UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 20212022

 

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

 

For the transition period from                 to                  

 

Commission File Number 001-14027

 

Anika Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

04-3145961

(State or Other Jurisdiction of

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

Incorporation or Organization)

 

 

32 Wiggins Avenue, Bedford, Massachusetts 01730

(Address of Principal Executive Offices) (Zip Code)

 

(781) 457-9000

(Registrant’s Telephone Number, Including Area Code)

 

N/A

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

 

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

 

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

   

Common Stock, par value $0.01 per share

ANIK

The Nasdaq StockNASDAQ Global Select Market LLC

 

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 October 25, 2021,31, 2022, there were 14,436,77314,609,669 outstanding shares of Common Stock, par value $0.01 per share.

 

 

 

 

 

ANIKA THERAPEUTICS, INC.

TABLE OF CONTENTS

 

  

Page

Part I

Financial Information

3

Item 1.

Condensed Consolidated Financial Statements (unaudited):

3

 

Condensed Consolidated Balance Sheets as of September 30, 20212022 and December 31, 20202021

3

 

Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 20212022 and 20202021

4

 

Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 20212022 and 20202021

5

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 20212022 and 20202021

6

 

Notes to Consolidated Financial Statements

7

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

2730

Item 4.

Controls and Procedures

2730

Part II

Other Information

31

Item 1.

Legal Proceedings

2831

Item 1A.

Risk Factors

2831

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

2832

Item 5.Other29

Item 6.

Exhibits

3032

Signatures

3133

 

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

 

 

 

 

 

 

 

 

PARTI:

FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

Anika Therapeutics, Inc. and Subsidiaries

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

(in thousands, except per share data)

(unaudited)

 

 

September 30,

 

December 31,

  

September 30,

 

December 31,

 

ASSETS

 

2021

  

2020

  

2022

  

2021

 

Current assets:

  

Cash and cash equivalents

 $90,976  $95,817  $87,777  $94,386 

Investments

 0  2,501 

Accounts receivable, net of reserves of $1,358 and $1,523 at September 30, 2021 and December 31, 2020, respectively

 32,352  24,102 

Accounts receivable, less allowance for credit losses of $1,566 and $1,442 at September 30, 2022 and December 31, 2021, respectively

 34,168  29,843 

Inventories, net

 35,019  46,209  37,237  36,010 

Prepaid expenses and other current assets

  7,433   8,754   8,579   8,289 

Total current assets

 165,780  177,383  167,761  168,528 

Property and equipment, net

 49,111  50,613  47,390  47,602 

Right-of-use assets

 21,397  22,619  30,987  20,957 

Other long-term assets

 23,671  15,420  18,342  20,285 

Intangible assets, net

 85,021  91,157  76,545  82,382 

Goodwill

  7,950   8,413   6,721   7,781 

Total assets

 $352,930  $365,605  $347,746  $347,535 
 

LIABILITIES AND STOCKHOLDERS EQUITY

            

Current liabilities:

  

Accounts payable

 $7,942  $8,984  $8,353  $7,633 

Accrued expenses and other current liabilities

 17,339  14,793  17,999  17,847 

Contingent consideration – current portion

  3,490   13,090 

Contingent consideration

  -   4,315 

Total current liabilities

  28,771   36,867   26,352   29,795 

Other long-term liabilities

 1,489  1,244  474  1,258 

Contingent consideration

 0  22,320 

Deferred tax liability

 12,972  11,895  6,800  10,157 

Lease liabilities

 19,638  20,879  29,183  19,240 

Commitments and contingencies (Note 9)

       

Commitments and contingencies (Note 10)

       

Stockholders’ equity:

  

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

 0  0 

Common stock, $0.01 par value; 90,000 shares authorized, 14,436 and 14,329 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

 144  143 

Preferred stock, $0.01 par value; 1,250 shares authorized, no shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively

 -  - 

Common stock, $0.01 par value; 90,000 shares authorized, 14,607 and 14,441 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively

 146  144 

Additional paid-in-capital

 63,864  55,355  76,661  67,081 

Accumulated other comprehensive loss

 (5,319) (4,542

)

 (7,497

)

 (5,718

)

Retained earnings

  231,371   221,444   215,627   225,578 

Total stockholders’ equity

  290,060   272,400   284,937   287,085 

Total liabilities and stockholders’ equity

 $352,930  $365,605  $347,746  $347,535 

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

3

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share data)

(unaudited)

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Revenue

 $40,264  $39,536  $116,614  $111,973 

Cost of revenue

  17,485   16,513   47,169   47,164 

Gross Profit

  22,779   23,023   69,445   64,809 
                 

Operating expenses:

                

Research & development

  7,301   7,673   20,433   21,327 

Selling, general & administrative

  21,276   17,500   61,745   53,664 

Change in fair value of contingent consideration

  -   (3,450

)

  -   (21,920

)

Total operating expenses

  28,577   21,723   82,178   53,071 

(Loss) income from operations

  (5,798

)

  1,300   (12,733

)

  11,738 

Interest and other income (expense), net

  436   (48

)

  378   (141

)

(Loss) income before income taxes

  (5,362

)

  1,252   (12,355

)

  11,597 

(Benefit from) provision for income taxes

  (1,187

)

  694   (2,404

)

  1,670 

Net (loss) income

 $(4,175

)

 $558  $(9,951

)

 $9,927 
                 

Net (loss) income per share:

                

Basic

 $(0.29

)

 $0.04  $(0.68

)

 $0.69 

Diluted

 $(0.29

)

 $0.04  $(0.68

)

 $0.68 
                 

Weighted average common shares outstanding:

                

Basic

  14,603   14,429   14,542   14,389 

Diluted

  14,603   14,647   14,542   14,588 
                 

Net (loss) income

 $(4,175

)

 $558  $(9,951

)

 $9,927 

Foreign currency translation adjustment

  (851

)

  199   (1,779

)

  (777

)

Comprehensive (loss) income

 $(5,026

)

 $757  $(11,730

)

 $9,150 

 

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

 

 


4

 

 

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share data)

(unaudited)

Anika Therapeutics, Inc. and Subsidiaries

 

Consolidated Statements of Stockholders' Equity

 

(in thousands)

 
                         
  

Nine Months Ended September 30, 2022

 
                  

Accumulated

     
  

Common Stock

      

Other

  

Total

 
  

Number of

  

$.01 Par

  

Additional Paid

  

Retained

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Value

  

in Capital

  

Earnings

  

Loss

  

Equity

 

Balance, January 1, 2022

  14,441  $144  $67,081  $225,578  $(5,718) $287,085 

Issuance of common stock for equity awards

  1   -   15   -   -   15 

Vesting of restricted stock units

  106   1   (1)  -   -   - 

Stock-based compensation expense

  -   -   2,545   -   -   2,545 

Retirement of common stock for minimum tax withholdings

  (30)  -   (844)  -   -   (844)

Net loss

  -   -   -   (2,933)  -   (2,933)

Other comprehensive income

  -   -   -   -   (81)  (81)

Balance, March 31, 2022

  14,518  $145  $68,796  $222,645  $(5,799) $285,787 

Vesting of restricted stock units

  61   1   (1)  -   -   - 

Issuance of ESPP shares

  20   -   -   -   -   - 

Stock-based compensation expense

  -   -   4,081   -   -   4,081 

Retirement of common stock for minimum tax withholdings

  (1)  -   (25)  -   -   (25)

Net loss

  -   -   -   (2,843)  -   (2,843)

Other comprehensive income

  -   -   -   -   (847)  (847)

Balance, June 30, 2022

  14,598  $146  $72,851  $219,802  $(6,646) $286,153 

Vesting of restricted stock units

  11   -   -   -   -   - 

Issuance of ESPP shares

  -   -   -   -   -   - 

Stock-based compensation expense

  -   -   3,876   -   -   3,876 

Retirement of common stock for minimum tax withholdings

  (2)  -   (66)  -   -   (66)

Net loss

  -   -   -   (4,175)  -   (4,175)

Other comprehensive income

  -   -   -   -   (851)  (851)

Balance, September 30, 2022

  14,607  $146  $76,661  $215,627  $(7,497) $284,937 

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Revenue

 $39,536  $31,694  $111,973  $97,769 

Cost of revenue

  16,513   14,351   47,164   45,487 

Gross Profit

  23,023   17,343   64,809   52,282 
                 

Operating expenses:

                

Research and development

  7,673   5,217   21,327   15,799 

Selling, general and administrative

  17,500   15,903   53,664   44,884 

Goodwill impairment

  0   0   0   18,144 

Change in fair value of contingent consideration

  (3,450

)

  4,150   (21,920

)

  (16,176

)

Total operating expenses

  21,723   25,270   53,071   62,651 

Income (loss) from operations

  1,300   (7,927

)

  11,738   (10,369

)

Interest and other expense, net

  (48

)

  (228

)

  (141

)

  (118

)

Income (loss) before income taxes

  1,252   (8,155

)

  11,597   (10,487

)

Provision for (benefit from) income taxes

  694   (1,744

)

  1,670   (2,161

)

Net income (loss)

 $558  $(6,411

)

 $9,927  $(8,326

)

                 

Net income (loss) per share:

                

Basic

 $0.04  $(0.45

)

 $0.69  $(0.59

)

Diluted

 $0.04  $(0.45

)

 $0.68  $(0.59

)

Weighted average common shares outstanding:

                

Basic

  14,429   14,205   14,389   14,202 

Diluted

  14,647   14,205   14,588   14,202 
                 

Net income (loss)

 $558  $(6,411

)

 $9,927  $(8,326

)

Foreign currency translation adjustment

  (467

)

  522   (777

)

  602 

Comprehensive income (loss)

 $91  $(5,889

)

 $9,150  $(7,724

)

  

Nine Months Ended September 30, 2021

 
                  

Accumulated

     
  

Common Stock

      

Other

  

Total

 
  

Number of

  

$.01 Par

  

Additional Paid

  

Retained

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Value

  

in Capital

  

Earnings

  

Loss

  

Equity

 

Balance, January 1, 2021

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

)

 $272,400 

Issuance of common stock for equity awards

  -   -   1   -   -   1 

Vesting of restricted stock units

  46   1   (1

)

  -   -   - 

Stock-based compensation expense

  -   -   2,259   -   -   2,259 

Retirement of common stock for minimum tax withholdings

  (9

)

  -   (333

)

  -   -   (333

)

Net income

  -   -   -   2,838   -   2,838 

Other comprehensive income

  -   -   -   -   (509

)

  (509

)

Balance, March 31, 2021

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

)

 $276,656 

Issuance of common stock for equity awards

  18   -   640   -   -   640 

Vesting of restricted stock units

  35   -   -   -   -   - 

Stock-based compensation expense

  -   -   2,797   -   -   2,797 

Retirement of common stock for minimum tax withholdings

  (1)  -   (19)  -   -   (19)

Net income

  -   -   -   6,531   -   6,531 

Other comprehensive income

  -   -   -   -   199   199 

Balance, June 30, 2021

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

Issuance of common stock for equity awards

  10   -   373   -   -   373 

Vesting of restricted stock units

  9   -   -   -   -   - 

Stock-based compensation expense

  -   -   2,863   -   -   2,863 

Retirement of common stock for minimum tax withholdings

  (1)  -   (71)  -   -   (71)

Net income

  -   -   -   558   -   558 

Other comprehensive income

  -   -   -   -   (467)  (467)

Balance, September 30, 2021

  14,436  $144  $63,864  $231,371  $(5,319) $290,060 

 

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

 


5

 

 

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Stockholders' EquityCash Flows

(in thousands)

(unaudited)

 

  

Nine Months Ended September 30, 2021

 
                  

Accumulated

     
  

Common Stock

      

Other

  

Total

 
  

Number of

  

$.01 Par

  

Additional Paid

  

Retained

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Value

  

in Capital

  

Earnings

  

Loss

  

Equity

 

Balance, January 1, 2021

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

)

 $272,400 

Issuance of common stock for equity awards

  0   0   1   0   0   1 

Vesting of restricted stock units

  46   1   (1

)

  -   -   - 

Stock-based compensation expense

  -   0   2,259   0   0   2,259 

Retirement of common stock for minimum tax withholdings

  (9

)

  0   (333

)

  0   0   (333

)

Net income

  -   0   0   2,838   0   2,838 

Other comprehensive income

  -   0   0   0   (509

)

  (509

)

Balance, March 31, 2021

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

)

 $276,656 

Issuance of common stock for equity awards

  18   0   640   0   0   640 

Vesting of restricted stock units

  35   0   0   0   0   0 

Stock-based compensation expense

  -   0   2,797   0   0   2,797 

Retirement of common stock for minimum tax withholdings

  (1)  0   (19)  0   0   (19)

