservation solutionsincreased 7% for the knee, shoulder, hip, ankle, wrist and toe that are designed to treat upper and lower extremity orthopedic conditions caused by trauma, injury and arthritic disease. These products are designed to be less invasive and more bone preserving than conventional joint replacements. These products are available in the United States and over 25 international markets.

Parcus Medical’s line of surgical implant and instrumentation solutions are used by surgeons to repair and reconstruct damaged ligaments and tendons due to sports injuries, trauma and disease. These solutions include screws, sutures, anchors, and other surgical systems that facilitate surgical procedures on the shoulder, knee, hip, distal extremities, and soft tissue. They are typically utilized by surgeons in ambulatory surgical center, or ASC, and hospital environments. These products are commercialized in the United States and over 60 international markets.

HYALOFAST, a biodegradable hyaluronic acid-based scaffold support for human bone marrow mesenchymal stem cells used for cartilage regeneration and as an adjunct for microfracture surgery. This product is currently available in Europe, South America, Asia, and certain other international markets.

TACTOSET, an HA-enhanced bone repair therapy designed to treat insufficiency fractures. TACTOSET is available in the United States, and we expect to leverage the commercial infrastructure of our recent acquisitions to increase market access to sell TACTOSET.

For the three-month period ended SeptemberJune 30, 2020, Orthopedic Joint Preservation and Restoration product revenue increased by $11.2 million to $11.7 million2021, as compared to the same period in 2019, resulting2020 primarily from the additionsdue to timing of the Arthrosurface and Parcus Medical product portfolios.distributor sales. For the nine-monthsix-month period ended SeptemberJune 30, 2020, Orthopedic Joint Preservation and Restoration product2021 revenue increased by $24.7 million to $26.2 million23% as compared to the same period in 2019, resulting2020 primarily from the additions of the Arthrosurface and Parcus Medical product portfolios.

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:

Advanced wound care products based on our biodegradable hyaluronic acid-based polymer (“HYAFF”) technology which are used to treat skin wounds, ranging from burns to diabetic ulcers. The lead product is HYALOMATRIX, a bi-layered, sterile and flexible advanced wound care device ideally suited for a range of wounds that include pressure ulcers, diabetic foot ulcers and deep second-degree burns.

Products used in connection with the treatment of ENT (ears, nose and throat) disorders. The lead product is MEROGEL, a HYAFF-based woven fleece nasal packing. We have partnered with Medtronic XoMed, Inc., or Medtronic, for worldwide distribution of these ENT products.

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.

Other product revenue remained consistent for the three-month period ended September 30, 2020 as compared to the corresponding period in 2019. Other product revenue decreased for the nine-month period ended September 30, 2020 by $0.8 million or 13%, as compared to the corresponding period in 2019, due to the impactsell through of COVID-19.legacy wound care products.

27

 

Product Gross Profit and Margin

ProductGross profit for the three- and six-month periods ended June 30, 2021 increased $7.1 million and $6.9 million to $20.8 million and $41.8 million, respectively, representing 55% and 58% of revenue. Gross profit for the three- and six-month periods ended June 30, 2020 was $13.7 million and $34.9 million, respectively, or 45% and 53% of revenue for the periods, respectively. These increases in gross profit for the three- and nine-monthsix-month periods ended SeptemberJune 30, 2020 decreased $6.32021, primarily resulted from increased revenue, partially offset by product rationalization charges in the second quarter of 2021. We 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 our product rationalization efforts. Gross margins include the impact of inventory step-up associated with the Arthrosurface and $12.4Parcus Medical acquisitions, as well as acquisition-related amortization expenses. These expenses together increased cost of revenue by $3.8 million, to $17.3or 10 points of gross margin and $8.0 million, and $52.3 million, respectively, representing 55% and 53%or 11 points of product revenue. Product gross profit for the three- and nine-month periods ended September 30, 2019 was $23.7 million and $64.7 million, respectively, or 80% and 76% of product revenue for the periods, respectively. The decrease in product gross margin, for the three- and nine-monthsix-month periods ended SeptemberJune 30, 2020,2021, respectively, as compared to increased cost of revenue of $3.8 million, or 13 points of gross margin, and $6.8 million, or 10 points of gross margin, respectively, for the same periods in 2019, was primarily due to fair valuation of inventory purchased associated with the two newly acquired companies and acquisition-related amortization expenses. The inventory fair-value markup and amortization of acquired intangible assets resulted in an increase of cost of goods sold of approximately $4.8 million and $11.7 million for the three- and nine-month period ended September 30, 2020, respectively. During the nine-month period ended September 30, 2020, we determined we will not pursue CE Mark renewals for certain of our products primarily in the wound care product family, resulting in an inventory impairment charge of $1.9 million, all of which was recorded in the three-months ended June 30, 2020.

 

Research and Development

Research and development expenses for the three- and nine-monthsix-month periods ended SeptemberJune 30, 20202021 were $5.2$7.3 million and $15.8$13.7 million, representing an increase of $1.1$2.8 million and $3.2$3.1 million, respectively, as compared to the same periods in 2019.2020. The increase in research and development expense for the three- and nine-monthsix-month periods ended SeptemberJune 30, 20202021 was primarily due to preparation activities for the CINGAL Pilot study, certain European post-market clinical studies, andproduct development activities associated with the development of new product candidates in our research and development pipeline, across allpreparation activities for the CINGAL Pilot study and certain European post-market clinical studies. Research and development activities were curtailed in the three- and six-months ended June 30, 2020 due to cost optimization in the light of our businesses.the early stages of the COVID-19 pandemic.

