The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share amounts or as otherwise noted)
(unaudited)
Anika Therapeutics, Inc., or the Company, is a global, integrated joint preservation, restoration and regenerative solutions company based in Bedford, Massachusetts. The Company’s mission is to be the global leader in orthopedic joint solutions and sports medicine with innovative technologies that exceed its customers’ expectations. Anika is committed to delivering solutions to improve the lives of patients across the orthopedic early-intervention continuum of care, ranging from joint pain management and regenerative products to sports medicine and orthopedic joint preservation and restoration. With close to three decades of expertise commercializing innovative products, Anika has expanded beyond its hyaluronic acid ("HA") technology platform, to add innovative and differentiated offerings to a consolidated orthopedic portfolio. Today, the Company is supported by direct and distributor sales forces and an active R&D engine focused on delivering innovative orthopedics solutions.
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 surgical repair and reconstruction of ligaments and tendons and Arthrosurface, Incorporated (“Arthrosurface”), a joint preservation technology company specializing in less invasive joint replacement solutions. The Company expects the Parcus Medical and Arthrosurface acquisitions to drive growth by broadening Anika's product portfolio into joint preservation and restoration, adding high-growth revenue streams, expanding its commercial capabilities, diversifying its revenue base, and expanding its product pipeline and research and development expertise.
There continues to be uncertainties regarding the pandemic of the novel coronavirus (“COVID-19”), and the Company is closely monitoring the impact of COVID-19 on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, and business partners. The Company is unable to predict the impact that COVID-19 may have on its financial position and operations moving forward due to the numerous uncertainties. Any estimates made herein may change as new events occur and additional information is obtained, and actual results could differ materially from any estimates made herein under different assumptions or conditions. The Company will continue to assess the evolving impact of COVID-19.
The Company is subject to risks common to companies in the biotechnology and medical device industries including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, commercialization of existing and new products, and compliance with U.S. Food and Drug Administration (“FDA”) and foreign regulations and approval requirements, as well as the ability to grow the Company’s business through appropriate commercial strategies.
The accompanying unaudited condensed consolidated financial statements and related notes have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and in accordance with accounting principles generally accepted in the United States (“US GAAP”). The financial statements include the accounts of Anika Therapeutics, Inc. and its subsidiaries. Inter-company transactions and balances have been eliminated. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to SEC rules and regulations relating to interim financial statements. The December 31, 2019 balances reported herein are derived from the audited consolidated financial statements. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the condensed consolidated financial 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, 2019. The results of operations for the three- and six-month periods ended June 30, 2020 are not indicative of the results to be expected for the year ending December 31, 2020.
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, Cheryl R. Blanchard, Ph.D., who has held that role since her appointment on April 26, 2020. Based on the criteria established by Accounting Standards Codification (“ASC”) 280, Segment Reporting, the Company has one operating and reportable segment.
Recent Accounting Adoptions
In August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40), which amends ASU No. 2015-05, Customers Accounting for Fees in a Cloud Computing Agreement, to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The most significant change aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. Accordingly, the amendments in ASU 2018-15 require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as assets related to the service contract and which costs to expense. ASU 2018-15 is effective for fiscal years and interim periods beginning after December 15, 2019. The Company adopted ASU 2018-15 using the prospective method as of January 1, 2020. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses. The standard, including subsequently issued amendments, requires a financial asset measured at amortized cost basis, such as accounts receivable and certain other financial assets, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for fiscal years and interim periods beginning after December 15, 2019 and requires the modified retrospective approach. The Company adopted ASU 2016-13 as of January 1, 2020. The adoption primarily impacted its trade receivables. The Company assesses its customer's ability to pay by conducting a credit review which includes an assessment of the customer's creditworthiness. The Company monitors the credit exposure through active review of customer balances. The Company's expected loss methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' account balances. Concentrations of credit risks are limited due to the large number of customers and their dispersion across a number of geographic areas. The historical credit losses have not been significant due to this dispersion and the financial stability of its customers. The Company considers credit losses immaterial to its business and, therefore, has not provided all the disclosures otherwise required by the standard.
Parcus Medical, LLC
On January 24, 2020, Anika Therapeutics, Inc. 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, 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 ligaments and tendons.
The acquisition of Parcus Medical 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 value as of the acquisition date. Recorded fair valuation of assets acquired and liabilities assumed related to the acquisition of Parcus Medical is preliminary and will be completed as soon as practicable, but no later than one year after the consummation of the transaction. Anika’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, which consists of:
Cash consideration
|
|
$
|
32,794
|
|
Deferred consideration
|
|
|
1,642
|
|
Estimated fair value of contingent consideration
|
|
|
40,700
|
|
Estimated total purchase consideration
|
|
$
|
75,136
|
|
Contingent consideration represents additional payments that the Company may be required to make in the future, which totals up to $60.0 million depending on the level of net sales generated in 2020 through 2022. The fair value of contingent consideration related to net sales 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. Deferred consideration is related to certain purchase price holdbacks which will be resolved within one year of the acquisition date and were recorded in accounts payable as of June 30, 2020. The liability for contingent and deferred consideration is included in current and long-term liabilities on the consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved.
Acquisition related costs are not included as a component of consideration transferred but are expensed in the periods in which the costs are incurred. The Company incurred approximately $1.9 million in transaction costs related to the Parcus Medical acquisition during the three-month period ending March 31, 2020. The transaction costs for the three-month period ending June 30, 2020 were immaterial. The transaction costs are included in selling, general and administrative expenses in the consolidated statements of operations.
Fair Value of Net Assets Acquired
The preliminary estimate of fair value required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable, however, actual results may differ from these estimates. The assessment of fair value is preliminary and is based on information that was available to management at the time the condensed consolidated financial statements were prepared. Those estimates and assumptions are subject to change as the Company obtains additional information related to those estimates during the applicable measurement periods (up to one year from the acquisition date). The most significant open items necessary to complete are related to intangible assets and tax related matters.