Net income

  -   0   0   6,531   0   6,531 

Other comprehensive income

  -   0   0   0   199   199 

Balance, June 30, 2021

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

Issuance of common stock for equity awards

  10   0   373   0   0   373 

Vesting of restricted stock units

  9   0   0   0   0   0 

Stock-based compensation expense

  -   0   2,863   0   0   2,863 

Retirement of common stock for minimum tax withholdings

  (1)  0   (71)  0   0   (71)

Net income

  -   0   0   558   0   558 

Other comprehensive income

  -   0   0   0   (467)  (467)

Balance, September 30, 2021

  14,436   144   63,864   231,371   (5,319)  290,060 

  

Nine Months Ended September 30, 2020

 
                  

Accumulated

     
  

Common Stock

      

Other

  

Total

 
  

Number of

  

$.01 Par

  

Additional Paid

  

Retained

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Value

  

in Capital

  

Earnings

  

Loss

  

Equity

 

Balance, January 1, 2020

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

)

 $288,378 

Vesting of restricted stock units

  42   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

  (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 

Issuance of common stock for equity awards

  2   0   68   0   0   68 

Vesting of restricted stock units

  7   0   0   0   0   0 

Stock-based compensation expense

  -   0   2,240   0   0   2,240 

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   209   209 

Balance, June 30, 2020

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

)

 $288,444 

Vesting of restricted stock units

  4   0   0   0   0   0 

Stock-based compensation expense

  -   0   1,920   0   0   1,920 

Retirement of common stock for minimum tax withholdings

  -   0   (24

)

  0   0   (24

)

Net loss

  -   0   0   (6,411

)

  0   (6,411

)

Other comprehensive income

  -   0   0   0   522   522 

Balance, September 30, 2020

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

)

 $284,451 
  

Nine Months Ended

September 30

 
  

2022

  

2021

 

Cash flows from operating activities:

        

Net (loss) income

 $(9,951

)

 $9,927 

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

        

Depreciation

  4,984   4,702 

Amortization of acquisition related intangible assets

  5,837   5,885 

Amortization of acquisition related inventory step-up

  -   6,244 

Non-cash operating lease cost

  1,322   1,312 

Change in fair value of contingent consideration

  -   (21,920)

Loss on disposal of fixed assets

  -   831 

Stock-based compensation expense

  10,502   7,919 

Deferred income taxes

  (3,491

)

  1,018 

Provision (recovery) for doubtful accounts

  379   (60)

Provision for inventory

  3,701   3,702 

Other

     (13)

Changes in operating assets and liabilities:

        

Accounts receivable

  (4,983

)

  (8,321)

Inventories

  (3,933

)

  (7,117)

Prepaid expenses, other current and long-term assets

  (456

)

  1,864 

Accounts payable

  533   (702

)

Operating lease liabilities

  (1,054

)

  (1,247

)

Accrued expenses, other current and long-term liabilities

  115   3,104 

Contingent consideration

  -   (2,780)

Income taxes

  423   (423

)

Net cash provided by operating activities

  3,928   3,925 
         

Cash flows from investing activities:

        

Acquisition of Parcus Medical and Arthrosurface, net of cash acquired

  -   (363

)

Proceeds from maturities of investments

  -   2,501 

Purchases of property and equipment

  (4,957

)

  (4,016

)

Net cash used in investing activities

  (4,957

)

  (1,878

)

         

Cash flows from financing activities:

        

Payments made on finance leases

  (284

)

  (210

)

Cash paid for tax withheld on vested restricted stock awards

  (935

)

  (423

)

Proceeds from exercises of equity awards

  15   1,014 

Contingent consideration payout

  (4,315)  (7,220)

Net cash used in financing activities

  (5,519

)

  (6,839)
         

Exchange rate impact on cash

  (61

)

  (49

)

         

Decrease in cash and cash equivalents

  (6,609

)

  (4,841)

Cash and cash equivalents at beginning of period

  94,386   95,817 

Cash and cash equivalents at end of period

 $87,777  $90,976 

Supplemental disclosure of cash flow information:

        

Non-cash investing activities:

        

Right-of-use assets obtained in exchange for operating lease liabilities

 $11,589  $195 

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

 $108  $220 

 

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

 


6


 

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

  

Nine Months Ended September 30,

 
  

2021

  

2020

 

Cash flows from operating activities:

        

Net income (loss)

 $9,927  $(8,326

)

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

        

Depreciation 

  4,702   4,545 
Amortization of acquisition related intangible assets  5,885   5,418 
Amortization of acquisition related inventory step-up  6,244   7,396 

Non-cash operating lease cost

  1,312   1,136 

Goodwill impairment

  0   18,144 

Change in fair value of contingent consideration

  (21,920)  (16,176

)

Loss on disposal of fixed assets

  831   287 

Loss on impairment of intangible asset

  0   1,025 

Stock-based compensation expense

  7,919   3,953 

Deferred income taxes

  1,018   (3,302

)

Recovery for doubtful accounts

  (60)  (482

)

Provision for inventory

  3,702   4,205 

Other

  (13)  (19)

Changes in operating assets and liabilities:

        

Accounts receivable

  (8,321)  7,811 

Inventories

  (7,117)  (8,840

)

Prepaid expenses, other current and long-term assets

  1,864   (989

)

Accounts payable

  (702)  (1,904

)

Operating lease liabilities

  (1,247)  (1,286

)

Accrued expenses, other current and long-term liabilities

  3,104   (2,340

)

Contingent consideration

  (2,780)  0 

Income taxes

  (423)  222 

Net cash provided by operating activities

  3,925   10,478 
         

Cash flows from investing activities:

        

Acquisition of Parcus Medical and Arthrosurface, net of cash acquired

  (363)  (93,859

)

Proceeds from maturities of investments

  2,501   27,000 

Purchases of investments

  0   (20,035

)

Purchases of property and equipment

  (4,016)  (1,179

)

Net cash used in investing activities

  (1,878)  (88,073

)

         

Cash flows from financing activities:

        

Payments made on finance leases

  (210)  (155

)

Repayments of long term debt

  0   (25,351

)

Proceeds from long term debt

  0   50,000 

Cash paid for contingent consideration

  (7,220)  0 

Cash paid for tax withheld on vested restricted stock awards

  (423)  (224

)

Proceeds from exercises of equity awards

  1,014   68 

Net cash (used in) provided by financing activities

  (6,839)  24,338 
         

Exchange rate impact on cash and cash equivalents

  (49)  10 
         

Decrease in cash and cash equivalents

  (4,841)  (53,247

)

Cash and cash equivalents at beginning of period

  95,817   157,463 

Cash and cash equivalents at end of period

 $90,976  $104,216 

Supplemental disclosure of cash flow information:

        

Non-cash Investing Activities:

        

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

 $195  $44 

Right of use assets

 $220  $0 

Consideration for acquisitions included in accounts payable and accrued expenses

 $0  $1,209 

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 consolidated financial statements.


 

ANIKA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

 

1.

Nature of Business

 

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

 

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

 

The Company is subject to risks common to companies in the life sciences industry 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 novelongoing 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, business partners and business partners.a broader impact on elective surgeries. The Company is unable to predict the specific impact that COVID-19 may have on its financial position and operations moving forward due to the numerous uncertainties. Any estimates made herein may change as new events occur and additional information is obtained, and actual results could differ materially from any estimates made herein under different assumptions or conditions. The Company will continue to assess the evolving impact of COVID-19.

 

 

2.

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States (“US GAAP”). The financial statements include the accounts of Anika Therapeutics, Inc. and its subsidiaries. Inter-company transactions and balances have been eliminated. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted from this report pursuant to SEC rules and regulations relating to interim financial statements. The December 31, 20202021 balances reported herein arewere derived from the audited consolidated financial statements. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the condensed consolidated financial statements.

 

The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company’s annual financial statements filed with its Annual Report on Form 10-K for the year ended December 31, 2020.2021. The results of operations for the three--month and nine-month periods ended September 30, 20212022, are not indicative of the results to be expected for the year ending December 31, 2021.2022

 

Segment Information

 

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its President and Chief Executive Officer as of September 30, 2021.2022. Based on the criteria established by Accounting Standards Codification (“ASC”) 280, Segment Reporting, the Company has one operating and reportable segment.

 

7

 

Recent Accounting Adoptions

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

 

3.

Business Combinations

 

Parcus Medical, LLC

 

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

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

 

Consideration Transferred

 

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

 

Cash consideration

 $32,794 

Deferred consideration

  1,642 

Estimated fair value of contingent consideration

  40,700 

Estimated total purchase consideration

 $75,136 

 

ContingentPursuant to the Parcus Medical Merger Agreement, contingent consideration represents additional payments that the Company may be required to make in the future which could total up to $60.0 million depending on the level of net sales of Parcus Medical products generated in 2020 through 2022.

The fair value of contingent consideration related to net sales as of January 24, 2020, and at each reporting date, was determined based on a Monte Carlo simulation model in an option pricing framework, at the acquisition date, whereby a range of possible scenarios were simulated. There also was deferred consideration related to certain purchase price holdbacks, which was resolved within one year of the acquisition date in accordance with the Parcus Merger Agreement and was recorded in accounts payable as of December 31, 2020. There was no deferred consideration as of September 30, 2021. The liability for contingent and deferred consideration iswas included in current and long-term liabilities on the condensed consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved. See NoteDuring the 4,three Fair Value Measurements, for additional discussion ofmonths ended September 30, 2022, the Company paid the contingent consideration related to net sales in the amount of $4.3 million which was included in current liabilities as of September 30, 2021 and December 31, 2020.2021. The Company does not expect any further milestones to be achieved.

 

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

 

Fair Value of Net Assets Acquired

 

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

 

8

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

 

8

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

 

Developed technology

 $41,100 

Trade name

  1,800 

Customer relationships

  1,100 

Total acquired intangible assets

 $44,000 

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

 

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

 

The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and assigned to the newly established reporting unit for Parcus Medical and Arthrosurface. The goodwill is attributable to the workforcewas impaired in 2020 and there was no remaining goodwill as of the business and the value of future technologies expected to arise after the acquisition. Goodwill will notDecember 31, 2020. be amortized and is expected to be deductible for income tax purposes as the acquisition of the limited liability company is an asset purchase for tax purposes. See Note 7,Goodwill, for further discussion.

 

Arthrosurface, Inc.

 

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

9

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

 

Consideration Transferred

 

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

 

Cash consideration

 $61,909 

Estimated fair value of contingent consideration

  28,376 

Estimated total purchase consideration

 $90,285 

 

Pursuant to the Arthrosurface Merger Agreement, the Company could be required to make future payments of up to $40.0 million depending on the achievement of regulatory milestones and the level of net sales of Arthrosurface products infrom 2020 through 2021. The fair value of contingent consideration related to regulatory milestones as of February 3, 2020 was determined through a scenario-based discounted cash flow analysis using scenario probabilities and regulatory milestone dates. The fair value of contingent consideration related to net sales achievement as of February 3, 2020 was determined based upon a Monte Carlo simulation approach at acquisition date, whereby a range of possible scenarios were simulated. InThe Company paid $5.0 million in October 2020 and $10.0 million in 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 asmilestones. As of September 30, 20212022, andthere were December 31, 2020.no milestones remaining.

 

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

 

Fair Value of Net Assets Acquired

 

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

 

9

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

 

Recognized identifiable assets acquired and liabilities assumed:

    

Cash and cash equivalents

 $1,072 

Accounts receivable

  5,368 

Inventories

  15,652 

Prepaid expenses and other current assets

  535 

Property, plant and equipment

  3,394 

Other long-term assets

  7,548 

Intangible assets

  48,900 

Accounts payable, accrued expenses and other liabilities

  (3,929

)

Deferred tax liabilities

  (11,147

)

Net assets acquired

  67,393 

Goodwill

  22,892 

Estimated total purchase consideration

 $90,285 

Intangible assets acquired consist of:

    

Developed technology

 $37,000 

Trade name

  3,400 

Customer relationships

  7,900 

IPR&D

  600 

Total acquired intangible assets

 $48,900 

10

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

Recognized identifiable assets acquired and liabilities assumed:

    

Cash and cash equivalents

 $1,072 

Accounts receivable

  5,368 

Inventories

  15,652 

Prepaid expenses and other current assets

  535 

Property, plant and equipment

  3,394 

Other long-term assets

  7,548 

Intangible assets

  48,900 

Accounts payable, accrued expenses and other liabilities

  (3,929

)

Deferred tax liabilities

  (11,147

)

Net assets acquired

  67,393 

Goodwill

  22,892 

Estimated total purchase consideration

 $90,285 

Intangible assets acquired consist of:

    

Developed technology

 $37,000 

Trade name

  3,400 

Customer relationships

  7,900 

IPR&D

  600 

Total acquired intangible assets

 $48,900 

 

The fair value of developed technology will be amortized over an estimated useful life of 15 years, the fair value of customer relationships over 10 years, and the fair value of the trade namenames over 5 years. A total of $0.6 million represents the fair value of IPR&D with an indefinite useful life that will be evaluated for impairment annually, or more frequently if events or changes in circumstances indicate thatwhich was impaired during the asset might be impaired.quarter ended December 31, 2021.