 

Selling, General and Administrative

Selling, general and administrative, (“or SG&A”)&A expenses for the three- and nine-monthsix-month periods ended SeptemberJune 30, 20202021 were $15.9 million$18.0 and $44.9$36.2 million, an increase of $8.4$3.4 million and $22.2$7.2 million, respectively, as compared to the same periods in 2019.2020. The increase in SG&A expenses for the three- and nine-month periodsthree-month period ended SeptemberJune 30, 20202021 was primarily related to incentive compensation,increased spending to support our sales infrastructure and expenses resulting fromcommercial capability through the expansion of our commercial team in the United States, partially offset by the absence of transaction costs incurred in 2020 related to the acquisitions of Parcus Medical and Arthrosurface. 

The increase in SG&A expenses for the six-month period ended June 30, 2021 was primarily related to full period expenses from Parcus Medical and Arthrosurface, increased spending to support our commercial capability in early 2020,the United States and a non-cash impairment charge related to fixed assets, partially offset by a decreasethe absence of transaction costs incurred in stock compensation expense2020 related to acquisitions of Parcus and Arthrosurface. Certain activities were curtailed in the nine-month periodthree- and six-months ended SeptemberJune 30, 2020 due to cost optimization in light of the forfeitureearly stages of unvested equity awards.the COVID-19 pandemic.

 

28

Goodwill Impairment Charge

We assess goodwill for impairment annually, as of end of November, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. U.S. and other country 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 ofthree-month period ended March 31, 2020, we performed a quantitative assessment of goodwill impairment related to the Parcus 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 quarterthree-month period ended March 31,June 30, 2020. The decline in fair value was primarily due to decreasesa decrease in immediate term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures, which directly impactimpacted the Parcus and Arthrosurface reporting unit. For the quarter ended September 30, 2020, there have beenunits. There were no events or changes in circumstances that indicate that the carrying value of goodwill as determined on March 31, 2020 may not be recoverable. If the pandemic's economic impact is more severe, or if the economic recovery takes longer to materialize or does not materialize as strongly as anticipated, this could result in further goodwill impairment charges.charges during the three- and six-month period ended June 30, 2021. 

20

 

Contingent Consideration Fair Value Change

In the three- and nine-month periods ended September 30, 2020, weWe recorded a $4.2$13.7 million expense and a $16.2$18.5 million net benefit respectively, related to changes in the change in fair value of our contingent consideration liabilities incurred as a result of the acquisition of Parcus Medical and Arthrosurface in January and February of 2020. The liability for contingent consideration is remeasured at each reporting period until the contingency is resolved. The $4.2 million increase in fair value of the contingent consideration for the three- month periodand six-month periods ended SeptemberJune 30, 2020 was primarily due2021, respectively. We recorded a $4.2 million net expense and $20.3 million net benefit related to the passage of time, higher than forecasted revenues during the third quarter, and a reductionchanges in market-based borrowing rates. The $16.2 million decrease inthe fair value of the contingent consideration for the nine-monththree- and six-month periods ended June 30, 2020, respectively. The increase in net benefit in the three-month period ended SeptemberJune 30, 2021 compared to the same period in 2020 wasis due primarily to athe decrease in the near term projections of revenue duelikelihood that certain contingent milestones would be achieved and result in payment. The decrease in net benefit in the six-month period ended June 30, 2021 compared to the COVID-19 pandemic. On October 15,same period in 2020, is due primarily to the Company received FDA clearance for its WristMotion Total Arthroplasty System, triggeringachievement of a $5 million regulatory-basedregulatory milestone payment perin June 2021, which partially offset the Arthrosurface Merger Agreement.decrease in the likelihood that certain other contingent milestones would be achieved and result in payment.

 

Income Taxes

The provision for income taxes was $2.6 million and $1.0 million for the three- and six-month periods ended June 30, 2021, based on effective tax rates of 28.5% and 9.4%, respectively. The benefit from income taxes was $1.7$2.0 million and $2.2$0.4 million for the three- and nine-monthsix-month periods ended SeptemberJune 30, 2020, based on effective tax rates of 21.4%20.6% and 20.6%, respectively. The provision for income taxes was $3.3 million and $7.8 million for the three- and nine-month periods ended September 30, 2019, based on effective tax rates of 26.6% and 25.3%17.9%, respectively. The net decreaseincrease in the effective tax rate for the three- and nine-month periodsthree-month period ended SeptemberJune 30, 2020,2021, as compared to the same periodsperiod in 2019,2020, was primarily due to the $1.9$0.7 million tax expense on the impairmentchange in the fair value of non-tax deductible goodwill offset by the $1.5 millioncontingent consideration, recognized as a discrete charge in the second quarter of 2021. The net tax benefit for the six-month period ended June 30, 2021 on the decrease in the fair value of the contingent consideration. The Company recognizedconsideration, in the amount of $1.1 million, resulted in a net deferreddecrease in the effective tax liability of $11.2 million primarily duerate for the six-month period ended June 30, 2021, as compared to intangible assets and inventory step up offset by net operating losses and research and development tax credits associated with the Arthrosurface acquisition discussedsame period in Note 3.2020.