The preliminary allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on preliminary estimates of fair value as of January 24, 2020, and is as follows:
Recognized identifiable assets acquired and liabilities assumed:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
196
|
|
Accounts receivable
|
|
|
2,029
|
|
Inventories
|
|
|
9,088
|
|
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
|
|
|
53,628
|
|
Goodwill
|
|
|
21,508
|
|
Estimated total purchase consideration
|
|
$
|
75,136
|
|
The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and assigned to the newly established reporting unit for Parcus Medical and Arthrosurface. The goodwill is attributable to the workforce of the business and the value of future technologies expected to arise after the acquisition. Goodwill will not be amortized and is expected to be deductible for income tax purposes as the acquisition of the limited liability company is an asset purchase for tax purposes. The acquired intangible assets based on preliminary estimates of fair value as of January 24, 2020 are as follows:
Intangible assets acquired consist of:
|
|
|
|
|
Developed technology
|
|
$
|
41,100
|
|
Trade name
|
|
|
1,800
|
|
Customer relationships
|
|
|
1,100
|
|
Total intangible assets
|
|
$
|
44,000
|
|
The preliminary fair value of the developed technology intangible assets has been estimated using the multi-period excess earnings method, which is based on the principle that the value of an intangible asset is equal to the present value of the incremental after-tax cash flow attributable to the asset, after charges for other assets employed by the business. The preliminary fair value of the customer relationships has been estimated using the avoided costs/lost profits method, which is based on the principle that the value of an intangible asset is based on consideration of the total costs that would be avoided by having this asset in place. The preliminary fair value of the trade name has been estimated using the relief from royalty method of the income approach, which is based on the principle that the value of an intangible asset is equal to the present value of the after-tax royalty savings attributable to owning the intangible asset. Key estimates and assumptions used in these models are projected revenues and expenses related to the asset, estimated contributory asset charges, estimated costs to recreate the asset, and a risk-adjusted discount rate used to calculate the present value of the future expected cash inflows or cash outflows avoided from the asset.
The final fair value determination of the identified intangible assets may differ from this preliminary determination, and such differences could be material. Based on the preliminary valuation, approximately $44.0 million represents the fair value of identifiable intangible assets. Approximately $41.1 million represents the fair value of developed technology that will be amortized over a useful life of 15 years, $1.1 million represents the fair value of customer relationships that will be amortized over a useful life of 10 years, and $1.8 million represents the fair value of the trade name that will be amortized over a useful life of 5 years.
Revenue and Net Loss
The Company recorded revenue from Parcus Medical of $2.0 million and a net loss of $2.0 million in the three-month period ended June 30, 2020. The Company recorded revenue from Parcus Medical of $4.6 million and a net loss of $2.9 million in the period from January 24 through June 30, 2020.
Arthrosurface, Incorporated
On February 3, 2020, Anika Therapeutics, Inc. completed the acquisition of Arthrosurface Incorporated 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, 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.
The acquisition of Arthrosurface has been accounted for as a business combination under ASC 805. Under ASC 805, assets acquired and liabilities assumed in a business combination must be recorded at their fair values as of the acquisition date. The final valuation of assets acquired and liabilities assumed related to the acquisition of Arthrosurface is expected to be completed as soon as practicable, but no later than one year after the consummation of the transaction. Anika’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, which consists of:
Cash consideration
|
|
$
|
61,909
|
|
Estimated fair value of contingent consideration
|
|
|
28,376
|
|
Estimated total purchase consideration
|
|
$
|
90,285
|
|
The Company may 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 generated in 2020 through 2021. The fair value of contingent consideration related to regulatory milestones was determined through a scenario-based discounted cash flow analysis using scenario probabilities and regulatory milestone dates. The fair value of contingent consideration related to certain net sales levels from 2020 through 2021 was determined based upon a Monte Carlo simulation approach in an option pricing framework at acquisition date, whereby a range of possible scenarios were simulated. 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.
Acquisition related costs are not included as a component of consideration transferred but are expensed in the periods in which the costs are incurred. The Company incurred approximately $2.2 million in transaction costs related to the Arthrosurface acquisition during the three-month period ending March 31, 2020. The transaction costs for the three-month period ending June 30, 2020 were immaterial. The transaction costs are included in selling, general and administrative expenses in the consolidated statements of operations.
Fair Value of Net Assets Acquired
The preliminary estimate of fair value required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable. However, actual results may differ from these estimates. The assessment of fair value is preliminary and is based on information that was available to management at the time the condensed consolidated financial statements were prepared. Those estimates and assumptions are subject to change as the Company obtains additional information related to those estimates during the applicable measurement periods (up to one year from the acquisition date). The most significant open items are related to intangible assets, property, plant and equipment and tax related matters.
The preliminary allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on preliminary estimates of fair value as of February 3, 2020, as follows:
Recognized identifiable assets acquired and liabilities assumed:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,072
|
|
Accounts receivable
|
|
|
5,368
|
|
Inventories
|
|
|
15,652
|
|
Prepaid expenses and other current assets
|
|
|
535
|
|
Property, plant and equipment
|
|
|
3,394
|
|
Other long-term assets
|
|
|
7,548
|
|
Intangible assets
|
|
|
48,900
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
(3,929
|
)
|
Deferred tax liabilities
|
|
|
(11,147
|
)
|
Net assets acquired
|
|
|
67,393
|
|
Goodwill
|
|
|
22,892
|
|
Estimated total purchase consideration
|
|
$
|
90,285
|
|
The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and assigned to the newly established reporting unit for Parcus Medical and Arthrosurface. The goodwill is attributable to the workforce of the business and the value of future technologies expected to arise after the acquisition. Goodwill will not be amortized and is not expected to be deductible for income tax purposes as the acquisition of the corporation is a stock purchase for tax purposes.