 

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

Pro Forma Information

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

The unaudited pro forma information for the nine-month periods ended September 30, 2021 and 2020 and there was calculated after applying the Company’s accounting policies and the impactno remaining goodwill as of acquisition date fair value adjustments. The pro forma financial information presents the combined results of operations of Anika, Parcus Medical and Arthrosurface as if the acquisitions had occurred on January 1, 2019 December 31, 2020.after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are factually supportable and directly attributable to the acquisitions.

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

The following table presents unaudited supplemental pro forma information:

  

Nine Months Ended

September 30, 2020

 
     

Total revenue

 $101,722 

Net loss

  (7,328

)

11

 

 

4.

Fair Value Measurements

 

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

The Company’s investmentsmoney market funds that are all classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets. For cash, currentaccounts receivables, accounts payable, and accrued 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. There were no transfers between fair value levels during the nine-month periods ended September 30, 2022 or 2021. See Note 3,Business Combinations for additional discussion of contingent consideration as of September 30, 2022.

 

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

10

 
      

Active Markets

  

Significant Other

  

Significant

     
      

for Identical

Assets

  

Observable

Inputs

  

Unobservable

Inputs

     
  

September 30, 2022

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Amortized Cost

 

Cash equivalents:

                    

Money Market Funds

 $67,348  $67,348  $-  $-  $67,348 
                     

Other current liabilities:

                    

Contingent Consideration - Short Term

 $-  $-  $-  $-  $- 

 

     

Active Markets

 

Significant Other

 

Significant

         

Active Markets

 

Significant Other

 

Significant

    
     

for Identical Assets

 

Observable Inputs

 

Unobservable Inputs

         

for Identical

Assets

 

Observable

Inputs

 

Unobservable

Inputs

    
 

September 30, 2021

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Amortized Cost

  

December 31, 2021

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Amortized Cost

 

Cash equivalents:

  

Money Market Funds

 $67,042  $67,042  $0  $0  $67,042  $67,046  $67,046  $-  $-  $67,046 
  

Other current and long-term liabilities:

 

Other current liabilities:

 

Contingent Consideration - Short Term

 $3,490  $0  $0  $3,490  $0  $4,315  $-  $-  $4,315  $- 

 

      

Active Markets

  

Significant Other

  

Significant

     
      

for Identical Assets

  

Observable Inputs

  

Unobservable Inputs

     
  

December 31, 2020

  

(Level 1)

  

(Level 2)

  

(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 

12

Contingent Consideration

 

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

 

 

Nine Months Ended

 

Nine Months Ended

 
 

Three Months Ended

September 30, 2021

  

Nine Months Ended

September 30, 2021

  

September 30, 2022

  

September 30, 2021

 

Balance, beginning

 $16,940  $35,410  $4,315  $35,410 

Additions

 0  0 

Payments

 (10,000

)

 (10,000

)

 (4,315) (10,000)

Change in fair value

  (3,450

)

  (21,920

)

  -   (21,920)

Balance, ending

 $3,490  $3,490  $-  $3,490 

 

Under the Parcus Medical Merger Agreement and Arthrosurface Merger Agreement, there are earn-out milestones totaling $100 million payable from

202011 to 2022. Parcus Medical has net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface has both regulatory and net sales earn-out milestones annually in 2020 and 2021. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model or a Monte Carlo simulation approach. The unobservable inputs used in the fair value measurement of the Company’s contingent consideration are the probabilities of successful achievement, the net sales estimates, the weighted average cost of capital used for the Monte Carlo simulation, discount rate and the periods in which the milestones are expected to be achieved. The discount rates used for the net sales milestones ranged from 3.2% - 3.3%. The weighted average cost of capital for Parcus increased from 11.4% as of December 31, 2020 to 11.6% as of September 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%. The Company achieved a regulatory milestone in June 2021. The probability of successful achievement of the remaining regulatory milestone was determined to be 0% as of September 30, 2021.

The overall fair value of the contingent consideration decreased by $3.5 million and $21.9 million during the three- and nine-month periods ended September 30, 2021, respectively, due primarily to the decrease in the likelihood that certain contingent milestones would be achieved. The fair value of remaining contingent consideration is assessed on a quarterly basis.

In October 2020, the Company made a regulatory-based milestone payment of $5.0 million pursuant to the terms of the Arthrosurface Merger Agreement as a result of regulatory clearance for the WristMotion Total Arthroplasty System. In June 2021, the Company received regulatory clearance for a reverse shoulder implant system, which triggered a $10.0 million regulatory milestone payment per the terms of the Arthrosurface Merger Agreement. This amount was paid in July 2021.


 

5.

Inventories

 

Inventories consist of the following:

 

 

September 30,

 

December 31,

  

September 30,

 

December 31,

 
 

2021

  

2020

  

2022

  

2021

 

Raw materials

 $16,084  $14,852  $19,015  $16,881 

Work-in-process

 12,795  12,811  11,650  11,442 

Finished goods

  28,935   33,347   24,277   26,731 

Total

 $57,814  $61,010  $54,941  $55,054 
  

Inventories

 $35,019  $46,209  $37,237  $36,010 

Other long-term assets

 22,795  14,801   17,704   19,044 

Total

 $54,941  $55,054 

 

Inventories are stated net of inventory reserves of $10.0 million and $9.1 million as of 13September 30, 2022


and December 31, 2021, respectively.

 

6.

Intangible Assets

 

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

     

Nine Months Ended September 30, 2021

  

December 31,

2020

          

Nine Months Ended

September 30, 2022

  

December 31,

2021

     
 

Gross
Value

  

Less: Accumulated
Currency Translation
Adjustment

  

Less:
Accumulated
Amortization

  

Net Book
Value

  

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

 $89,580  $(1,562) $(16,435) $71,583  $75,899  15  $89,580  $(1,607

)

 $(22,238

)

 $65,735  $70,081  15 

IPR&D

 3,256  (969) 0  2,287  2,587  

Indefinite

  2,656  (1,006

)

 -  1,650  1,650  

Indefinite

 

Customer relationships

 9,000  0  (1,502) 7,498  8,173  10  9,000  -  (2,402

)

 6,598  7,273  10 

Distributor relationships

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

)

 (4,285

)

 -  -  5 

Patents

 1,000  (185) (620) 195  259  16  1,000  (189

)

 (668

)

 143  179  16 

Tradenames

  5,200   0   (1,742)  3,458   4,239   5   5,200   -   (2,781

)

  2,419   3,199   5 

Total

 $112,736  $(3,131) $(24,584) $85,021  $91,157   13  $112,136  $(3,217

)

 $(32,374

)

 $76,545  $82,382   13 

 

The aggregate amortization expense related to intangible assets was $2.0$1.9 million and $1.9$2.0 million for the three-month periods ended September 30, 20212022 and 2020,2021, respectively, and $5.8 million and $5.9 million and $5.4 million for each of the nine-month periods ended September 30, 20212022 and 2020,2021. respectively. 

 

 

7.

Goodwill

 

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

 

Changes in the carrying value of goodwill for the nine months ended September 30, 20212022 were as follows:

 

  

Nine Months Ended

September 30, 2021

 

Balance, beginning January 1, 2021

 $8,413 

Effect of foreign currency adjustments

  (463

)

Balance, ending September 30, 2021

 $7,950 
  

Nine Months Ended September 30, 2022

 

Balance, beginning

 $7,781 

Effect of foreign currency adjustments

  (1,060

)

Balance, ending

 $6,721 

12

8.

Leases

The Company leases its buildings and manufacturing facilities under operating leases. As of September 30, 2022, the Company had real estate leases in Bedford, Massachusetts, Franklin, Massachusetts, Sarasota, Florida, Warsaw, Indiana and Padova, Italy.

In June 2022, the Company finalized renewal options to extend the current term of its leases for its building and manufacturing facility in Bedford as well as its two facilities in Sarasota. With the extension of these renewal options, the Bedford lease term extends to 2027 with several lease renewal options into 2038 and the two leases in Sarasota extend to 2027 but may be extended by mutual agreement. The Sarasota leases also include a right to terminate in 2025 at the Company’s option. The current term of the Franklin lease extends to 2023 and the current term of the Padova lease extends to 2032, with a right to terminate at the Company’s option without penalty.

The following table summarizes the Company’s significant commitments under lease agreements as of September 30, 2022:

  

Operating Leases

 
     

2022 (Remainder of Year)

 $720 

2023

  3,081 

2024

  3,025 

2025

  3,066 

2026

  2,760 

Thereafter

  27,873 

Present value adjustment

  (9,421

)

Present value of lease payments

  31,105 

Less current portion included in accrued expenses and other current liabilities

  (1,922

)

Total lease liabilities

 $29,183 

During the three and nine months ended September 30, 2022, the Company incurred lease expense of $0.8 million and $2.1 million, respectively. During the three and nine months ended September 30, 2021, the Company incurred lease expense of $0.6 million and $1.9 million, respectively. As of September 30, 2022, the weighted average remaining operating lease term was 15.0 years and the weighted average incremental borrowing rate used to determine the operating lease liability was 3.6%.

 

 

8.9.

Accrued Expenses and Other Liabilities

 

Accrued expenses and other liabilities consist of the following:

 

 

September 30,
2021

  

December 31,
2020

  

September 30, 2022

  

December 31, 2021

 
  

Compensation and related expenses

 $8,794  $7,345  $11,166  $9,523 

Professional fees

 2,046  3,438  3,063  3,590 

Operating lease liability - current

 1,542  1,437 

Operating lease liability – current

 1,922  1,526 

Clinical trial costs

 2,463  1,429  1,352  1,961 

Financing lease liability – current

 -  188 

Other

  2,494   1,144   496   1,059 

Total

 $17,339  $14,793  $17,999  $17,847 

 

1413

 
 

9.10.

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 no accrued warranties as of September 30, 20212022 andor December 31, 20202021 and has no history of claims paid.

 

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

 

On October 21, 2021, the Company received notice that the former unitholders of Parcus Medical had filed a request for arbitration regarding the earnout provisions agreed to in the Parcus Medical Merger Agreement. The Company has engaged in the arbitration process and does not anticipate a resolution during 2022. The Company is unable to estimate the potential liability with respect to this matter at this time. There are numerous factors that make it difficult to estimate reasonably possible loss or range of loss at this stage of the matter, including the significant number of legal and factual issues still to be resolved in the arbitration process. The Company intends to vigorously defend against the claims and believes it has strong defenses to the claims asserted.

 

10.11.

Revenue and Geographic Information

 

Revenue by product family was as follows: 

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Joint Pain Management

 $26,153  $18,439  $69,790  $66,168 

Joint Preservation and Restoration

  11,193   11,715   35,296   26,233 

Other

  2,190   1,540   6,887   5,368 
  $39,536  $31,694  $111,973  $97,769 
  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

OA Pain Management

 $25,665  $26,153  $74,139  $69,790 

Joint Preservation and Restoration

  11,821   11,193   36,055   35,296 

Non-Orthopedics

  2,778   2,190   6,420   6,887 
  $40,264  $39,536  $116,614  $111,973 

 

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 51%45% and 48%51% for the three months ended September 30, 20212022 and 2020,2021, respectively, and 46%43% and 52%46% for the nine months ended September 30, 20212022 and 2020,2021, respectively.respectively

 

We receiveThe Company receives payments from our customers based on billing schedules established in each contract. Up-front payments are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional. Deferred revenue was $0.9$0.1 million and $0.2$1.0 million as of September 30, 20212022 and December 31, 2020,2021, respectively.