 

Non-GAAP Financial Measures

Adjusted EBITDA

We present certain information below with respect to adjusted EBITDA, which we define as ourgross profit and adjusted gross margin, adjusted Earnings Before Interest, Tax, Depreciation and Amortization (“EBITDA”), adjusted net income, 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. Thisadjusted diluted earnings per share or adjusted EPS, which are financial measure ismeasures not based on any standardized methodology prescribed by accounting principles generally accepted in the United States, (“GAAP”)or GAAP, and areis not necessarily comparable to similarly titled measures presented by other companies.

 

29

We have presented adjusted gross profit and adjusted gross margin, adjusted EBITDA, adjusted net income, adjusted EPS, because it is athey are key measuremeasures 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 thisthese financial measure helpsmeasures 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 eliminatedthese items in calculating adjusted EBITDAthese measures can provide a useful measuretool for period-to-period comparisons of our core operating performance. Accordingly, we believe that adjusted EBITDA providesthese 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 Gross Profit and Adjusted Gross Margin

We define adjusted gross profit as our gross profit excluding amortization of certain acquired assets, the impact of inventory fair-value step up associated with our recent acquisitions and product rationalization charges. 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 fair value of certain identified assets acquired in acquisitions, including developed technology and acquired tradenames. We define adjusted gross margin as adjusted gross profit divided by total revenue.

The following is a reconciliation of adjusted gross profit to gross profit for the three- and six-month periods ended June 30, 2021 and 2020, respectively:

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2021

  

2020

  

2021

  

2020

 

Gross profit

 $20,812  $13,742  $41,786  $34,939 

Product rationalization charges

  2,063   1,920   2,063   1,920 

Acquisition related intangible asset amortization

  1,562   1,758   3,124   2,721 

Acquisition related inventory step up

  2,208   2,032   4,786   4,123 

Adjusted gross profit

 $26,645  $19,452  $51,759  $43,703 
                 

Adjusted gross margin

  70%  64

%

  71%  66%

21

Adjusted gross profit for the three- and six-month periods ended June 30, 2021 increased $7.2 million and $8.1 million to $26.7 million and $51.8 million, respectively, representing 70% and 71% of revenue. Adjusted gross profit for the three- and six-month periods ended June 30, 2020 was $19.5 million and $43.7 million, respectively, or 64% and 66% of revenue for the periods, respectively. This increase in gross profit for the three- and six-month periods ended June 30, 2021, primarily resulted from higher revenue due to the inclusion of full period results from Parcus Medical and Arthrosurface in 2021 as we acquired these businesses in early 2020 and organic growth in existing legacy business as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially in the United States.  

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

 

 

we exclude acquisition-relatedacquisition related expenses, including impactstransaction costs and other related expenses, amortization and depreciation of purchase price accounting, such asacquired assets in recent acquisitions, and the impact of inventory fair-value step up on cost of goods sold, amortization and depreciation of acquired assets, transactions costs, and other related expenses;revenue;

 

 

we exclude certain impairment charges, including 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;

 

 

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.

 

 

3022


 

The following is a reconciliation of net income (loss) to adjusted EBITDA for the three- and nine-monthsix-month periods ended SeptemberJune 30, 2021 and 2020, and 2019, respectively (dollars in thousands):respectively:

 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

Three Months Ended September 30,

  

Nine Months Ended September 30,

  

2021

  

2020

  

2021

  

2020

 
 

2020

  

2019

  

2020

  

2019

  

(in thousands)

 

Net income (loss)

 $(6,411) $9,200  $(8,326) $23,142  $6,531  $(7,708

)

 $9,369  $(1,915

)

Interest and other income (expense), net

 228  (482) 118  (1,513)

Income taxes

 (1,744) 3,331  (2,161) 7,817 

Interest and other (income) expense, net

 50  169  93  (110

)

Provision for (benefit) from income taxes

 2,599  (1,997

)

 976  (417

)

Depreciation and amortization

 1,718  1,516  5,130  4,459  1,716  1,739  3,437  3,412 

Stock-based compensation

 1,920  1,311  3,953  4,140  2,797  2,240  5,056  2,033 

Product rationalization charges

 -  -  2,892  -  2,063  2,892  2,063  2,892 

Acquisition-related expenses

 5,033  -  16,384  - 

Acquisition related expenses

 -  -  -  4,184 

Acquisition related intangible asset amortization

 1,787  1,996  3,574  3,047 

Acquisition related inventory step up

 2,208  2,032  4,786  4,123 

Goodwill impairment

 -  -  18,144  -  -  -  -  18,144 

Change in fair value of contingent consideration (benefit)

  4,150   -   (16,176)  - 

Change in fair value of contingent consideration

  (13,650)  4,196   (18,470)  (20,326

)

Adjusted EBITDA

 $4,894  $14,876  $19,958  $38,045  $6,101  $5,559  $10,884  $15,067 

 

Adjusted EBITDA infor the three- and nine-month periodsthree-month period ended SeptemberJune 30, 2020, decreased $10.02021, increased $0.5 million and $18.1 million, respectively, as compared with the comparablesame periods in 2019.2020. The increase in adjusted EBITDA for the period was primarily due to higher revenues as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially in the United States, partially offset by an increase in operating expenses primarily attributable to the expansion of our commercial capability in the United States and increase in clinical trial activity.