Intangible assets acquired consist of:
|
|
|
|
|
Developed technology
|
|
$
|
37,000
|
|
Trade name
|
|
|
3,400
|
|
Customer relationships
|
|
|
7,900
|
|
IPR&D
|
|
|
600
|
|
Total intangible assets
|
|
$
|
48,900
|
|
The preliminary fair value of the developed technology intangible assets has been estimated using the multi-period excess earnings method, which is based on the principle that the value of an intangible asset is equal to the present value of the incremental after-tax cash flow attributable to the asset, after charges for other assets employed by the business. The preliminary fair value of the customer relationships has been estimated using the avoided costs/lost profits method, which is based on the principle that the value of an intangible asset is based on consideration of the total costs that would be avoided by having this asset in place. The preliminary fair value of the trade name has been estimated using the relief from royalty method of the income approach, which is based on the principle that the value of an intangible asset is equal to the present value of the after-tax royalty savings attributable to owning the intangible asset. Key estimates and assumptions used in these models are projected revenues and expenses related to the asset, estimated contributory asset charges, estimated costs to recreate the asset, and a risk-adjusted discount rate used to calculate the present value of the future expected cash inflows or cash outflows avoided from the asset.
The final fair value determination of the identified intangible assets may differ from this preliminary determination, and such differences could be material. Based on the preliminary valuation, approximately $48.9 million represents the fair value of identifiable intangible assets. Approximately $37.0 million represents the fair value of developed technology that will be amortized over an estimated useful life of 15 years, $7.9 million represents the fair value of customer relationships that will be amortized over an estimated useful life of 10 years, and $3.4 million represents the fair value of trade names that will be amortized over an estimated useful life of 5 years. A total of $0.6 million represents the fair value of in-process research and development (“IPR&D”) with an indefinite useful life that will be evaluated for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Revenue and Net Loss
The Company recorded revenue from Arthrosurface of $4.2 million and a net loss of $2.8 million in the three-month period ended June 30, 2020. The Company recorded revenue from Arthrosurface of $8.4 million and a net loss of $6.8 million in the period from February 3 through June 30, 2020.
Pro-forma Information
The Parcus Medical and Arthrosurface acquisitions were both completed in the first quarter of 2020. Both acquired companies have similar businesses with all of their products in the Orthopedic Joint Preservation and Restoration product family as discussed in Note 11, serving orthopedic surgeons, ambulatory surgical centers and hospitals. We have combined legacy Anika, Parcus Medical and Arthrosurface proforma supplemental information as follows.
The unaudited pro forma information for the three- and six-month periods ended June 30, 2020 and 2019 was calculated after applying the Company’s accounting policies and the impact of acquisition date fair value adjustments. The pro forma financial information presents the combined results of operations of Anika Therapeutics, Inc., Parcus Medical and Arthrosurface as if the acquisitions had occurred on January 1, 2019 after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are factually supportable and directly attributable to the acquisitions.
These pro forma adjustments include: (i) a net increase in amortization expense to record amortization expense for the aforementioned acquired identifiable intangible assets, (ii) an adjustment to cost of product revenue based on the preliminary fair value inventory adjustment 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 Merger Agreements, (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 rate presented in this unaudited pro forma condensed 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 ownership change. As further information becomes available, any such adjustment described above could be material to the amounts presented in the unaudited pro forma condensed combined financial statements. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred at the beginning of each period presented, or of future results of the consolidated entities.
The following table presents unaudited supplemental pro forma information:
|
|
For the Three Months ended June 30,
|
|
|
For the Six Months ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Total revenue
|
|
$
|
30,678
|
|
|
$
|
40,428
|
|
|
$
|
70,028
|
|
|
$
|
75,133
|
|
Net income (loss)
|
|
|
(7,708
|
)
|
|
|
5,073
|
|
|
|
(917
|
)
|
|
|
2,387
|
|
4.
|
Fair Value Measurements
|
The Company held U.S. treasury bills of $20.1 million and certificates of deposit of $7.5 million at June 30, 2020. The Company held U.S. treasury bills of $27.5 million at December 31, 2019. Unrealized losses and the associated tax impact on the Company’s available-for-sale securities were insignificant as of June 30, 2020 and December 31, 2019, respectively.
The Company’s investments are all classified within Levels 1 and 2 of the fair value hierarchy. The Company’s investments classified within Level 1 of the fair value hierarchy are valued based on quoted prices in active markets. Level 2 investments are based on matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. For cash, current receivables, accounts payable, long-term debt and interest accrual, the carrying amounts approximate fair value, because of the short maturity of these instruments, and therefore fair value information is not included in the table below. Contingent consideration related to the previously described business combinations are classified within Level 3 of the fair value hierarchy as the determination of fair value uses considerable judgement and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability.
The fair value hierarchy of the Company's cash equivalents, investments and liabilities at fair value was as follows:
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
for Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Amortized Cost
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
49,357
|
|
|
$
|
49,357
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
49,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank certificates of deposit
|
|
$
|
7,514
|
|
|
$
|
-
|
|
|
$
|
7,514
|
|
|
$
|
-
|
|
|
$
|
7,524
|
|
U.S. treasury bills
|
|
|
20,110
|
|
|
|
20,110
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,178
|
|
Total investments
|
|
$
|
27,624
|
|
|
$
|
20,110
|
|
|
$
|
7,514
|
|
|
$
|
-
|
|
|
$
|
27,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current and long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration- short term
|
|
$
|
11,688
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,688
|
|
|
$
|
-
|
|
Contingent consideration- long term
|
|
|
37,062
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,062
|
|
|
|
-
|
|
Total other current and long-term liabilities
|
|
$
|
48,750
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
48,750
|
|
|
$
|
-
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
for Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Amortized Cost
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
48,971
|
|
|
$
|
48,971
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
48,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills
|
|
$
|
27,480
|
|
|
$
|
27,480
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
27,479
|
|
There were no transfers between fair value levels during the six-month period ended June 30, 2020 or in 2019.