 

14

Total revenue by geographic location was as follows:

 

 

Three Months Ended September 30,

  

Three Months Ended September 30,

 
 

2021

  

2020

  

2022

  

2021

 
 

Total

 

Percentage of

 

Total

 

Percentage of

  

Total

 

Percentage of

 

Total

 

Percentage of

 
 

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

 

Geographic Location:

                

United States

 $30,910  78% $26,409  84% $31,093  77

%

 $30,910  78

%

Europe

 4,238  11% 2,954  9% 4,885  12

%

 4,238  11

%

Other

  4,388   11%  2,331   7%  4,286   11

%

  4,388   11

%

Total

 $39,536   100% $31,694   100% $40,264   100

%

 $39,536   100

%

 

 

Nine Months Ended September 30,

  

Nine Months Ended September 30,

 
 

2021

  

2020

  

2022

  

2021

 
 

Total

 

Percentage of

 

Total

 

Percentage of

  

Total

 

Percentage of

 

Total

 

Percentage of

 
 

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

  

Revenue

 

Geographic Location:

                

United States

 $85,984  77

%

 $77,848  80% $87,552  75

%

 $85,984  77

%

Europe

 14,808  13

%

 11,140  11% 15,973  14

%

 14,808  13

%

Other

  11,181   10

%

  8,781   9%  13,089   11

%

  11,181   10

%

Total

 $111,973   100

%

 $97,769   100% $116,614   100

%

 $111,973   100

%

 

15

 

11.12.

Equity Incentive Plan

Equity Incentive Plan

 

The Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan (the “2017 Plan”) was approved by the Company’s stockholders on June 13, 2017 and subsequently amended on June 18, 2019, June 16, 2020, and June 16, 2021 andJune 8, 2022. On June 8, 2022, the Company’s stockholders approved an amendment to the 2017 Plan increasing the number of shares by 250,000 shares from 4.6 million shares to 4.85 million shares. The 2017 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights (“SARs”), restricted stock awards, (“RSAs”), performance restricted stock units (“PSUs”), restricted stock units (“RSUs”), total shareholder return options (“TSRs”) and performance options that may be settled in cash, stock, or other property. In accordance with the 2017 Plan approved by the Company’s stockholders, including the amendments thereto, each share award other than stock options or SAR’sSARs will reduce the number of total shares available for grant by two shares. Subject to adjustment for specified types of changes in the Company’s capitalization, no more than 4.64.85 million shares of common stock may be issued under the 2017 Plan. There are 1.9were 1.2 million shares available for future grant at September 30, 2022 under the 30,2017 Plan.

The Anika Therapeutics, Inc. 2021 Inducement Plan (the “Inducement Plan”) was adopted by the Company’s board of directors on November 4, 2021.The Inducement Plan reserves 125,000 shares of common stock for issuance pursuant to equity-based awards granted under the Inducement Plan. Such awards may be granted only to an individual who was not previously the Company’s employee or director with the Company. The Inducement Plan provides for the grant of awards under terms substantially similar to the 2017 Plan (as amended). There were 4,883 shares available for future grant at September 30, 2022 under the Inducement Plan.

 

The Company may satisfy the awards upon exercise, or upon fulfillment of the vesting requirements for other equity-based awards, with either newly issued shares or shares reacquired by the Company. Stock-based awards are granted with an exercise price equal to or greater than the market price of the Company’s stock on the date of grant. Awards contain service conditions or service and performance conditions, and they generally become exercisable ratably over one to fourthree years with a maximum contractual term of ten years.

 

15

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 (in thousands):

 

 

Three Months Ended September 30,

  

Nine Months Ended September 30,

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
 

2021

  

2020

  

2021

  

2020

  

2022

  

2021

  

2022

  

2021

 

Cost of revenue

 $142  $202  $485  $564  $242  $142  $645  $485 

Research and development

 360  206  1,003  558 

Selling, general and administrative

  2,361   1,512   6,431   2,832 

Research & development

 397  360  1,267  1,003 

Selling, general & administrative

  3,237   2,361   8,590   6,431 

Total stock-based compensation expense

 $2,863  $1,920  $7,919  $3,954  $3,876  $2,863  $10,502  $7,919 

 

Stock Options

 

Stock options are granted to purchase common shares at prices that are equal to the fair market value of the shares on the date the options are granted.granted or, in the case of premium options, are granted with an exercise price at 110% of the market price of the Company’s common stock on the date of grant. Options generally vest in equal annual installments over a period of three to fouryears and expire 10 years after the date of grant. The grant-date fair value of options is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.

 

The following summarizes the activity under the Company’s stock option plans:

 

  

Number of Options

  

Weighted Average Exercise Price

  

Weighted Average

Remaining

Contractual

Term (in years)

  

Aggregate Intrinsic

Value

(in thousands)

 

Outstanding as of December 31, 2020

  896,819  $41.50         

Granted

  493,628  $37.67         

Exercised

  (27,851) $34.62      $234 

Forfeited and canceled

  (177,604) $44.32         

Outstanding as of September 30, 2021

  1,184,992  $39.65   8.5  $4,654 

Vested, September 30, 2021

  304,172  $44.01   7.3  $812 

Vested and expected to vest, September 30, 2021

  1,184,992  $39.65   8.5  $4,654 
  

Number of Options

  

Weighted Average Exercise Price

  

Weighted Average

Remaining

Contractual

Term (in years)

  

Aggregate Intrinsic

Value

(in thousands)

 

Outstanding as of December 31, 2021

  1,175,993  $39.56         

Granted

  486,901  $27.60         

Exercised

  (437

)

 $9.10      $10 

Forfeited and canceled

  (156,672

)

 $44.08         

Outstanding as of September 30, 2022

  1,505,785  $35.21   8.3  $78 

Vested, September 30, 2022

  499,617  $40.00   7.3  $8 

Vested or expected to vest, September 30, 2022

  1,505,785  $35.21   8.3  $78 

 

Of the 493,628 stockThe aggregate intrinsic value of options granted duringexercised for the nine-month period ended September 30, 2021,2022 314,541was immaterial.

The Company granted 486,901 stock options during the nine-month ended September 30, 2022, of which 398,314 shares were premium-priced options which were granted with an exercise price at 110%options.

As of the market priceSeptember 30, 2022, there was $8.7 million of the Company’s commonunrecognized compensation cost related to unvested stock on the dateoptions. This expense is expected to be recognized over a weighted average period of grant.1.8 years.

 

The Company uses the Black-Scholes pricing model to determine the fair value of options granted. The calculation of the fair value of stock options is affected by the stock price on the grant date, the expected volatility of the Company’s common stock over the expected term of the award, the expected life of the award, the risk-free interest rate and the dividend yield. The Company estimates the fair value of TSRs using Monte-Carlo simulation model.model where the expected volatility assumption is evaluated over 6.3 years. The actual number of TSR 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. There were 104,638 TSRs as of September 30, 2022.

 

16

 

The assumptions used in the Black-Scholes pricing model for options granted during the nine months ended September 30, 20212022 and 2020,2021, along with the weighted-average grant-date fair values, were as follows:

 

  

Nine Months Ended September 30,

 
  

2021

  

2020

 

Risk-free interest rate

  0.30%0.68%   0.21%1.59% 

Expected life of options (in years)

  4.06.3   4.06.3 

Dividend yield

  -%   -% 

Expected stock price volatility

  54.80% –56.06%   46.48% –52.99% 

As of September 30, 2021, there was $10.0 million of unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted average period of 1.9 years.

 

Nine Months Ended September 30,

 

2022

2021

Risk free interest rate

 

1.3%

-

3.4%

 

0.3%

-

0.7%

Expected volatility

 

53.8%

-

55.5%

 

54.8%

-

56.1%

Expected life (years)

  

4.5

   

4.0

 

Expected dividend yield

  

0.0%

   

0.0%

 

Fair value per option

  

$11.26

   

$14.55

 

 

Restricted Stock Units

 

RSUs generally vest in equal annual installments over a three or four year periods.-year period. The grant-date fair value of RSUs is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. The Company determines the fair value of restricted stock unitsRSUs based on the closing price of its common stock on the date of grant.

 

RSU activity isfor the nine-month period ended September 30, 2022 was as follows:

 

 

Number of Shares

  

Weighted Average Fair Value

  

Number of Shares

  

Weighted Average Fair Value

 

Outstanding as of December 31, 2020

 233,239  $37.50 

Outstanding as of December 31, 2021

 412,658  $36.33 

Granted

 308,243  35.42  507,524  $25.14 

Vested

 (90,013) 37.63  (159,871

)

 $36.48 

Forfeited and cancelled

  (48,624)  35.69   (67,389

)

 $32.45 

Outstanding as of September 30, 2021

  402,845  $36.10 

Outstanding as of September 30, 2022

  692,922  $28.48 

The weighted-average grant-date fair value per share of RSUs granted was $25.14 for the nine-month period ended September 30, 2022. The total fair value of RSUs vested was $5.8 million and $3.9 million for the nine-month periods ended September 30, 2022 and 2021, respectively.

 

As of September 30, 2021,2022, there was $11.3$14.8 million of unrecognized compensation cost related to time-based RSUs, which iswas expected to be recognized over a weighted-average period of 2.12.0 years.

 

Performance Stock Units

 

PSUs generally vest over a three or four year periods from the grant date and include both a service and performance component. 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.

PSU activity isfor the nine-month ended September 30, 2022 was as follows:

 

  

Number of Shares

  

Weighted Average

Fair Value

 

Outstanding as of December 31, 2020

  178,297  $35.93 

Granted

  0   0 

Vested

  0   0 

Forfeited and cancelled

  (18,500)  37.02 

Outstanding as of September 30, 2021

  159,797  $35.80 
  

Number of Shares

  

Weighted Average Fair Value

 

Outstanding as of December 31, 2021

  158,297  $37.44 

Performance factor adjustment

  2,125  $32.53 

Vested

  (19,125

)

 $32.53 

Forfeited and cancelled

  (23,400

)

 $41.86 

Outstanding as of September 30, 2022

  117,897  $34.98 

 

The total fair value of PSUs vested was $0.6 million and $0 for the nine-month period ended September 30, 2022 and 2021, respectively. As of September 30, 2021,2022, there was $0.1 millionnone of unrecognized compensation costthe milestones related to the outstanding PSUs which iswere expected to be recognized over a weighted-average period of 0.4 years.

On November 4, 2021, the Anika Therapeutics, Inc. 2021 Inducement Plan (the “Inducement Plan”) was adopted by the Company’s board of directors. The Inducement Plan reserves 125,000 shares of common stock for issuance pursuant to equity-based awards granted under the Inducement Plan. Such awards may be granted only to an individual who was not previously the Company’s employee or director, or who is returning to employment following a bona fide period of non-employment with the Company, in each case as an inducement material to the individual’s entry into employment with the Company within the meaning of Rule 5635(c)(4) of the Nasdaq Listing Rules. The Inducement Plan provides for the grant of awards under terms substantially similar to the 2017 Plan (as amended).achieved.

 

17

 
 

12.13.

Income Taxes

 

ForThe Company recorded an income tax benefit of $1.2 million and $2.4 million for the three- and nine-month periods ended  September 30, 2022, resulting in effective tax rates of 22.1% and 19.5%, respectively. The Company recorded income tax expense of $0.7 million and $1.7 million for the three- and nine-month periods ended  September 30, 2021, the Company recorded an income tax provision of $0.7 million and $1.7 million, resulting inbased on effective tax rates of 55.4% and 14.4%, respectively. For the three- and nine-month periods ended September 30, 2020, due to losses in those periods, the Company incurred benefits from income taxes of $1.7 million and $2.2 million, resulting in effective tax rates of 21.4% and 20.6%, respectively.

The net increasedecrease in the effective tax rate for the three-month period ended September 30, 2021,2022, as compared to the same period in 2020,2021, was primarily due to stock optionnon-deductible stock-option activity and an adjustment toduring the Foreign Derived Intangible Income (“FDII”) deduction expected for three-month period ended September 30, 2021.The year-to-date net tax benefit on the change in the fair value of the contingent consideration, in the amount of $1.1 million in 2021, resulted in a net decreaseincrease in the effective tax rate for the nine-month period ended  September 30, 2021,2022, as compared to the same period in 2020.2021, was primarily due to the year-to-date net tax benefit in 2021 on the change in the fair value of contingent consideration, in the amount of $1.1 million, and a year-to-date discrete charge of $0.7 million in 2022 related to non-deductible stock compensation.

 

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

 

In connection with the preparation of the financial statements, the Company assessed whether it is more likely than not that it will be able to utilize, in future periods, the Company’s deferred income taxestax assets to offset future taxable income.income and tax liabilities. The Company has concluded that it is more likely than not that the majority of its deferred tax assets will be realized, throughafter evaluation and consideration of both the positive and negative evidence. On December 31, 2021, the Company released a valuation allowance that had been previously recorded related to its net deferred tax assets in Italy in the amount of $0.9 million. The Company did not record a valuation allowance on its deferred tax balances as of September 30, 2022.