Adjusted EBITDA for the six-month period ended June 30, 2021, decreased $4.2 million as compared with the same period in 2020. The decrease in adjusted EBITDA for the periodsperiod was primarily due to an increase in operating expenses primarily attributable to expansion of our commercial capability in the unfavorable impact of the COVID-19 pandemic on our revenues, unfavorable revenue mix and higher expenses following our acquisitionsUnited States, increase in early 2020clinical trial activity, as well as a non-cash impairment charge related to support future growth.fixed assets, partially offset by increase in revenue.

 

Adjusted Net Income and Adjusted EPS

We present information below with respect to adjusted net income and adjusted diluted earnings per share (“adjusted EPS”).EPS. We define adjusted net income as our net income 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 non-cashcertain impairment charges, including product rationalization charges, associated with certain non-core legacy products, each on a tax effected basis. Acquisition-relatedAcquisition related expenses are those that we would not have incurred except as a direct result of acquisition transactions. Acquisition-relatedAcquisition related expenses consist of investment banking, legal, accounting, and other professional and related expenses and the impact of purchase accounting associated with acquisition transactions, such as amortization of inventory step up and the amortization of intangible assets recorded as part of purchase accounting.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 trade name.tradenames. We define adjusted EPS as US GAAP diluted earnings (loss) per share excluding the above adjustments to net income used in calculating adjusted net income, each on a per share and a tax effected basis. This financial measure is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similarly titled measures presented by other companies.

We have presented adjusted net income and adjusted EPS because they are key measures used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business. We believe these financial measures help identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. In particular, we believe that the exclusion of the expenses eliminated in calculating adjusted net income and adjusted EPS can provide useful measures for period-to-period comparisons of our core operating performance. Accordingly, we believe that adjusted net income and adjusted EPS 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.

 

The following is a reconciliation of adjusted net income (loss) to adjusted net income for the three- and nine-month periodsix-month periods ended SeptemberJune 30, 2021 and 2020, and 2019, respectively (dollars in thousands):respectively:

 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

Three Months Ended September 30,

  

Nine Months Ended September 30,

  

2021

  

2020

  

2021

  

2020

 
 

2020

  

2019

  

2020

  

2019

  

(in thousands)

 

Net income (loss)

 $(6,411) $9,200  $(8,326) $23,142  $6,531  $(7,708

)

 $9,369  $(1,915

)

Product rationalization charges, tax effected

 -  -  2,377  -  1,590  2,377  1,590  2,377 

Acquisition-related expenses, tax effected

 3,832  -  12,508  - 

Acquisition related expenses, tax effected

 -  -  -  3,198 

Acquisition related intangible asset amortization, tax effected

 1,356  1,529  2,754  2,329 

Acquisition related inventory step up, tax effected

 1,675  1,556  3,688  3,151 

Goodwill impairment, tax effected

 -  -  15,773  -  -  -  -  15,773 

Change in fair value contingent consideration, tax effected

  3,336   -   (13,873)  - 

Adjusted net income (loss)

 $757  $9,200  $8,459  $23,142 

Change in fair value of contingent consideration, tax effected

  (9,789)  3,474   (15,287)  (17,208

)

Adjusted net income

 $1,363  $1,228  $2,114  $7,705 

 

3123


 

The following is a reconciliation of dilutedadjusted EPS to adjusted diluted EPSearnings (loss) per share for the three- and nine-monthsix-month periods ended SeptemberJune 30, 20202021 and 2019:2020:

 

 

Three Months Ended September 30,

  

Nine Months Ended September 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 

Diluted earnings (loss) per share

 $(0.45) $0.64  $(0.59) $1.62  $0.45  $(0.54

)

 $0.64  $(0.13

)

Product rationalization charges, tax effected

 -  -  0.17  -  0.11  0.17  0.11  0.17 

Acquisition-related expenses per share, tax effected

 0.27  -  0.88  - 

Acquisition related expenses per share, tax effected

 -  -  -  0.23 

Acquisition related intangible asset amortization, tax effected

 0.09  0.11  0.19  0.16 

Acquisition related inventory step up, tax effected

 0.11  0.11  0.25  0.22 

Goodwill impairment, tax effected

 -  -  1.11  -  -  -  -  1.10 

Change in fair value contingent consideration, tax effected

  0.23   -   (0.98)  - 

Adjusted diluted EPS

 $0.05  $0.64  $0.59  $1.62 

Change in fair of value contingent consideration, tax effected

  (0.67)  0.24   (1.05)  (1.19

)

Adjusted EPS

 $0.09  $0.09  $0.14  $0.56 

 

Adjusted net income and adjusted diluted EPS forin the three-monththree- month period ended SeptemberJune 30, 2020 decreased $8.52021, increased $0.1 million and $0.59, respectively, as compared with the comparablesame period in 2019. 2020. The increase in adjusted net income for the period was primarily due to higher revenues as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially in the United States partially offset by an increase in selling and marketing expenses primarily attributable to increased cost to support our commercial capability in the United States, an increase in research and development expenses and an increase in tax expenses.