Contingent Consideration
The following table provides a rollforward of the contingent consideration related to business acquisitions discussed in Note 3.
|
|
Six Months Ended
|
|
|
|
June 30, 2020
|
|
Balance, beginning January 1, 2020
|
|
$
|
-
|
|
Additions
|
|
|
69,076
|
|
Payments
|
|
|
-
|
|
Change in fair value
|
|
|
(20,326
|
)
|
Balance, ending June 30, 2020
|
|
$
|
48,750
|
|
Under the Parcus Medical and Arthrosurface merger agreements, there are earn-out milestones totaling $100 million payable from 2020 to 2022. Parcus Medical and Arthrosurface each have net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface has regulatory earn-out milestones in 2020 and 2021. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model or a Monte Carlo simulation approach. The unobservable inputs used in the fair value measurement of the Company’s contingent consideration are the probabilities of successful achievement, the weighted average cost of capital used for the Monte Carlo simulation, discount rate and the periods in which the milestones are expected to be achieved. The discount rates used for the net sales and regulatory earn-out milestones ranged from 3.3% - 3.8%. The probability of successful achievement of the regulatory earn-out milestones range from 60%-90% for Arthrosurface, which remained unchanged from the acquisition date to June 30, 2020. The key variables that led to a decrease in contingent consideration versus the acquisition date are the decrease in near term revenues due to the COVID-19 pandemic and an increase in the weighted average cost of capital from 11.5% to 14.0% for Arthrosurface and 14.5% to 16.0% for Parcus Medical. Increases or decreases in any of the probabilities of success in which milestones are expected to be achieved would result in a higher or lower fair value measurement, respectively. Increases or decreases in the discount rate would result in a lower or higher fair value measurement, respectively.
The fair value of contingent consideration is assessed on a quarterly basis. The $4.2 million increase in fair value of the contingent consideration for the three-month period ended June 30, 2020 was primarily due to an increase in revenue assumptions based on second quarter results and future projections, and other assumption changes as a result of events that occurred in the quarter. The $20.3 million decrease in fair value of the contingent consideration for six-month period ended June 30, 2020 was due to a decrease in the near term projections of revenue due to the COVID-19 pandemic.
Inventories consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
13,851
|
|
|
$
|
12,058
|
|
Work-in-process
|
|
|
11,914
|
|
|
|
8,330
|
|
Finished goods
|
|
|
33,680
|
|
|
|
8,777
|
|
Total
|
|
$
|
59,445
|
|
|
$
|
29,165
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
46,479
|
|
|
$
|
21,995
|
|
Other long-term assets
|
|
|
12,966
|
|
|
|
7,170
|
|
The increase in inventories for the six months ended June 30, 2020 is due to the acquisitions of Parcus Medical and Arthrosurface in January and February 2020 discussed in Note 3.
The Company recorded an inventory reserve of $1.9 million during the three-month period ended June 30, 2020 as the Company will not pursue CE mark renewals, primarily for certain advanced wound care products as a result of the Company's product rationalization efforts. The additional inventory reserve represents excess inventory which will not be sold prior to expiration of the applicable CE mark based on current projections.
Intangible assets as of June 30, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
Gross Value
|
|
|
Less: Accumulated Currency Translation Adjustment
|
|
|
Less: Current Period Impairment Charge
|
|
|
Less: Accumulated Amortization
|
|
|
Net Book Value
|
|
|
Weighted Average Useful Life
|
|
Developed technology
|
|
$
|
93,953
|
|
|
$
|
(2,904
|
)
|
|
$
|
(1,025
|
)
|
|
$
|
(11,460
|
)
|
|
$
|
78,564
|
|
|
|
15
|
|
In-process research & development
|
|
|
5,006
|
|
|
|
(1,242
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,764
|
|
|
Indefinite
|
|
Customer relationships
|
|
|
9,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(377
|
)
|
|
|
8,623
|
|
|
|
10
|
|
Distributor relationships
|
|
|
4,700
|
|
|
|
(415
|
)
|
|
|
-
|
|
|
|
(4,285
|
)
|
|
|
-
|
|
|
|
5
|
|
Patents
|
|
|
1,000
|
|
|
|
(177
|
)
|
|
|
-
|
|
|
|
(555
|
)
|
|
|
268
|
|
|
|
16
|
|
Tradenames
|
|
|
5,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(441
|
)
|
|
|
4,759
|
|
|
|
5
|
|
Total
|
|
$
|
118,859
|
|
|
$
|
(4,738
|
)
|
|
$
|
(1,025
|
)
|
|
$
|
(17,118
|
)
|
|
$
|
95,978
|
|
|
|
13
|
|
|
|
|
|
|
|
Year ended December 31, 2019
|
|
|
|
Gross Value
|
|
|
Less: Accumulated Currency Translation Adjustment
|
|
|
Less: Current Period Impairment Charge
|
|
|
Less: Accumulated Amortization
|
|
|
Net Book Value
|
|
|
Weighted Average Useful Life
|
|
Developed technology
|
|
$
|
17,100
|
|
|
$
|
(2,934
|
)
|
|
$
|
(389
|
)
|
|
$
|
(9,657
|
)
|
|
$
|
4,120
|
|
|
|
15
|
|
In-process research & development
|
|
|
4,406
|
|
|
|
(1,234
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,172
|
|
|
Indefinite
|
|
Distributor relationships
|
|
|
4,700
|
|
|
|
(415
|
)
|
|
|
-
|
|
|
|
(4,285
|
)
|
|
|
-
|
|
|
|
5
|
|
Patents
|
|
|
1,000
|
|
|
|
(176
|
)
|
|
|
-
|
|
|
|
(531
|
)
|
|
|
293
|
|
|
|
16
|
|
Elevess Tradename
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,000
|
)
|
|
|
-
|
|
|
|
9
|
|
Total
|
|
$
|
28,206
|
|
|
$
|
(4,759
|
)
|
|
$
|
(389
|
)
|
|
$
|
(15,473
|
)
|
|
$
|
7,585
|
|
|
|
11
|
|
The aggregate amortization expense related to intangible assets was $2.2 million and $0.2 million for the three-month periods ended June 30, 2020 and 2019, respectively, and $3.5 million and $0.5 million for the six-month periods ended June 30, 2020 and 2019, respectively.