 

13.14.

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 EPS. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding share-based awards using the treasury stock method.method

 

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

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Shares used in the calculation of basic EPS

  14,429   14,205   14,389   14,202 

Effect of dilutive securities:

                

Share based awards

  218   0   199   0 

Diluted shares used in the calculation of EPS

  14,647   14,205   14,588   14,202 
  

Three Month Period Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Shares used in the calculation of basic earnings per share

  14,603   14,429   14,542   14,389 

Effect of dilutive securities:

                

Share-based payment awards

  -   218   -   199 

Diluted shares used in the calculation of earnings per share

  14,603   14,647   14,542   14,588 

 

The Company had a net loss during the three and nine-months ended September 30, 2022, and therefore all potential common shares would have been anti-dilutive and accordingly were excluded from the computation of diluted EPS. Stock options of 1.01.1 million shares were outstanding for each of the threenine-month periodsperiod ended September 30, 2021, and 2020respectively, and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive. Stock options of 1.1 million and 0.8 million shares were outstanding for the nine-month periods ended September 30, 2021 and 2020 and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive. 

 

18

 
 
 

ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion in conjunction with our financial statements and related notes appearing elsewhere in this report and our audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2020,2021, or our 20202021 Form 10-K. In addition to historical information, this report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning our business, consolidated financial condition, and results of operations. The Securities and Exchange Commission, or the SEC, encourages companies to disclose forward-looking statements so that investors can better understand a company’s prospects and make informed investment decisions. Forward-looking statements are subject to risks and uncertainties, many of which are outside our control, which could cause actual results to differ materially from these statements. Therefore, you should not rely on any of these forward-looking statements. Forward-looking statements can be identified by such words as "will," "likely," "may," "believe," "expect," "anticipate," "intend," "seek," "designed," "develop," "would," "future," "can," "could," “estimate,” “potential,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters. All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, operations, costs, plans, and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements regarding the effect of COVID-19 and related impacts on our business, operations, and financial results, expected future operating results, expectations regarding the timing and receipt of regulatory results, anticipated levels of capital expenditures, and expectations of the effect on our financial condition of claims, litigation, and governmental and regulatory proceedings.

 

Please also refer to those factors described in “Part I, Item 1A. Risk Factors” of our 20202021 Form 10-K for important factors that we believe could cause actual results to differ materially from those in our forward-looking statements. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

 

Management Overview

 

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

 

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

 

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

 

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

 

 

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

19

 

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

 

Prioritized investment in differentiated pipeline of regenerative solutions, bone preserving implants and sports medicine soft tissue solutions;repair products;

   
 

Leveraging our global commercial expertise and building out our capabilities to drive growth across the portfolio;portfolio, with an intentional and increased focus on the ambulatory surgery centers site of care in the United States;

 

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

 

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

 

19

Key Developments during the Three Months Ended September 30, 2021

We completed the launch activities for WristMotion Total Wrist Arthroplasty System. The product is a modular joint preservation system that replaces both the radial and carpal sides of the wrist joint for patients suffering from rheumatoid arthritis, osteoarthritis, or post-traumatic arthritis.

We received 510(k) clearance for Tactoset Injectable Bone Substitute for hardware augmentation. This product is indicated for filling bone voids or defects of the skeletal system (i.e. extremities and pelvis) that are not intrinsic to the stability of bony structure.

COVID-19 Pandemic and Resulting Supply Chain and Staffing Challenges

 

In March 2020, the World Health Organization declared the spread of the COVID-19 virus a global pandemic. This pandemic has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. There has been significant volatility in our results on a quarterly basis due to the worldwide cancellation or delay of elective procedures, staffing shortages and supply chain disruptions, as well as the impact on timelines associated with certain clinical studies. While elective procedure volume had a limited recovery after the initial pandemic impacts seen in the early parts of second quarter of 2020 due to the easing of COVID-19 related restrictions in certain jurisdictions, areas of the United States and other countries have recently seen, and continue to see, fluctuating infection rates increasing as the result of emerging variants of COVID-19.Continuing fluctuations in infection rates in the United States and other countries make future results difficult to predict despite recent advances in the vaccination rates of certain parts of the population. In this time of uncertainty as a result of the COVID-19 pandemic, we have taken many precautions to provide a safe work environment for our employees and customers, including the establishment and implementation of a work from home policy, where possible. While increasing vaccination rates and the loosening of restrictions, especially in the United States, have resulted in a return to a more normalized business environment, the pandemic continues to have an impact on our business in certain jurisdictions and a resurgenceResurgence 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,staffing shortages or other restrictionssupply chain disruptions that could impact our business and operations. We may also have to take further actions that we determine arehad some disruption 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 due to supply chain disruptions and staffing shortages which has caused back orders or delays in certain shipments to our customers. The companies that produce our products, product components or otherwise support our manufacturing processes, the distribution centers where we manage our inventory, or the operations of our logistics and other service providers, including third parties that sterilize and store our products, are or could be disrupted, temporarily close or experience worker shortages for a sustained period of time. To date, we believe we have taken adequate precaution to mitigate the impact of the current disruption of key materials, components and parts to the extent possible and reasonable. We expect, however, the current supply chain disruption with certain key suppliers to continue, which could have a material adverse effect on our operations. For additional information on the impact of supply chain disruption related to the COVID-19 pandemic on our manufacturing operations, please refer to the section captioned “Part II, Item 1A. Risk Factors.

Our commercial day-to-day operations have been impacted due to the worldwide cancellations and/or delays of elective procedures and restrictions on travel for both our employees and our clinician customers, 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 or other challenges associated with infections, staffing shortages, volatility in elective surgical procedures or supply chain disruptions due to COVID-19 and its current or new variants in certain jurisdictions. In particular, supply constraints that have continued into 2022 that we have partially been able to mitigate to date have impacted and could be expected to impact our ability to produce and supply our products. The impact of these restrictions on our operations, if implemented,challenges is currently unknown but could be significant.

 

Products

 

JointOA Pain Management

 

Our JointOA Pain Management product family consists of:

 

 

Monovisc and Orthovisc, our single- and multi-injection, HA-based viscosupplement product offerings indicated to provide pain relief from OA conditions.conditions solely for use in the knee. Our JointOA 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, or “Mitek”, part of the Johnson & Johnson Medical Companies, orCompanies. In December 2011, we entered into a fifteen-year licensing agreement with Mitek to exclusively market Monovisc in the United States through December 2026. In December 2003, we entered into a ten-year licensing agreement with Mitek to exclusively market Orthovisc in the United States. Mitek extended this agreement for additional five-year terms in 2007, 2012, 2017 and most recently in August 2022. The current agreement expires on December 20, 2028 unless extended at the option of Mitek. The Monovisc and Orthovisc products have been the market leaders, based on combined overall revenue in the viscosupplement market, since 2018. Internationally, we market our JointOA Pain Management products directly through a worldwide network of commercial distributors.

 

 

Cingal, our novel, third-generation, single-injection OA Pain Management product consisting of our proprietary cross-linked HA material combined with a steroid,fast-acting steroid. Cingal is designed to provide both short- and long-term pain relief. Cingal is CE Mark approved and for several years has been sold outside the United States directly in over 35 countries through our network of distributors for several years.distributors. In the United States, Cingal is a pipeline product undergoingcurrently in clinical trialdevelopment and is not available for commercial sale.

 

 

Hyvisc, our high molecular weight injectable HA veterinary product approved 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.

20

 

Joint Preservation and Restoration

 

Our Joint Preservation and Restoration product family consists of: 

 

 

Bone Preserving Joint Technologies.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 as well as knee and hip conditions caused by arthritic disease, acute trauma injury and arthritic disease.injury. These products span multiple joints including the shoulder, foot/ankle, wrist, knee and hip and are generally intended to mimicrestore a patient’s natural anatomy to the extent feasible.and movement. These products are often used to treat patients with OA progression beyond where our JointOA 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 selling to hospitals and surgery centers through an independent network of sales representatives and distributors, and utilize our distributor network for sales in certain international markets.

20

 

 

Soft Tissue Repair.Repair. Our line of soft tissue repair solutions is used by surgeons to repair and reconstruct damaged ligaments and tendons resulting from sports injuries, acute trauma and disease. These more traditional sports medicine solutions include screws, sutures, suture anchors, grafts 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 by selling to hospitals and surgery centers through an independent network of sales representatives and distributors, and utilize our distributor network for sales in over 60 international markets.

 

 

Regenerative Solutions.Solutions. Our portfolio of orthopedic regenerative solutions based onleveraging our proprietary technologies based on HA and Hyaff, which is a solid form of HA. These products include Tactoset Injectable Bone Substitute, an HA-enhanced injectable bone repair therapy designed to treat insufficiency fractures and for augmenting hardware fixation, such as suture anchor fixation that we commercialize only in the United States,anchors and Hyalofast, a biodegradable support for human bone marrow mesenchymal stem cells used for cartilage regeneration and as an adjunct for microfracture surgery. Tactoset cleared and commercialized principally in the United States, whereas Hyalofast is CE Mark approved and currently available outside the United States in over 35 countries within Europe, South America, Asia, and certain other international markets. In the United States, Hyalofast is a pipeline product under clinical trial studies and is not available for commercial sale.

 

We currently commercialize Bone Preserving Joint Technologies, Soft Tissue Repair products, and Tactoset (from our Regenerative Solutions portfolio) in the United States by selling to hospitals and ambulatory surgery centers, through an independent network of sales representatives and distributors, and utilize our distributor network for sales in certain international markets.

OtherNon-Orthopedic

 

Our OtherNon-Orthopedic product family consists of legacy HA-based products that do not fit into one of our other primary product categories.are marketed principally for non-orthopedic applications. 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, as well as products used in connection with the treatment of ears, nose and throat disorders, and ophthalmic products, including injectable, high molecular weight HA products such as Anikavisc and Nuvisc, used as viscoelastic agents in ophthalmic surgical procedures such as cataract extraction and intraocular lens implantation.

These Non-Orthopedic products are sold through commercial sales and marketing partners around the world.

 

 

 

 


21

 

Results of Operations

 

Three and Nine Months Ended September 30, 20212022 Compared to Three and Nine Months Ended September 30, 2020.2021

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2021

  

2020

  

$ Change

  

% Change

  

2021

  

2020

  

$ Change

  

% Change

 
  

(in thousands, except percentages)

  

(in thousands, except percentages)

 

Revenue

 $39,536  $31,694  $7,842   25

%

 $111,973  $97,769  $14,204   15%

Cost of revenue

  16,513   14,351   2,162   15

%

  47,164   45,487   1,677   4%

Gross profit

  23,023   17,343   5,680   33

%

  64,809   52,282   12,527   24%

Gross margin

  58

%

  55

%

          58

%

  53

%

        

Operating expenses:

                                

Research and development

  7,673   5,217   2,456   47

%

  21,327   15,799   5,528   35%

Selling, general and administrative

  17,500   15,903   1,597   10

%

  53,664   44,884   8,780   20%

Goodwill impairment

  -   -           -   18,144   (18,144

)

  (100%)

Change in fair value of contingent consideration

  (3,450

)

  4,150   (7,600

)

  (183

%)

  (21,920

)

  (16,176

)

  (5,744

)

  36%

Total operating expenses

  21,723   25,270   (3,547

)

  (14

%)

  53,071   62,651   (9,580

)

  (15%)

Income (loss) from operations

  1,300   (7,927

)

  9,227   116

%

  11,738   (10,369

)

  22,107   213%

Interest and other expense, net

  (48

)

  (228

)

  (180

)

  (79

%)

  (141

)

  (118

)

  23   19%

Income (loss) before income taxes

  1,252   (8,155

)

  9,407   115

%

  11,597   (10,487

)

  22,084   211%

Provision for (benefit from) income taxes

  694   (1,744

)

  2,438   140

%

  1,670   (2,161

)

  3,831   177%

Net income (loss)

 $558  $(6,411

)

 $6,969   109

%

 $9,927  $(8,326

)

 $18,253   219%
  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2022

  

2021

  

$ Inc/(Dec)

  

% Inc/(Dec)

  

2022

  

2021

  

$ Inc/(Dec)

  

% Inc/(Dec)

 
  

(in thousands, except percentages)

      

(in thousands, except percentages)

     

Revenue

 $40,264  $39,536  $728   2% $116,614  $111,973  $4,641   4%

Cost of revenue

  17,485   16,513   972   6%  47,169   47,164   5   0%

Gross Profit

  22,779   23,023   (244)  (1%)  69,445   64,809   4,636   7%

Gross Margin

  57%  58%          60%  58%        

Operating expenses:

                                

Research & development

  7,301   7,673   (372)  (5%)  20,433   21,327   (894)  (4%)

Selling, general & administrative

  21,276   17,500   3,776   22%  61,745   53,664   8,081   15%
                                 

Change in fair value of contingent consideration

  -   (3,450)  3,450   (100%)  -   (21,920)  21,920   (100%)

Total operating expenses

  28,577   21,723   6,854   32%  82,178   53,071   29,107   55%
(Loss) income  from operations  (5,797)  1,300   (7,097)  (546%)  (12,733)  11,738   (24,471)  (208%)

Interest and other income (expense), net

  436   (48)  484   (1,008%)  378   (141)  519   (368%)
(Loss) income before income taxes  (5,361)  1,252   (6,613)  (528%)  (12,355)  11,597   (23,952)  (207%)
(Benefit from) provision for income taxes  (1,187)  694   (1,881)  (271%)  (2,404)  1,670   (4,074)  (244%)
Net (loss) income $(4,175) $558  $(4,733)  (848%) $(9,951) $9,927  $(19,878)  (200%)

22

 

Revenue

 

Revenue for the three-month period ended September 30, 20212022 was $39.5$40.3 million, an increase of $7.9$0.8 million as compared to $31.7$39.5 million for the three-month period ended September 30, 2020.2021. Revenue for the nine-month period ended September 30, 20212022 was $112.0$116.6 million, an increase of $14.2$4.6 million as compared to $97.8$112.0 million for the nine-month period ended September 30, 2020. For the three- and nine-month periods ended September 30, 2021, the increases in revenue were primarily driven by partial recovery from the initial impact of the COVID-19 pandemic on sales volumes and related strategic partner ordering patterns. The increase for the nine-month period ended September 30, 2021, was also in part due to inclusion of full first quarter results of Parcus Medical and Arthrosurface, which we acquired on January 24, 2020 and February 3, 2020, respectively. 2021.

 

The following tables present product revenue by product family:

 

  

Three Months Ended September 30,

 
  

2021

  

2020

  

$ change

  

% change

 
  

(in thousands, except percentages)

 

Joint Pain Management

 $26,153  $18,439  $7,714   42%

Joint Preservation and Restoration

  11,193   11,715   (522

)

  (4%)

Other

  2,190   1,540   650   42%
  $39,536  $31,694  $7,842   25%

  

Nine Months Ended September 30,

 
  

2021

  

2020

  

$ change

  

% change

 
  

(in thousands, except percentages)

 

Joint Pain Management

 $69,790  $66,168  $3,622   6%

Joint Preservation and Restoration

  35,296   26,233   9,063   35%

Other

  6,887   5,368   1,519   28%
  $111,973  $97,769  $14,204   15%
  

Three Months Ended September 30,

 
  

2022

  

2021

  

$ Inc/(Dec)

  

% Inc/(Dec)

 
                 

OA Pain Management

 $25,665  $26,153  $(488)  (2

%)

Joint Preservation and Restoration

  11,821   11,193   628   6

%

Non-Orthopedic

  2,778   2,190   588   27%
  $40,264  $39,536  $728   2

%

 

Revenue from our Joint Pain Management product family increased 42% and 6% for the three- and nine-month periods ended September 30, 2021, respectively, as compared to the same periods in 2020 due primarily to partial recovery from the initial impact of the COVID-19 pandemic on sales volumes and related strategic partner ordering patterns. In 2020, customer ordering patterns delayed a portion of the initial impact of the COVID-19 pandemic on this product family from the second quarter into the second half of 2020.

  

Nine Months Ended September 30,

 
  

2022

  

2021

  

$ Inc/(Dec)

  

% Inc/(Dec)

 
                 

OA Pain Management

 $74,139  $69,790  $4,349   6

%

Joint Preservation and Restoration

  36,055   35,296   759   2

%

Non-Orthopedic

  6,420   6,887   (467

)

  (7)%
  $116,614  $111,973  $4,641   4

%

 

Revenue from our Joint Preservation and Restoration product family decreased 4% for

23

For the three-month period ended September 30, 20212022, the increase in revenue was mainly due to growth in Joint Preservation and Restoration revenues as comparedhospitals and ASCs recover from the COVID 19 pandemic and higher Non-Orthopedic revenues from the sales of certain legacy products related to end-of-life purchases. This revenue increase was offset by lower US OA Pain Management revenue primarily related to ordering patterns from Mitek in the same period in 2020, due primarily to the impact of the COVID-19 pandemic, including rolling suspensions of elective procedures by hospitals in certain regions as well as the limitations on access to customers during the period. prior year.

For the nine-month period ended September 30, 2021,2022, the increase in revenue was mainly due an increase in OA Pain Management revenues from ourinternational viscosupplement distributors and Hyvisc equine product sales due to recovery from the COVID 19 pandemic as well as favorable ordering patterns, offset by lower US OA Pain Management sales to Mitek as a result of ordering patterns in the prior year. The increase in total revenue was also due to an increase in Joint Preservation and Restoration product family increased 35%revenues as comparedhospitals and ASCs performing more procedures as they recover from COVID 19 pandemic, which however remained limited due in part to constraints on staffing, offset by lower Non-Orthopedic revenue in part related to the same period in 2020 due primarily to organic growth as the initial impacttiming of the COVID-19 pandemicorders on elective procedures begins to lift in various worldwide jurisdictions, especially in the United States during the first half of 2021, as well as due to the inclusion of full quarter results from Parcus Medical and Arthrosurface in the first quarter.legacy products.

 

Revenue from our Other product family increased 42% for the three-month period ended September 30, 2021, as compared to the same period in 2020 primarily due to timing of distributor sales. For the nine-month period ended September 30, 2021 revenue increased 28% as compared to the same period in 2020 primarily due to timing of distributor sales as well as due to the sell through of legacy wound care products during the first quarter.

Gross Profit and Margin

 

Gross profit for the three- and nine-monththree -and nine -month periods ended September 30, 2021 increased $5.72022 decreased by $0.2 million and $12.5increased by $4.6 million, to $23.0$22.8 million and $64.8$69.4 million, respectively, representing 58%respectively. The decrease in gross profit for the three-month period ended September 30 2022 was related to a reserve of $2.6 million primarily associated with inventory for certain legacy Non-Orthopedic products that the Company no longer expects to sell. The increase in gross profit for the nine-month period ended September 30, 2022, as compared to the same period in 2021 was primarily due to increased revenue for eachas well as the impact of inventory step-up charges associated with the periods. acquisitions of Arthrosurface and Parcus Medical in 2021.

Gross profitmargin for the three- and nine-month periods ended September 30, 20202022 was $17.3 million57% and $52.3 million, respectively, or 55% and 53% of revenue for the periods,60%, respectively. The increase in gross profit for the three- and nine-month periods ended September 30, 2021, primarily resulted from increased revenue. The increase for the nine-month period ended September 30, 2021 was partially offset by product rationalization charges in the second quarter of 2021. Gross margins include the impact of inventory step-up associated with the Arthrosurface and Parcus Medical acquisitions, as well as acquisition-related amortization expenses. These expenses together increased cost of revenue by $3.0 million, or 8 points of gross margin, and $10.9 million, or 10 points of gross margin for the three- and nine-month periods ended September 30, 2021 respectively, as compared to increased cost of revenue of $4.8 million, or 15 points ofwas 58% for each period. The decrease in gross margin and $11.7 million, or 12 pointsfor the three-month period ended September 30, 2022 was due primarily to product rationalization charges in the third quarter of 2022. The increase in gross margin respectively, for the same periodsnine-month period ended September 30, 2022 was due primarily to the unfavorable impact of inventory step-up charges associated with the Arthrosurface and Parcus Medical in 2020.2021.

 

Research and Development

 

Research and development expenses for the three- and nine-month periods ended September 30, 20212022 were $7.7$7.3 million and $21.3$20.4 million, representing an increasea decrease of $2.5$0.4 million and $5.5$0.9 million, respectively as compared to the same periodsperiod in 2020.2021. The increase in research and development expensedecreases for the three-three-month and nine-month periods ended September 30, 2021 was2022 were primarily due to product development activitieslower clinical trial spending, associated with the developmentconclusion of new product candidatesour Cingal Phase III trial in our research and development pipeline, execution of the CINGAL Pilot study and certain European post-market clinical studies. Research and development activities were curtailed in the three- and nine-months ended September 30, 2020 due to cost optimization in the light of the early stages of the COVID-19 pandemic.2022.

 

Selling, General and Administrative

 

Selling, general and administrative, or SG&A expenses for the three- and nine-month periods ended September 30, 20212022 were $17.5$21.3 million and $53.7$61.7 million representing an increase of $1.6$3.8 million and $8.8$8.0 million, respectively as compared to the same periodsperiod in 2020. The2021. This increase in SG&A expensesexpense for the three-month periodand nine-month periods ended September 30, 20212022, was primarily related to an increase in share-based compensation expense due largely to forfeitures of unvested shares during the comparable period and higher sales and marketing activities and events during 2021 which had been suspended in 2020 due to the impactexpansion of the COVID-19 pandemic. 

The increase in SG&A expenses for the nine-month period ended September 30, 2021 was primarily related to full period expenses from Parcus Medical and Arthrosurface, increased spending to support our commercial capabilitycapabilities in the United States and expanded marketing activities and a non-cash loss on disposal of fixed assets, partially offset byother operational capabilities to support the absence of transaction costs incurredgrowing business needs. Certain marketing and medical education activities also were more limited in 2020 related to acquisitions of Parcus and Arthrosurface. Certain activities were curtailed in the three- and nine-months ended September 30, 20202021 due to cost optimization in light of the early stages of the COVID-19 pandemic.

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 changespandemic. The increase in healthcare guidelines caused a temporary suspension of domestic elective surgical procedures. As a result of these events, during the three-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 unitSG&A expense was less than its carrying value. Consequently, a non-cash goodwill impairment charge of $18.1 million was recorded in the three-month period ended March 31, 2020. The decline in fair value was primarilyalso due to higher stock-based compensation expense in 2022 driven by a decreasechange in immediate term revenueheadcount associated with the Company’s strategic transformation that accelerated in 2020 and related cash flows as a result of the temporary suspension of domestic elective procedures, which directly impacted the Parcus and Arthrosurface reporting units. There were no goodwill impairment charges during the three- and nine-month period ended September 30, 2021.

22

 

Contingent Consideration Fair Value Change

 

We recorded a $3.5 millionThe fair value of contingent consideration as of September 30, 2022 did not change compared to December 31, 2021. During the three-month and $21.9 million net benefit related to changessix-month periods ended September 30, 2021, the change in the fair value of contingent consideration liabilities was $3.5 million and $21.9 million, respectively, resulting in a non-cash benefit to net income in those periods.

Income Taxes

The benefit from income taxes was $1.2 million and $2.4 million for the three- and six-month periods ended September 30, 2022, resulting in effective tax rates of 22.1% and 19.5%, respectively. The provision for income taxes was $0.7 million and $1.7 million for the three- and nine-month periods ended September 30, 2021, respectively. We recorded a $4.2 million net expense and $16.2 million net benefit related to changes in the fair value of contingent consideration for the three- and nine-month periods ended September 30, 2020, respectively. The increase in net benefit in the three- and nine-month periods ended September 30, 2021 compared to the same period in 2020 is due primarily to the decrease in the likelihood that certain contingent milestones would be achieved.

Income Taxes

For the three- and nine-month periods ended September 30, 2021, the provision for income taxes was $0.7 million and $1.7 million, resulting inbased on effective tax rates of 55.1%55.4% and 14.3%14.4%, respectively. For the three- and nine-month periods ended September 30, 2020, due to losses in those periods, we incurred benefits from income taxes of $1.7 million and $2.2 million, resulting in effective tax rates of 21.4% and 20.6%, respectively.

24

The net increasedecrease in the effective tax rate for the three-month period ended September 30, 2021,2022, as compared to the same period in 2020,2021, was primarily due to stock optionnon-deductible stock-option activity and an adjustment toduring the Foreign Derived Intangible Income (FDII) deduction expected forthree-month period ended September 30, 2021. The year-to-date net tax benefit on the change in the fair value of the contingent consideration, in the amount of $1.1 million in 2021, resulted in a net decreaseincrease in the effective tax rate for the nine-month period ended  September 30, 2021,2022, as compared to the same period in 2020.2021, was primarily due to the net tax benefit in 2021 on the change in the fair value of contingent consideration and non-deductible stock compensation in 2022.