Adjusted net income and adjusted diluted EPS forin the nine-monthsix-month period ended SeptemberJune 30, 20202021, decreased $14.7$5.6 million and $1.03, respectively, as compared with the comparablesame period in 2019.2020. The decrease in adjusted net income for the three- and nine-month periodsperiod was primarily due to the unfavorable impact of the COVID-19 pandemic on our revenues, an unfavorable revenue mix impact on profitability, as well as higherincrease in selling and marketing expenses following our acquisitions in early 2020primarily attributable to increased cost to support future growth.our commercial capability in the United States, an increase in research and development expenses, an increase in share-based compensation expense due to the forfeiture of unvested shares during the comparable period, a non-cash impairment charge related to fixed assets and an increase in tax expenses.

 

Liquidity and Capital Resources

We require cash to fund our operating expenses and to make capital expenditures.expenditures and other investments in the business. 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, cash equivalents, investments, and debt, have met our cash requirements. Cash, cash equivalents, and investments aggregated $124.8$97.2 million and $184.9$98.3 million, and working capital totaled $170.7$136.4 million and $218.0$140.5 million as of SeptemberJune 30, 20202021 and December 31, 2019,2020, 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 $50.0 million from our existing credit facility with Bank of America on April 8, 2020, of which we repaid $25.0 million during the three-months ended September 30, 2020. Beyond the existing facility, our credit facility has an additional $50.0 million accordion feature that we could potentially access in the future. In addition, we are exploring other sources of funding aimed at further supporting our liquidity profile, as well as maintaining business and organizational continuity through the pandemic. In parallel, we have implemented a number of internal short-term expense controls and are prioritizing business initiatives to conserve cash flow.

 

Cash provided by operating activities was $10.5$1.9 million for the nine-monthsix-month period ended SeptemberJune 30, 2020,2021, as compared to cash provided by operating activities of $24.0$4.6 million for the same period in 2019.2020. The decrease in cash provided by operating activitieschange was primarily attributable to the unfavorable impacttiming of the COVID-19 pandemic on our revenues, impact of unfavorable revenue mix on profitability, higher spending on commercial infrastructure following our acquisitions of Parcus Medical and Arthrosurface in early 2020, payment of accrued expenses and thecollections, increase in inventoryinventories and timing of certain state tax payments, partially off-set by a decrease in cash outflows related to acquisition related expenses for the nine-monthsix-month period ended SeptemberJune 30, 2020.2021.

 

Cash used in investing activities was $88.1$0.6 million for the nine-monthsix-month period ended SeptemberJune 30, 2020,2021, as compared to cash used in investing activities of $1.3$94.8 million for the same period in 2019.2020. The change was primarily due to the consideration paid for the acquisitions of Parcus Medical and Arthrosurface in the nine-monthsix-month period ended SeptemberJune 30, 2020.

 

Cash provided by financing activities was $24.3$0.1 million for the nine-monthsix-month period ended SeptemberJune 30, 2020,2021, as compared to cash usedprovided by financing activities of $8.4$49.5 million for the same period in 2019.2020. The change was primarily due to net borrowingsa drawdown of $25.0$50.0 million onfrom our existing credit facility duringin the nine-monthssix-month period ended SeptemberJune 30, 2020 as a precautionary measure associated with the potential impact of the COVID-19 pandemic on our operations.2020.

 

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with US GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We believe that our accounting policies for revenue recognition, accounts receivable and allowance for credit losses, goodwill, acquired in-process research and development, inventory and contingencies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. There werehave been no other significant changes in ourto the above critical accounting policies or in the underlying accounting assumptions and estimates during the three months ended September 30, 2020 to augment the critical accounting estimatesused in such policies from those disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report onannual consolidated financial statements and accompanying notes included in our 2020 Form 10-K for the fiscal year ended December 31, 2019,2020. 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 than those described below.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.  

 

3224


 

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.

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 earnout 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 comprehensive income.

33

Goodwill

We assess goodwill for impairment on November 30 of each year, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether further impairment testing is necessary, such as macroeconomic conditions, changes in our industry and the markets in which we operate, and our market capitalization, and our reporting units' historical and expected future financial performance. If we conclude that it is more likely than not that a reporting unit's fair value is less than it’s carrying value or we bypass the optional qualitative assessment, recoverability is assessed by comparing the fair value of the reporting unit with its carrying amount. If a reporting unit's carrying value exceeds its fair value, we will measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

For quantitative tests, we estimate the fair value of the reporting units using an income approach. Under the income approach, the fair value of the reporting unit is estimated based on the discounted present value of the projected 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. Estimates of future cash flows are dependent on our knowledge and experience about past and current events, and as well as significant judgments and assumptions about conditions we expect to exist, including revenue growth rates, margins, and the discount rate. Our estimates of cash flows are also based on historical and future operating performance, economic conditions and actions we expect to take. These assumptions are based on a number of factors, including future operating performance, economic conditions, actions we expect to take, and present value techniques. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. It is possible that assumptions underlying the impairment analysis will change in a manner that impairment in value may occur in the future.