In the first quarter of 2020, the Company acquired Parcus Medical and Arthrosurface as discussed in Note 3, which resulted in an increase of $92.9 million of gross value in intangible assets. During the six-month period ended June 30, 2020, the Company determined that it will not pursue CE Mark renewals for certain of its products, which resulted in an impairment of $1.0 million of which $0.3 million was recognized in the first quarter of 2020. The impairments are included in the selling, general & administrative expenses on its condensed consolidated statements of operations.
The Company assessed the recoverability of intangible and long-lived assets besides goodwill and concluded no impairments existed as of March 31, 2020. If the pandemic's economic impact is more severe, or if the economic recovery takes longer to materialize or does not materialize as strongly as anticipated, this could result in intangible or long-lived asset impairment charges. For the quarter ended June 30, 2020, there were no impairments related to the pandemic’s economic impact. However, the Company did identify certain intangible asset impairments as a result of product rationalization and the related decision to not pursue certain related CE Mark renewals.
The Company assesses goodwill for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment on each reporting unit. In connection with the evaluation of goodwill for impairment, the Company may first consider qualitative factors to assess whether there are any indicators to suggest it is more likely than not that the fair value of a reporting unit may not exceed its carrying amount. If after assessing such factors or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then a quantitative assessment is not required. If the Company chooses to bypass the qualitative assessment, or if it chooses to perform a qualitative assessment but is unable to qualitatively conclude that no impairment has occurred, then the Company will perform a quantitative assessment. If the estimated fair value of a reporting unit is less than its carrying value, an impairment charge is recognized for the excess of the reporting unit’s carrying value over its fair value.
As of December 31, 2019, the Company concluded that it operated as a single reporting unit and performed the 2019 goodwill impairment test using a single reporting unit.
Changes in the carrying value of goodwill were as follows:
|
|
Six Months Ended
June 30, 2020
|
|
|
Year Ended
December 31, 2019
|
|
Balance, beginning
|
|
$
|
7,694
|
|
|
$
|
7,851
|
|
Effect of foreign currency adjustments
|
|
|
8
|
|
|
|
(157
|
)
|
Acquisitions
|
|
|
44,400
|
|
|
|
-
|
|
Impairment
|
|
|
(18,144
|
)
|
|
|
-
|
|
Balance, ending
|
|
$
|
33,958
|
|
|
$
|
7,694
|
|
The increase in goodwill for the six months ended June 30, 2020 is related to the acquisitions of Parcus Medical and Arthrosurface in January and February 2020 as further discussed in Note 3. As a result of the acquisitions, the Company now has two reporting units. The newly formed reporting unit includes Parcus Medical and Arthrosurface, which share similar economic and qualitative characteristics. This reporting unit produces sports medicine surgical tools, instruments and joint implants. The legacy Anika business remains in one reporting unit, which specializes in therapies based on its hyaluronic acid, or HA, technology platform.
The widespread economic volatility resulting from the COVID-19 pandemic triggered impairment testing in the first quarter of 2020, and accordingly, the Company performed interim impairment testing on the goodwill balances of its reporting units. For the legacy Anika reporting unit, the Company performed a qualitative assessment including consideration of 1) general macroeconomic factors, 2) industry and market conditions, and 3) the extent of the excess of the fair value over the carrying value indicated in prior impairment testing. The Company determined it was not more likely than not that the fair value of the legacy Anika reporting unit is less than its carry amount and thus, goodwill was not impaired as of March 31, 2020. Through June 30, 2020, there have been no events or changes in circumstances that indicate that the carrying value of goodwill may not be recoverable.
U.S. government policy responses to the COVID-19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of domestic elective surgical procedures. As a result of these events during the first quarter of 2020, the Company performed a quantitative assessment of goodwill impairment related to the Parcus Medical and Arthrosurface reporting unit as of March 31, 2020. The Company then estimated the fair value of the Parcus Medical and Arthrosurface reporting unit using a discounted cash flow method, which is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the reporting units beyond the cash flows from the discrete projection period. The Company determined that a discounted cash flow model provided the best approximation of fair value of the reporting unit for the purpose of performing the interim impairment test.
This approach incorporates significant estimates and assumptions related to the forecasted results including revenues, expenses, the achievement of certain cost synergies, terminal growth rates and discount rates to estimate future cash flows. While assumptions utilized are subject to a high degree of judgment and complexity, the Company made reasonable assumptions to best estimate future cash flows under a high degree of economic uncertainty that existed as of March 31, 2020. In developing its assumptions, the Company also considered observed trends of its industry participants.
The results of the interim impairment test indicated that the estimated fair value of the Parcus and Arthrosurface reporting unit was less than its carrying value. This is primarily due to decreases in near term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures which directly impact the Parcus and Arthrosurface reporting unit. Consequently, a non-cash goodwill impairment charge was recorded as reflected in the table above as of March 31, 2020. For the quarter ended June 30, 2020, there have been no events or changes in circumstances that indicate that the carrying value of goodwill as determined on March 31, 2020 may not be recoverable. If the pandemic's economic impact is more severe, or if the economic recovery takes longer to materialize or does not materialize as strongly as anticipated, this could result in further goodwill impairment charges.