Net (Loss) Income

For the three and nine-month periods ended September, 2022, net loss was $4.2 million and $10.0 million, or $0.29 per diluted share and $0.68 per diluted share, respectively, compared to net income of $0.6 million and $9.9 million, or $0.04 per diluted share and $0.68 per diluted share, for the same periods in prior year. The decrease in net income and diluted earnings per share was primarily due to the change in fair value of contingent consideration of $21.9 million for the nine-months ended September 30, 2021, as well as increased spending to expand our commercial capability in the United States, partially offset by increased revenue.

 

Non-GAAP Financial Measures

 

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

 

We have presented adjusted gross profit and adjusted gross margin, adjusted EBITDA, adjusted net income, adjusted EPS, because they are key measures used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business. We believe these financial measures help identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. In particular, we believe that the exclusion of these items in calculating these measures can provide a useful tool for period-to-period comparisons of our core operating performance. Accordingly, we believe that these measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects and allowing for greater transparency with respect to key financial metrics used by our management in itstheir 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 intangible assets, the impact of inventory fair-value step up associated with our recent acquisitions and certain product rationalization charges. The amortized assets contribute to revenue generation, and the amortization of such assets will recurlikely continue in future periods until such assets are fully amortized. These assets include the 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 nine-month periods ended September 30, 20212022 and 2020,2021, respectively:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Gross profit

 $23,023  $17,343  $64,809  $52,282 

Product rationalization charges

  -   -   2,063   1,920 

Acquisition related intangible asset amortization

  1,562   1,562   4,686   4,283 

Acquisition related inventory step up

  1,458   3,273   6,244   7,396 

Adjusted gross profit

 $26,043  $22,178  $77,802  $65,881 
                 

Adjusted gross margin

  66%  70

%

  69%  67%
  

For the Three Months Ended

September 30,

  

For the Nine Months Ended

September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Gross Profit

 $22,779  $23,023  $69,445  $64,809 

Product rationalization related charges

  2,636   -   2,636   2,063 

Acquisition related intangible asset amortization

  1,562   1,562   4,686   4,686 

Acquisition related inventory step up

  -   1,458   -   6,244 

Adjusted Gross Profit

 $26,977  $26,043  $76,767  $77,802 
                 

Adjusted Gross Margin

  67

%

  66

%

  66

%

  69

%

25

 

Adjusted gross profit for the three- and nine-month periods ended September 30, 20212022 increased $3.9by $1.0 million and $11.9decreased $1.0 million to $26.0$27.0 million and $77.8$76.8 million, respectively, representing 66%adjusted gross margin of 67% and 69% of revenue.66%. Adjusted gross profit for the three- and nine-month periods ended September 30, 20202021 was $22.2$26.0 million and $65.9$77.8 million, respectively, or 70%representing gross margin of 66% and 67% of revenue for the periods,69%, respectively. This increase in adjusted gross profit for the three-month period ended September 30, 2021 as compared with the same period in 2020, primarily resulted from organic growth of Joint Pain Management revenue as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially in the United States. The decrease in adjusted gross margin for the three-month period ended September 30, 2021 as compared with the same period in 2020, is due primarily to unfavorable revenue mix and lower production volumes based on timing related to the COVID-19 pandemic.

23

This increase in adjusted gross profit and adjusted gross margin for the nine-month period ended September 30, 2021 as compared with the same period in 2020,2022, was primarily resulted from higher revenue due to the inclusion of full period results from Parcus Medicalhigher manufacturing costs and Arthrosurfaceproduction inefficiencies caused in 2021 as we acquired these businesses in early 2020part by supply chain and organic growth of Joint Pain Management revenue as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially in the United States.  staffing challenges.

 

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

 

 

we exclude certain impairment charges, including certain product rationalization charges 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 (benefit from) 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.

 

24
26

 

The following is a reconciliation of adjusted EBITDA to net income (loss) to adjusted EBITDA for the three- and nine-month periods ended September 30, 20212022 and 2020,2021, respectively:

 

 

Three Months Ended September 30,

  

Nine Months Ended September 30,

  

For the Three Months Ended

September 30,

 

For the Nine Months Ended

September 30,

 
 

2021

  

2020

  

2021

  

2020

  

2022

  

2021

  

2022

  

2021

 
 

(in thousands)

 

Net income (loss)

 $558  $(6,411

)

 $9,927  $(8,326

)

Net (loss) income

 $(4,175

)

 $558  $(9,951

)

 $9,927 

Interest and other expense, net

 48  228  141  118  (436

)

 48  (378) 141 

Provision for (benefit) from income taxes

 694  (1,744

)

 1,670  (2,161

)

(Benefit from) provision for income taxes

 (1,187

)

 694  (2,404

)

 1,670 

Depreciation and amortization

 1,789  1,718  5,226  5,132  1,549  1,789  4,980  5,226 

Stock-based compensation

 2,863  1,920  7,919  3,953 

Product rationalization charges

 -  -  2,063  2,892 

Acquisition related expenses

 -  -  -  4,157 

Share-based compensation

 3,876  2,863  10,502  7,919 

Product rationalization

 2,636  -  2,636  2,063 

Acquisition related intangible asset amortization

 1,787  1,760  5,361  4,831  1,787  1,787  5,361  5,361 

Acquisition related inventory step up

 1,458  3,273  6,244  7,396  -  1,458  -  6,244 

Goodwill impairment

 -  -  -  18,144 

Change in fair value of contingent consideration

  (3,450

)

  4,150   (21,920

)

  (16,176

)

  -   (3,450

)

  -   (21,920

)

Adjusted EBITDA

 $5,747  $4,894  $16,631  $19,960  $4,050  $5,747  $10,746  $16,631 

 

Adjusted EBITDA for the three-month period ended September 30, 2021, increased $0.92022, decreased by $1.6 million as compared with the same periodsperiod in 2020.2021. The increasedecrease in adjusted EBITDA for the period was primarily due to higher revenuesincreased commercial spending to support future growth as COVID-19 pandemic related restrictions started liftingcertain marketing and medical education activities were more limited in various worldwide jurisdictions, especially in the United States, partially offset by an increase in operating expenses primarily attributable to the increase in clinical trial activity. In 2020, customer ordering patterns delayed a portion of the initial impact of the COVID-19 pandemic on this product family from the second quarter into the second half of 2020.2021.

 

Adjusted EBITDA for the nine-month period ended September 30, 2021,2022, decreased $3.3$5.9 million as compared with the same period in 2020.2021. The decrease in adjusted EBITDA for the period was primarily due to lower adjusted gross profit, from higher manufacturing costs and production inefficiencies caused in part by supply chain and staffing challenges, as well as an increase in operating expenses primarily attributable to expansion of our commercial capability in the United States, increase in clinical trial activity, as well as a non-cash impairment charge related to fixed assets during the first quarter of 2021, partially offset by an increase in revenue.States.

 

Adjusted Net Income (Loss) and Adjusted EPS

 

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

 

27

The following is a reconciliation of adjusted net income (loss) to net income (loss) for the three- and nine-month periods ended September 30, 20212022 and 2020,2021, respectively:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

(in thousands)

 

Net income (loss)

 $558  $(6,411

)

 $9,927  $(8,326

)

Product rationalization charges, tax effected

  -   -   1,590   2,377 

Acquisition related expenses, tax effected

  -   -   -   3,174 

Acquisition related intangible asset amortization, tax effected

  1,146   1,340   3,898   3,688 

Acquisition related inventory step up, tax effected

  935   2,492   4,626   5,646 

Goodwill impairment, tax effected

  -   -   -   15,773 

Change in fair value of contingent consideration, tax effected

  (1,865

)

  3,336   (17,152

)

  (13,873

)

Adjusted net income

 $774  $757  $2,889  $8,459 

25

  

For the Three Months Ended

September 30,

  

For the Nine Months Ended

September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Net (loss) income

 $(4,175

)

 $558  $(9,951

)

 $9,927 

Product rationalization, tax effected

  2,056   -   1,947   1,590 

Impairment on property and equipment; tax effected

  -   -   -   - 

Acquisition related intangible asset amortization; tax effected

  1,394   1,146   3,960   3,898 

Acquisition related inventory step up, tax effected

  -   935   -   4,626 

Change in fair value of contingent consideration, tax effected

  -   (1,865)  -   (17,152)

Adjusted net (loss) income

 $(725

)

 $774  $(4,044

)

 $2,889 

 

The following is a reconciliation of adjusted EPS to diluted earnings (loss) per share for the three- and nine-month periods ended September 30, 20212022 and 2020:2021:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Diluted earnings (loss) per share

 $0.04  $(0.45

)

 $0.68  $(0.59

)

Product rationalization charges, tax effected

  -   -   0.11   0.17 

Acquisition related expenses per share, tax effected

  -   -   -   0.22 

Acquisition related intangible asset amortization, tax effected

  0.08   0.09   0.27   0.26 

Acquisition related inventory step up, tax effected

  0.06   0.18   0.32   0.40 

Goodwill impairment, tax effected

  -   -   -   1.11 

Change in fair of value contingent consideration, tax effected

  (0.13

)

  0.23   (1.18

)

  (0.98

)

Adjusted EPS

 $0.05  $0.05  $0.20  $0.59 
  

For the Three Months Ended

September 30,

  

For the Nine Months Ended

September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Diluted (loss) earnings per share (EPS)

 $(0.29

)

 $0.04  $(0.68

)

 $0.68 

Product rationalization, tax effected

  0.14   -   0.13   0.11 

Impairment on Property and Equipment

  -   -   -     

Acquisition related intangible asset amortization; tax effected

  0.10   0.08   0.27   0.27 

Acquisition related inventory step up, tax effected

  -   0.06   -   0.32 

Change in fair value of contingent consideration, tax effected

  -   (0.13

)

  -   (1.18

)

Adjusted diluted (loss) earnings per share (EPS)

 $(0.05

)

 $0.05  $(0.28

)

 $0.20 

 

Adjusted net (loss) income and adjusted diluted (loss) income per share in the three- monththree-month period ended September 30, 2021 was unchanged from the same period in 2020 as the increase in gross profit was offset2022 decreased by an increase in operating expenses due to higher research and development expenses and increased marketing efforts. Adjusted net income for the period increased in 2021 due to higher revenues as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially in the United States. This was offset by an increase in operating expenses primarily attributable to an increase in research and development expenses, sales and marketing expenses and share based compensation expenses.

Adjusted net income in the nine-month period ended September 30, 2021, decreased $5.6$1.5 million or $0.10, respectively, as compared with the same period in 2020.2021. The decrease for the period was primarily due to increased commercial spending to support future growth as certain marketing and medical education activities were more limited in 2021.

Adjusted net (loss) income in and adjusted diluted (loss) income per share the nine-month period ended September 30, 2022, decreased $6.9 million or $0.48, as compared with the same period in 2021. The decrease in adjusted net income for the period was primarily due to lower adjusted gross profit, from higher manufacturing costs and production inefficiencies caused in part by supply chain and staffing challenges due largely to the impact of the COVID-19 pandemic, as well as 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, an increase in share-based compensation expense due to forfeitures of unvested shares during the comparable period, a non-cash impairment charge related to fixed assets in the first quarter of 2021 and an increase in tax expenses.stock-based compensation expense driven by incremental headcount associated with the Company’s strategic transformation that accelerated in 2020 and 2021.

 

Liquidity and Capital Resources

 

We require cash to fund our operating expensesactivities and to make capital expenditures and other investments in the business. We expect that our requirements for cash to fund these uses will increase as our operations expand. Historically we have generated positiveWe continue to generate cash flow from operations, which, together withoperating activities and believe that our availableoperating cash flows, cash equivalents, investments,currently on our condensed consolidated balance sheet and debt, have metavailability under our credit facility will be sufficient to allow us to continue to invest in our existing business, to manage our capital structure on a short and long-term basis, and to meet our anticipated operating cash requirements.needs. Cash, cash equivalents, and investments aggregated $91.0$87.8 million and $98.3$94.4 million, and working capital totaled $137.0$141.4 million and $140.5$138.7 million, as ofat September 30, 20212022 and December 31, 2020,2021, respectively. We are closely monitoring our liquidity and capital resources for any potential impact that the COVID-19 pandemic may have on our operations.

 

28

On November 12, 2021, we entered into a Third Amendment to Credit Agreement with Bank of America N.A. as administrative agent, which amended our existing revolving line of credit agreement dated October 24, 2017 which provides up to $75.0 million in the form of a senior revolving line of credit. Subject to certain conditions, we may request up to an additional $75.0 million for a maximum aggregate commitment of $150.0 million. As of September 30, 2022, and December 31, 2021, there were no outstanding borrowings, and we are in compliance with the terms of the credit facility.