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, we assessed goodwill for each of our reporting units. As of March 31, 2020, there was $7.5 million of goodwill on the balance sheet related to the legacy Anika reporting unit. We assessed that our legacy reporting unit’s fair value was greater than its carrying value using the qualitative assessment. Upon their acquisition, we recorded $44.4 million of goodwill on the balance sheet related to the combined Parcus Medical and Arthrosurface reporting unit. We performed a quantitative assessment of goodwill impairment related to the Parcus Medical and Arthrosurface reporting unit. The temporary suspension of domestic elective procedures directly impacted the Parcus Medical and Arthrosurface reporting unit, resulting in an immediate term revenue decline. We further applied an increase in discount rate due to the increased overall uncertainty. These key changes, together with estimates on operating expenses, capital requirements, tax benefits, and other cash flow projections indicated that the estimated fair value of this reporting unit was less than its carrying value. Consequently, a goodwill impairment charge of $18.1 million was recorded in the quarter ended March 31, 2020. There were no events since March 31, 2020 that indicated any further impairments to the Parcus Medical and Arthrosurface reporting unit.

In the event the financial performance of our reporting units do not meet our expectations in the future, we experience future prolonged market downturns, negative trends from the COVID-19 pandemic continue, or there are other negative revisions to key assumptions, we may be required to perform additional impairment analyses and could be required to recognize a goodwill impairment charge.

Recent Accounting Pronouncements

A discussion of Recent Accounting Pronouncements is included in our Annual Report on2020 Form 10-K for the fiscal year ended December 31, 2019 and is updated in the Notes to the consolidated financial statements included in this report.

 

34

Contractual Obligations and Other Commercial Commitments

Our contractual obligations and other commercial commitments are summarized in the section captioned “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations and Other Commercial Commitments” in our Annual Report on2020 Form 10-K for the year ended December 31, 2019. Material contractual obligations incurred in the quarter included those described in Note 16, “Revolving Credit Agreement.”10-K. There were otherwise no material changes to our contractual obligations reported in our 2019 Annual Report on2020 Form 10-K or our Quarterly Report on Form 10-Q during the nine-month periodsix months ended SeptemberJune 30, 2020.2021. For additional discussion, see Note 10, “Commitments and Contingencies,”9 to the consolidated financial statements included in this report.

 

To the extent that funds generated from our operations, together with our existing capital resources, are insufficient to meet future requirements, we will be required to obtain additional funds through equity or debt financings, strategic alliances with corporate partners and others, or through other sources. No assurance can be given that any additional financing will be made available to us or will be available on acceptable terms should such a need arise.

 

Off-balanceOff-Balance Sheet Arrangements

We do not use special purpose entities or other off-balance sheet financing techniques that we believe have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, or capital resources.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our market risks and the ways we manage them are summarized in the section captioned “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2019.10-K. There have been no material changes in the first ninesix months of 20202021 to our market risks or to our management of such risks.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

 

(a)

Evaluation of disclosure controls and procedures.

 

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

 

 

(b)

Changes in internal controls over financial reporting.

 

As of the filing of this report, management is in the process of evaluating and integrating the internal controls of the acquired Parcus Medical and Arthrosurface businesses into our existing operations. During the three-month period ended September 30, 2020, we continued to implement controls over the accounting and disclosures related to purchase accounting and integration of the Parcus Medical and Arthrosurface businesses, as well as to enhance controls surrounding the goodwill impairment assessment. There were no other material changes in our internal control over financial reporting during the three-month periodquarter ended SeptemberJune 30, 2020,2021, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

 

 

35


 

As a result of the COVID-19 pandemic, certain employees began working remotely in March 2020. Additionally, we have enhanced existing controls by implementing more frequent forecasting and increasing board oversight. Notwithstanding these changes, we have not identified any material changes in our internal control over financial reporting. We are continually monitoring and assessing the COVID-19 situation to determine any potential impact on the design and operating effectiveness of our internal controls over financial reporting.

PART II: OTHER INFORMATION

PART II:

OTHER INFORMATION

 

ITEM1.

LEGALPROCEEDINGS

 

We are 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, we do not expect the resolution of these occasional legal proceedings to have a material adverse effect on our financial position, results of operations, or cash flow.flow, as described in Note 9 to the consolidated financial statements in this report. There have been no material changes to the information provided in the section captioned “Part I, Item 3. Legal Proceedings” in our Annual Report on2020 Form 10-K for the year ended December 31, 2019.10-K.

 

ITEM 1A.

RISK FACTORS

 

Except as set forth below, thereThere have been no material changes to the risk factors described in the section captioned “Part I, Item 1A. Risk Factors” in our Annual Report on2020 Form 10-K for the year ended December 31, 2019, asand updated by the section captioned “Part II, Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the interimquarterly period ended March 31, 2020.2021. In addition to the other information set forth in this report, you should carefully consider the factors discussed in the section captioned “Part I, Item 1A. Risk Factors” in our Annual Report on2020 Form 10-K for the year ended December 31, 2019 and the section captioned “Part II, Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the interimquarterly period ended March 31, 2020,2021, which could materially affect our business, financial condition, or future results. The risks described in our Annual Report on2020 Form 10-K and our Quarterly ReportsReport on Form 10-Q for the quarterly period ended March 31, 2021 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition, and/or operating results.

 

Risks Related to the COVID-19 Pandemic

The ongoing COVID‑19 outbreak has affected 215 countries and territories, including the United States and Italy. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. On October 23, 2020, the Director-General of the World Health Organization stated that the global population, particularly in the northern hemisphere, is at a critical juncture in the pandemic and that upcoming months will be challenging, with some countries seeing an exponential increase in cases. Government and private sector actions responding to the pandemic have disrupted, and will continue to disrupt, domestic business activities generally and have adversely affected, and are likely to continue to negatively affect, our business operations for an indefinite period. Numerous countries, including the United States and Italy, have imposed, and are expected to continue to impose, restrictions on travel, as well as general movement restrictions, business closures and other measures imposed to slow the spread of COVID‑19.