The components of lease expense and other information are as follows:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
Amortization of ROU Assets
|
|
|
49
|
|
|
|
-
|
|
|
|
86
|
|
|
|
-
|
|
Interest on finance lease liabilities
|
|
|
8
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
Finance lease expense
|
|
$
|
57
|
|
|
$
|
-
|
|
|
$
|
101
|
|
|
$
|
-
|
|
Operating lease expense
|
|
|
595
|
|
|
|
521
|
|
|
|
1,169
|
|
|
|
1,043
|
|
Short-term lease expense
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
6
|
|
Variable lease expense
|
|
|
74
|
|
|
|
60
|
|
|
|
137
|
|
|
|
112
|
|
Total lease expense
|
|
$
|
726
|
|
|
$
|
585
|
|
|
$
|
1,407
|
|
|
$
|
1,161
|
|
|
|
For the Three Months Ended
|
|
|
For the Six months ended
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
Weighted Average Remaining Lease Term (in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
16.1
|
|
|
|
17.3
|
|
|
|
16.1
|
|
|
|
17.3
|
|
Financing leases
|
|
|
3.7
|
|
|
|
-
|
|
|
|
3.7
|
|
|
|
-
|
|
Weighted Average Discount Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
4.1
|
%
|
|
|
4.1
|
%
|
|
|
4.1
|
%
|
|
|
4.1
|
%
|
Financing leases
|
|
|
5.0
|
%
|
|
|
-
|
|
|
|
5.0
|
%
|
|
|
-
|
|
Other information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
593
|
|
|
$
|
497
|
|
|
$
|
1,137
|
|
|
$
|
994
|
|
Operating cash flows from financing leases
|
|
$
|
59
|
|
|
$
|
-
|
|
|
$
|
110
|
|
|
$
|
-
|
|
Future commitments due under these lease agreements as of June 30, 2020 are as follows:
Years ended December 31,
|
|
Operating Leases
|
|
|
Financing Leases
|
|
|
Total
|
|
2020 (Remaining 6 months)
|
|
$
|
1,195
|
|
|
$
|
128
|
|
|
$
|
1,323
|
|
2021
|
|
|
2,304
|
|
|
|
174
|
|
|
|
2,478
|
|
2022
|
|
|
2,240
|
|
|
|
166
|
|
|
|
2,406
|
|
2023
|
|
|
2,123
|
|
|
|
160
|
|
|
|
2,283
|
|
2024
|
|
|
2,059
|
|
|
|
44
|
|
|
|
2,103
|
|
Thereafter
|
|
|
21,374
|
|
|
|
-
|
|
|
|
21,374
|
|
Present value adjustment
|
|
|
(8,405
|
)
|
|
|
(57
|
)
|
|
|
(8,462
|
)
|
Present value of lease payments
|
|
|
22,890
|
|
|
|
615
|
|
|
|
23,505
|
|
Less current portion included in accrued expenses and other current liabilities
|
|
|
(1,476
|
)
|
|
|
(186
|
)
|
|
|
(1,662
|
)
|
Total lease liabilities
|
|
$
|
21,414
|
|
|
$
|
429
|
|
|
$
|
21,843
|
|
Accrued expenses consist of the following:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Compensation and related expenses
|
|
$
|
3,212
|
|
|
$
|
5,830
|
|
Professional fees
|
|
|
3,052
|
|
|
|
3,850
|
|
Operating lease liability - current
|
|
|
1,476
|
|
|
|
1,141
|
|
Clinical trial costs
|
|
|
1,113
|
|
|
|
788
|
|
Current portion of acquisition related contingent consideration (Note 4)
|
|
|
11,688
|
|
|
|
-
|
|
Finance lease liability - current
|
|
|
186
|
|
|
|
-
|
|
Other
|
|
|
1,018
|
|
|
|
836
|
|
Total
|
|
$
|
21,745
|
|
|
$
|
12,445
|
|
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 June 30, 2020 or December 31, 2019 and has no history of claims paid.
The Company is also involved from time-to-time in various legal proceedings arising in the normal course of business. Although the outcomes of these legal proceedings are inherently difficult to predict, the Company does not expect the resolution of these occasional legal proceedings to have a material adverse effect on its financial position, results of operations, or cash flow.
The Company receives payments from its customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. As of June 30, 2020, deferred revenue was immaterial.
The Company has agreements with DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopaedics, Inc. (“Mitek”) that include the grant of certain licenses, performance of development services, and supply of product. Revenues from the agreements with Mitek represent 54% of total Company revenues for the three- and six-month periods ended June 30, 2020. The Company has agreements with other customers that may include the delivery of a license and supply of product.
Product and Total Revenue
Historically, the Company categorized its product offerings into four product families: Orthobiologics, Dermal, Surgical, and Other, which included its ophthalmic and veterinary products. As a result of the Company’s acquisitions of Parcus Medical and Arthrosurface during the first quarter of 2020, the Company now divides the product portfolio into three product families: Joint Pain Management, Orthopedic Joint Preservation and Restoration, and Other.