  

Nine Months Ended

September 30,

 
  

2022

  

2021

 

Cash provided by (used in)

        

Operating activities

 $3,928  $3,925 

Investing activities

  (4,957

)

  (1,878

)

Financing activities

  (5,519

)

  (6,839)

Effect of exchange rate changes on cash

  (61

)

  (49

)

Net decrease in cash and cash equivalents

 $(6,609

)

 $(4,841)

The following changes contributed to the net change in cash and cash equivalents in the nine-month period ended September 30, 2022 as compared to the same period in 2021.

Operating Activities

Cash provided by operating activities was $3.9 million for the nine-month period ended September 30, 2021, as compared to cash provided by operating activities of $10.5 million for2022 was consistent with the same period in 2020. The change2021, as the higher net loss was primarilyin part a result of higher non-cash stock compensation expense, and was offset by an improvement in working capital attributable to timing of collections timingand inventory purchases.

For the foreseeable future, we expect to continue to invest in research and development for new products and clinical studies as well as continued investment in our commercial infrastructure to support our growth strategy. These costs will be funded with a combination of certain state tax paymentscash on hand and change in contingent consideration and a decrease in cash outflows relatedexpected to acquisition related expenses for the nine-month period ended September 30, 2021. In July 2021, the Company paid contingent consideration in the amount of $10.0 million, $2.8 million of which was classified within operating activities and the remaining $7.2 million was classified within financing activities.be generated from future operations. 

Investing Activities

 

Cash used in investing activities was $1.9$5.0 million for the nine-month period ended September 30, 2021,2022, as compared to cash used in investing activities of $88.1$1.9 million for the same period in 2020.2021. The change was primarily due to an increase in capital expenditures to support commercial growth of the consideration paid for the acquisitions of Parcus Medical and Arthrosurfacebusiness in the nine-month period ended September 30, 2020.2022 and proceeds from maturities of investments that occurred in 2021.

Financing Activities

 

Cash used in financing activities was $6.8$5.5 million for the nine-month period ended September 30, 2021,2022, as compared to cash provided byused in financing activities of $24.3$6.8 million for the same period in 2020.2021. The change was primarily dueattributable to a drawdown of $50.0 million from our existing credit facility in the nine-month period ended September 30, 2020 and the portion of thelower contingent consideration payment related to financing activities, as described above,payments in the nine-month period ended September 30, 2021.2022 and lower stock option exercises in 2022.

29

 

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 have been no significant changes to the above critical accounting policies or in the underlying accounting assumptions and estimates used in such policies from those disclosed in our annual consolidated financial statements and accompanying notes included in our 20202021 Form 10-K for the year ended December 31, 2020.2021 We monitor our estimates on an ongoing basis for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates, if past experience or other assumptions do not turn out to be substantially accurate.

26

 

Recent Accounting Pronouncements

 

A discussion of Recent Accounting Pronouncements is included in our 20202021 Form 10-K and is updated infor the Notes to the consolidated financial statements included in this report.fiscal year ended December 31, 2021.

 

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 20202021 Form 10-K.10-K for the year ended December 31, 2021. There were no material changes to our contractual obligations reported in our 20202021 Form 10-K during the nine months ended September 30, 2021.2022 other than changes in operating leases reported in Note 8. For additional discussion, see Note 910 to the condensed consolidated financial statements included in this report.

 

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

 

Off-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.10-K for the year ended December 31, 2021. There have been no material changes in the first nine months of 20212022 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, 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.

 

There were no material changes in our internal control over financial reporting during the quarter ended September 30, 2021,2022, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

 


30

 

PARTII:

OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

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, as described in Note 9 to the consolidated financial statements in this report.flow. There have been no material changes to the information provided in the section captioned “Part I, Item 3. Legal Proceedings” in our 2020Annual Report on Form 10-K other thanfor the matter described below.year ended December 31, 2021.

 

On October 21, 2021, we received notice that the former unitholders of Parcus Medical had filed a request for arbitration regarding the earnout provisions agreed to in the Parcus Medical Merger Agreement. We are unable to estimate the potential liability with respect to this matter at this time. There are numerous factors that make it difficult to estimate reasonably possible loss or range of loss at this stage of the matter, including the significant number of legal and factual issues still to be resolved in the arbitration process. We intend to vigorously defend against the claims, and we believe that we have strong defenses to the claims asserted.

ITEM 1A.

RISK FACTORS

 

ThereExcept as set forth below, there have been no material changes to the risk factors described in the section captioned “Part I, Item 1A. Risk Factors” in our 2020Annual Report on Form 10-K for the year ended December 31, 2021, as amended and updatedsupplemented by the information in “Part II, Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021.2022 and June 30, 2022. 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 2020Annual Report on Form 10-K for the year ended December 31, 2021 and in “Part II, Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021,2022, which could materially affect our business, financial condition, or future results. The risks described in our 2020Annual Report on Form 10-K and oursuch subsequently filed Quarterly Report 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.

Inflation could adversely affect our business, financial condition or results of operations.

Inflationhas the potential to adversely affect our business, financial condition and results of operations by increasing our overall costs and increasing the risk that patients will curtail normal levels of elective orthopedic procedures due to pressure on the overall global economy. The existence of inflation in the economy has resulted in, and may continue to result in, higher shipping costs, supply shortages, increased costs of labor and other similar effects. As a result of inflation, we have experienced and may continue to experience, cost increases. Although we may take measures to mitigate the impact of inflation, if these measures are not effective our business, financial condition and results of operations could be adversely affected.

We rely on a small number of suppliers for certain key raw materials and a small number of suppliers for a number of other materials required for the manufacturing and delivery of our products, and disruption could materially adversely affect our business, financial condition, and results of operations.

Although we believe that alternative sources for many of these and other components and raw materials that we use in our manufacturing processes are available, we cannot be certain that the supply of key raw and other materials will continue to be available at current levels or will be sufficient to meet our future needs. The COVID-19 pandemic has impacted, and is expected to continue to impact, our supply chain as the companies that produce our products, product components or otherwise support our manufacturing processes, the distribution centers where we manage our inventory, or the operations of our logistics and other service providers, including third parties that sterilize and store our products, are, or may be, disrupted, temporarily closed or experience worker shortages for a sustained period of time. For example, for the manufacture of bone preserving joint technologies, we engage a single third-party organization as a contract manufacturer. Any supply interruption could harm our ability to manufacture our products until a new source of supply is identified and qualified. We may not be able to find sufficient alternative suppliers in a reasonable time-period, or on commercially reasonable terms, if at all, and our ability to produce and supply our products and our ability to generate revenue could be impaired.

Our global supply chain has been and is expected to continue to be materially adversely impacted due to the COVID-19 pandemic and faces new and ongoing challenges related to supply constraints.

We rely upon the facilities of our global suppliers to support our business. As a result of COVID-19 and the measures designed to contain its spread, certain of our suppliers have not had the materials, capacity, or capability to supply our needed materials and other supplies that we require to manufacture our products according to our schedule and specifications. It is uncertain to what extent these supply chain challenges will continue as the COVID-19 pandemic continues to evolve. In the past several months, variants of COVID-19 surged across the globe, causing further delays in the supply chain. Despite our attempts to mitigate the impact on our business, constrained supply conditions are expected to adversely impact the amount of revenue we realize. During the first nine months of 2022, we experienced disruptions in our supply chain and manufacturing capability that impacted our revenue for the period. If we are not able to mitigate the impact of these supply shortages, our ability to generate revenue will be significantly impacted. Further, logistics issues, including our ability and our supply chain’s ability to quickly ramp up production, and transportation demands may continue to cause delays. If our suppliers’ operations are curtailed, or if our suppliers are not able to deliver materials and supplies to us as scheduled, we may need to seek alternate sources of supply, which may be more expensive or require approval from regulatory agencies which could cause further delays. Alternative sources may not be available or may result in delays in shipments to us from our supply chain and subsequently to our customers, each of which would affect our results of operations. Even if alternative sources are identified, we may not be able to quickly establish additional or replacement sources for certain components or materials due, in part, to the FDA’s manufacturing requirements. If the duration of the production and supply chain disruptions continue for an extended period of time, the impact on our supply chain could have a material adverse effect on our results of operations and cash flows.

31

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Issuer Purchases and Withholding of Equity Securities

 

Under our equity compensation plans, and subject to the approval of the Compensation Committee ofOn May 2, 2019, we announced that our Board of Directors employee grantees haveapproved 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 which represents the optionmaximum value of electing to satisfy tax withholding obligations atshares that may yet be purchased. No open market repurchases were made during the time of vesting or exercise by allowing us to withhold shares of stock otherwise issuable to the grantee. During the three-monthnine-month period ended September 30, 2021, we withheld 1,461 shares to satisfy grantee tax withholding obligations on restricted stock award and restricted stock unit vesting events.2022.

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

Period

 

Total Number of
Shares Withheld (1)

  

Average
Price per Share

  

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

 

July 1 to 30, 2021

  731  $43.24  $20,000 

August 1 to 31, 2021

  436  $41.76  $20,000 

September 1 to 30, 2021

  294  $39.41  $20,000 

Total

  1,461         

 

(1)

1,461 shares were withheld by us to satisfy grantee tax withholding obligations on restricted stock unit vesting events in the third quarter of 2021. These shares were not acquired pursuant to a publicly announced share repurchase program.

(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 September 30, 2021.


ITEM 5:OTHER 

(a)

On November 4, 2021, our Board of Directors adopted the Anika Therapeutics, Inc. 2021 Inducement Plan, or the Inducement Plan, to be effective immediately, and, subject to the adjustment provisions of the Inducement Plan, reserved 125,000 shares of common stock for issuance pursuant to equity awards granted under the Inducement Plan. Awards under the Inducement Plan may be granted only to an individual who was not previously our employee or director, or who is returning to employment following a bona fide period of non-employment with us, in each case as an inducement material to the individual’s entry into employment with us within the meaning of Rule 5635(c)(4) of the Nasdaq Listing Rules. In accordance with Rule 5635(c)(4), we did not seek approval of the Inducement Plan by our stockholders.

The Inducement Plan provides for the grant of equity-based awards, including non-qualified stock options, stock appreciation rights, restricted stock awards, performance restricted stock units, restricted stock units, total shareholder return options and performance options, and its terms are substantially similar to the Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan (as amended), including with respect to treatment of equity awards in the event of a “Change in Control” as defined under both the 2017 Omnibus Incentive Plan and the Inducement Plan.

The foregoing description of the Inducement Plan is qualified in its entirety by reference to the full text of the Inducement Plan, which is attached to this Quarterly Report on Form 10-Q as Exhibit 10.1 and which is incorporated herein by reference.

29

ITEM 6.

EXHIBITS

 

Exhibit No.

Description

  
†10.13.1Certificate of Incorporation of Anika Therapeutics, Inc. 2021 Inducement Plan (incorporated by reference to Exhibit 3.1 to the Current Report on Form 10-K (File No. 001-14027) filed by the Registrant on March 11, 2022)
  
†10.23.2DescriptionBylaws of Securities Registered PursuantAnika Therapeutics, Inc., effective as of June 6, 2018 (incorporated by reference to Section 12 ofExhibit 3.2 to the Securities Exchange Act of 1934Current Report on Form 10-K (File No. 001-14027) filed by the Registrant on March 11, 2022)
†10.1Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan (as amended effective June 8, 2022) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed (File No. 000-21326) by the Registrant on June 10, 2022)
  

(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-Oxley Act of 2002.

  

(101)

XBRL

  

*101

The following materials from Anika Therapeutics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 20212022 as filed with the SEC on November 4, 2021,9, 2022, formatted in Inline XBRL (eXtensible Business Reporting Language), as follows:

 

i.

Consolidated Balance Sheets as of September 30, 20212022 (unaudited) and December 31, 20202021 (unaudited)

 

ii.

Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 20212022 and September 30, 20202021 (unaudited)

 

iii.

Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 20212022 and September 30, 2020 (unaudited)20201(unaudited)

 

iv.

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20212022 and September 30, 20202021 (unaudited)

 

v.

Notes to Consolidated Financial Statements (unaudited)

104

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

*

Filed herewith.

**

Furnished herewith.

Management contract or compensatory plan or arrangement.

 

 


32

 

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, 20219, 2022

By:

/s/ MICHAEL LEVITZ

 
  

Michael Levitz

 
  

Executive Vice President, Chief Financial Officer and Treasurer

  

(Authorized Officer and Principal Financial Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3133