We have previously set forth key risks from the COVID‑19 pandemic as updated by the statements below. The current circumstances are dynamic, however. While the quarantine, social distancing, and other regulatory measures instituted or recommended in response to COVID‑19 are not expected to be permanent, in his comments on October 23, 2020 the Director-General of the World Health Organization urged leaders worldwide to take immediate, additional action, such as isolation and quarantining of individuals and temporary closing of businesses, to keep transmission of the coronavirus at a low level. The full impact of COVID-19 on our business operations and financial condition, including the duration and severity of the impact on overall customer demand and on our clinical studies, cannot be reasonably estimated at this time. The COVID‑19 pandemic continues to adversely affect the economies and financial markets of many countries, resulting in an economic downturn and changes in global economic policy that could reduce demand for our products and have a material adverse impact on our business, operating results and financial condition.

36

Our operations are located in areas impacted by the COVID-19 pandemic, and those operations have been, and may continue to be, adversely affected by the COVID-19 pandemic.

The coronavirus has impacted the social and economic framework in the United States and Italy. Our administrative, research and development, and manufacturing operations are principally performed at our U.S. facilities in Massachusetts and Florida. Though our Italian operations represent a relatively small percentage of our consolidated business, we conduct commercial activity, product development, sales and inventory management and other services in our office in Padova, Italy. Our business operations in the United States and Italy are subject to potential business interruptions arising from protective measures that have been, and may be, taken by Italian, U.S., Massachusetts and Florida regulators and other agencies and governing bodies. Business disruptions elsewhere in the world could also negatively affect the sources and availability of components and materials that are essential to the operation of our business in both the United States and Italy. While we have seen improvement in certain areas in which we do business over the course of the second and third quarters of 2020 as it related to the pandemic, the situation in other jurisdictions, including Florida, has deteriorated over the same period. It is difficult to predict with certainty the timing for a return to pre-COVID-19 pandemic operations.

Stay-at-home orders, business closures, travel restrictions, supply chain disruptions, employee illness or quarantines, and other extended periods of interruption to our business could result in disruptions to our operations, which could adversely impact the growth of our business, could cause us to cease or delay operations, and could prevent our customers from receiving shipments or processing payments. To mitigate the spread of COVID-19, we transitioned a significant subset of our employee population to a remote work environment, which may exacerbate various cybersecurity risks to our business, including an increased demand for information technology resources, an increased risk of phishing and other cybersecurity attacks, and an increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information. Extended periods of interruption to our corporate, development or manufacturing facilities due to the COVID-19 pandemic could cause us to lose revenue and market share, which would depress our financial performance and could be difficult to recapture. Our business may also be harmed if travel within, to or from the United States and Italy continues to be restricted or inadvisable. In addition, employee disruptions and remote working environments related to the COVID-19 pandemic have impacted, and are continuing to impact, the efficiency and pace with which we work and develop our product candidates and our manufacturing capabilities.

The COVID-19 pandemic has resulted in a significant reduction in the number of elective surgeries being performed, which has decreased the usage of, and revenue from, certain of our products.

A significant portion of the demand for our products results from the usage of our products in elective surgeries. As COVID-19 reached a global pandemic level in March 2020, the volume of elective surgery procedures worldwide, including in the U.S. and Western Europe, declined precipitously, as healthcare systems diverted resources to meet the increasing demands of managing COVID-19 and as patients deferred elective surgeries to avoid the risk of exposure to the coronavirus. The American College of Surgeons, U.S. surgeon general, and other public health bodies recommended delaying elective surgeries during the COVID-19 pandemic, and surgeons and medical societies continue to evaluate the risks of minimally invasive surgeries in the presence of infectious diseases.

The decreased number of procedures performed has negatively impacted our revenue and operating results, and it is impossible to reasonably predict when the level of elective procedures will begin to return to pre-COVID-19 levels. There is significant uncertainty in light of ongoing infection rates in many areas of the United States and in various international jurisdictions. Procedure volumes have not returned to pre-COVID-19 levels and there is no guarantee that the positive trends will continue. As a result, elective procedures may yet again decline substantially in future periods, especially in geographies with substantial COVID-19 infection rates. In the United States, COVID-19 policymaking is being handled largely on a state-by-state, and even city-by-city, basis. The international outlook is similar, as countries are taking varying approaches to combating the pandemic and returning to pre-COVID operations. The pace of recovery will continue to be phased and regionally determined based on local orders and the overall impact of COVID-19. A continuation of the decreased level of elective procedures due to COVID-19 will result in a loss of sales and profits and other material adverse effects on our business and operating results.

37

Risks Related to Our Business and Industry

Our business is dependent upon retaining qualified management and technical personnel, including our recent hiring of a chief executive officer and our chief financial officer.