Product revenue by product family was as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint pain management
|
|
$
|
22,247
|
|
|
$
|
26,632
|
|
|
$
|
47,730
|
|
|
$
|
49,482
|
|
Orthopedic joint preservation and restoration
|
|
|
6,622
|
|
|
|
802
|
|
|
|
14,518
|
|
|
|
966
|
|
Other
|
|
|
1,809
|
|
|
|
2,979
|
|
|
|
3,827
|
|
|
|
4,682
|
|
|
|
$
|
30,678
|
|
|
$
|
30,413
|
|
|
$
|
66,075
|
|
|
$
|
55,130
|
|
Total revenue by geographic location was as follows:
|
|
Three Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Total
|
|
|
Percentage of
|
|
|
Total
|
|
|
Percentage of
|
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
Geographic Location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
25,133
|
|
|
|
82
|
%
|
|
$
|
22,937
|
|
|
|
76%
|
|
Europe
|
|
|
2,910
|
|
|
|
9
|
%
|
|
|
4,927
|
|
|
|
16%
|
|
Other
|
|
|
2,635
|
|
|
|
9
|
%
|
|
|
2,554
|
|
|
|
8%
|
|
Total
|
|
$
|
30,678
|
|
|
|
100
|
%
|
|
$
|
30,418
|
|
|
|
100%
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Total
|
|
|
Percentage of
|
|
|
Total
|
|
|
Percentage of
|
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
Geographic Location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
51,438
|
|
|
|
78
|
%
|
|
$
|
43,026
|
|
|
|
78%
|
|
Europe
|
|
|
8,186
|
|
|
|
12
|
%
|
|
|
7,454
|
|
|
|
14%
|
|
Other
|
|
|
6,451
|
|
|
|
10
|
%
|
|
|
4,661
|
|
|
|
8%
|
|
Total
|
|
$
|
66,075
|
|
|
|
100
|
%
|
|
$
|
55,141
|
|
|
|
100%
|
|
12.
|
Equity Incentive Plan
|
The Company estimates the fair value of stock options and stock appreciation rights (“SARs”) using the Black-Scholes valuation model, and estimates the fair value of the total shareholder return (“TSRs”) options using a Monte-Carlo simulation model as of the grant date. Fair value of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) is measured by the grant-date price of the Company’s shares. Fair value of performance restricted stock units (“PSUs”) is measured by the grant-date price of the Company’s shares with corresponding compensation cost recognized over the requisite service period. Compensation cost of PSUs is recognized based on the estimated probabilities of achieving the performance goals. Changes to the probability assessment and the estimated shares expected to vest will result in adjustments to the related compensation cost that will be recorded in the period of the change. If the performance targets are not achieved, no compensation cost is recognized, and any previously recognized compensation cost is reversed. Compensation cost of the TSRs is recognized on a straight-line basis over the vesting period, regardless of whether the market condition for vesting is ultimately achieved.
The fair value of each stock option award, including TSRs, during the six-month periods ended June 30, 2020 and 2019 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
|
|
Six months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Risk free interest rate
|
|
|
0.31%
|
-
|
1.59%
|
|
|
|
2.18%
|
-
|
2.54%
|
|
Expected volatility
|
|
|
46.48%
|
-
|
51.87%
|
|
|
|
44.05%
|
-
|
44.72%
|
|
Expected life (years)
|
|
|
4.0
|
-
|
6.3
|
|
|
|
|
3.5
|
|
|
Expected dividend yield
|
|
|
|
0.00%
|
|
|
|
|
|
0.00%
|
|
|
The Company presents the expenses related to stock-based compensation awards in the same expense line items as cash compensation paid to each of its employees as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Cost of product revenue
|
|
$
|
216
|
|
|
$
|
82
|
|
|
$
|
362
|
|
|
$
|
174
|
|
Research & development
|
|
|
156
|
|
|
|
91
|
|
|
|
352
|
|
|
|
268
|
|
Selling, general & administrative
|
|
|
1,868
|
|
|
|
1,270
|
|
|
|
1,319
|
|
|
|
2,387
|
|
Total stock-based compensation expense
|
|
$
|
2,240
|
|
|
$
|
1,443
|
|
|
$
|
2,033
|
|
|
$
|
2,829
|
|
The Company’s former President and Chief Executive Officer, Joseph Darling passed unexpectedly in January 2020. According to the terms of Mr. Darling’s equity award grants and the Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan (the “2017 Plan”), the unvested portion of his stock-based compensation was forfeited upon his death, resulting in a one-time benefit of $1.8 million that was fully recognized during the three-month period ended March 31, 2020 within selling, general & administrative expenses.
The following table sets forth share information for stock-based compensation awards granted and exercised during the three- and six-month periods ended June 30, 2020 and 2019:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
106,438
|
|
|
|
27,325
|
|
|
|
317,213
|
|
|
|
131,617
|
|
RSUs
|
|
|
83,476
|
|
|
|
8,000
|
|
|
|
184,107
|
|
|
|
173,507
|
|
PSUs
|
|
|
88,820
|
|
|
|
-
|
|
|
|
146,220
|
|
|
|
114,500
|
|
TSRs
|
|
|
104,638
|
|
|
|
-
|
|
|
|
104,638
|
|
|
|
-
|
|
Exercises:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,146
|
|
|
|
22,400
|
|
|
|
2,146
|
|
|
|
22,900
|
|
Forfeitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
20,625
|
|
|
|
38,163
|
|
|
|
54,103
|
|
|
|
39,072
|
|
RSAs
|
|
|
-
|
|
|
|
14,450
|
|
|
|
8,574
|
|
|
|
21,116
|
|
RSUs
|
|
|
8,483
|
|
|
|
22,000
|
|
|
|
72,166
|
|
|
|
22,500
|
|
PSUs
|
|
|
8,000
|
|
|
|
-
|
|
|
|
71,000
|
|
|
|
18,000
|
|
Expirations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
200
|
|
|
|
2,855
|
|
|
|
563
|
|
|
|
18,862
|
|
During the three- and six-month periods ended June 30, 2020, the Company granted stock-based compensation awards in the form of stock options, PSUs, TSRs, and RSUs to employees and RSUs to non-employee directors, the majority of which become exercisable or vest ratably over a three-year period. The PSUs granted to employees contained performance conditions with business and financial targets. The business target, amounting to 40% of the total performance conditions, will be measured based on achievement in the 2020-2022 fiscal years, while the financial targets, amounting to 60% of the total performance conditions, will ultimately be measured with respect to the Company’s operating results in the 2020-2022 fiscal years. The Company recorded $0.3 and ($0.2) million of stock-based compensation expense associated with PSUs for the three- and six-month periods ended June 30, 2020.