We are highly dependent on the members of our management and technical staff, the loss of one or more of whom could have a material adverse effect on us. We have experienced a number of management changes in recent years, and there can be no assurances that any future management changes will not adversely affect our business. We believe that our future success will depend in large part upon our ability to attract and retain technical and highly skilled executive, managerial, professional, and technical personnel. We face significant competition for such personnel from competitive companies, research and academic institutions, government entities, and other organizations. There can be no assurance that we will be successful in hiring or retaining the personnel we require. The failure to hire and retain such personnel could have a material adverse effect on our business, financial condition, and results of operations.

On January 29, 2020, Joseph Darling, our former President and Chief Executive Officer, passed away unexpectedly. Dr. Cheryl Blanchard, a member of the Board of Directors, was named Interim Chief Executive Officer initially and became our permanent President and Chief Executive Officer on April 26, 2020.

Effective August 21, 2020, Sylvia Cheung resigned from her position of Chief Financial Officer, Treasurer and Assistant Secretary for personal reasons. On August 5, 2020, we announced that we had appointed Michael Levitz as our Executive Vice President, Chief Financial Officer and Treasurer, effective August 10, 2020 following a search process aided by an executive search firm.

Even though we have appointed Dr. Blanchard and Mr. Levitz to succeed Mr. Darling and Ms. Cheung, respectively, we may face challenges in building our business in accordance with our strategy as the result of having both a chief executive officer and chief financial officer that are relatively new to our company.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Issuer Purchases of Equity Securities

 

On May 2, 2019, we announced thatUnder our equity compensation plans, and subject to the approval of the Compensation Committee of our Board of Directors, approved a $50.0 million share repurchase program with $30.0 millionemployee grantees have the option of electing to be utilized for an accelerated share repurchase program and $20.0 million reserved for open market purchases. We did not repurchase anysatisfy tax withholding obligations at the time of vesting or exercise by allowing us to withhold shares duringof stock otherwise issuable to the grantee. During the three-month period ended SeptemberJune 30, 2020,2021, we withheld 1,093 shares to satisfy grantee tax withholding obligations on restricted stock award and a total of $20.0 million remained available for open market repurchases as of September 30, 2020.restricted stock unit vesting events.

 

Following is a summary of stock repurchases for the three-month period ended June 30, 2021 (in thousands, except share data):

 

Period

 

Total Number of
Shares Purchased as Part of Publicly Announced Plans or Programs (1)

  

Average
Price per Share

  

Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs(2)

 

April 1 to 30, 2021

  -  $-  $20,000 

May 1 to 31, 2021

  637  $43.72  $20,000 

June 1 to 30, 2021

  456  $43.50  $20,000 

Total

  1,093         

 

(1)

1,093 shares were withheld by us to satisfy grantee tax withholding obligations on restricted stock award and restricted stock unit vesting events in May 2021.

(2)

On May 2, 2019, we announced that our Board of Directors approved a $50.0 million share repurchase program with $30.0 million to be utilized for an accelerated share repurchase program, which was completed in January 2020, and $20.0 million reserved for open market repurchases. No open market repurchases were made during the three-month period ended June 30, 2020.

 

 

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ITEM 6.

EXHIBITS

 

ExhibitNo.

Description

   

†10.1

Offer Letter dated as of July 29, 2020 between Anika Therapeutics, Inc. and Michael  Levitz 2017 Omnibus Incentive Plan (as amended effective June 16, 2021) (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed on June 22, 2021)

  
(31)

†10.2

Anika Therapeutics, Inc. 2021 Employee Stock Purchase Plan (adopted June 16, 2021) (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed on June 22, 2021)

(31)

Rule 13a-14(a)/15d-14(a) Certifications

   

*31.1

Certification of Dr. Cheryl R. Blanchard, pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

*31.2

Certification of Michael Levitz, pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

(32)

Section 1350 Certifications

  

**32.1

Certification of Dr. Cheryl R. Blanchard, and Michael Levitz, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- OxleySarbanes-Oxley Act of 2002.

   

(101)

Inline XBRL

   

*101

The following materials from Anika Therapeutics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 20202021 as filed with the Securities and Exchange CommissionSEC on November 4, 2020,August 5, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language), as follows:

 

i.

Consolidated Balance Sheets as of SeptemberJune 30, 20202021 (unaudited) and December 31, 20192020 (unaudited)

 

ii.

Consolidated Statements of Operations and Comprehensive Income for the threeThree and nine months ended SeptemberSix Months Ended June 30, 20202021 and SeptemberJune 30, 20192020 (unaudited)

 

iii.

Consolidated Statements of Stockholders’ Equity for the nine months ended SeptemberSix Months Ended June 30, 20202021 and SeptemberJune 30, 20192020 (unaudited)

 

iv.

Consolidated Statements of Cash Flows for the nine months ended SeptemberSix Months Ended June 30, 20202021 and SeptemberJune 30, 20192020 (unaudited)

 

v.

Notes to Consolidated Financial Statements (unaudited)

  

(104)

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*

Filed herewith.

**

Furnished herewith.

*

Filed herewith.

**Furnished herewith.
†   Management contract or compensatory plan or arrangement.

 

 

39


 

SIGNATURES

 

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

 

  

ANIKA THERAPEUTICS, INC.

   

Date: November 4, 2020August 5, 2021

By:

/s/ MICHAEL LEVITZ

  

Michael Levitz

  

Executive Vice President, Chief Financial Officer and Treasurer

  

(Authorized Officer and Principal Financial Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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