During the second quarter of 2020, the initial equity grants to the Company’s current President and Chief Executive Officer contained a TSR option award at 104,638 targeted options, with market and service conditions. The actual number of options that may be earned ranges from 0% to 150% of the target number, depending on the total shareholder return of the Company relative to the peer group over the vesting period of 2.7 years. The grant-date fair value of the TSRs is recorded as stock-based compensation expense on a straight-line basis over the period from the date of grant to the settlement date. The Company recorded $0.2 million of stock-based compensation expense associated with TSRs for the three and six-month periods ended June 30, 2020.
13.
|
Earnings Per Share (“EPS”)
|
Basic EPS is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. Unvested restricted shares, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic earnings per share. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, SARs, RSAs, RSUs, TSRs, and PSUs using the treasury stock method.
The following table provides share information used in the calculation of the Company's basic and diluted earnings (loss) per share:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Shares used in the calculation of basic earnings per share
|
|
|
14,199
|
|
|
|
13,916
|
|
|
|
14,201
|
|
|
|
14,054
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, RSAs, PSUs, TSRs and RSUs
|
|
|
-
|
|
|
|
172
|
|
|
|
-
|
|
|
|
149
|
|
Diluted shares used in the calculation of earnings per share
|
|
|
14,199
|
|
|
|
14,088
|
|
|
|
14,201
|
|
|
|
14,203
|
|
For the three- and six-month periods ended June 30, 2020, the net loss available to common shareholders is divided by the weighted average number of common shares outstanding during the period to calculate basic earnings per share. The assumed exercise of stock options would have been anti-dilutive. Stock options of 1.0 million shares were outstanding for the three-month periods ended June 30, 2020 and 2019 and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive. Stock options of 0.9 million and 1.0 million shares were outstanding for the six-month periods ended June 30, 2020 and 2019 and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive.
14.
|
Accelerated Share Repurchase
|
In May 2019, the Company’s Board of Directors authorized a repurchase program of up to $50.0 million shares of the Company’s common stock with $30.0 million to be repurchased through an accelerated share repurchase program and up to $20.0 million to be potentially repurchased on the open market from time-to-time. On May 7, 2019, the Company entered into an accelerated share repurchase agreement with Morgan Stanley & Co. LLC (“Morgan Stanley”) pursuant to a Fixed Dollar Accelerated Share Repurchase Transaction (“ASR Agreement") to purchase $30.0 million of shares of its common stock. Pursuant to the terms of the ASR Agreement from May 2019 to January 2020, the Company repurchased 0.6 million shares under the ASR Agreement at an average repurchase price of $50.78 per share. The ASR Agreement settled on January 14, 2020. Through June 30, 2020, no open market repurchases had been executed.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The CARES Act includes several provisions that provide economic relief for individuals and businesses. The Company will continue to evaluate the impact of the CARES Act, but does not expect it to result in a material impact.
The benefit from income taxes was $2.0 million and $0.4 million for the three- and six-month periods ended June 30, 2020, based on effective tax rates of 20.6% and 17.9%, respectively. The provision for income taxes was $3.0 million and $4.5 million for the three- and six-month periods ended June 30, 2019, based on effective tax rates of 24.2% and 24.3%, respectively. The net decrease in the effective tax rate for the three- and six-month periods ended June 30, 2020, as compared to the same periods in 2019, was primarily due to the $1.9 million tax expense on the impairment of non-tax deductible goodwill offset by the $1.7 million tax benefit on the decrease in the fair value of the contingent consideration. In addition, the Company recorded a $0.3 million tax windfall for the six-month period ended June 30, 2020 related to exercises of employee equity awards. The Company recognized a net deferred tax liability of $11.2 million primarily due to intangible assets and inventory step up offset by net operating losses and research and development tax credits associated with the Arthrosurface acquisition discussed in Note 3.
The Company files income tax returns in the United States on a federal basis, in certain U.S. states, and in Italy. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate.
In connection with the preparation of the financial statements, the Company assesses whether it was more likely than not that it would be able to utilize, in future periods, the net deferred tax assets associated with its net operating loss carry-forward. In the second quarter of 2020, the Company established a valuation allowance in the amount of $0.4 million against the portion of the deferred tax asset balance that is “more likely than not” not to be realized.
16.
|
Revolving Credit Agreement
|
On April 8, 2020, the Company submitted a loan notice to draw down the $50.0 million available under its existing credit facility, with an initial applicable interest of 2.08%. Interest expense for the three-month period ended June 30, 2020 was $0.2 million associated with the revolving credit agreement. The credit facility will mature in October 2022, and the Company may prepay the credit facility at any time without penalty. Proceeds from the borrowing may be used for purposes permitted under the Credit Agreement, as defined below, including for working capital and general corporate purposes.
The existing credit facility was entered into on October 24, 2017. The Company, as borrower, entered into a new five-year agreement with Bank of America, N.A., as administrative agent, swingline lender and issuer of letters of credit, for a $50.0 million senior revolving line of credit (the “Credit Agreement”). Subject to certain conditions, the Company may request up to an additional $50.0 million in commitments for a maximum aggregate commitment of $100.0 million, which requests must be approved by the Revolving Lenders (as defined in the Credit Agreement). Loans under the Credit Agreement generally bear interest equal to, at the Company’s option, either: (i) LIBOR plus the Applicable Margin, as defined below, or the (ii) Base Rate, defined as the highest of: (a) the Federal Funds Rate plus 0.50%, (b) Bank of America, N.A.’s prime rate and (c) the one month LIBOR adjusted daily plus 1.0%, plus the Applicable Margin. The Applicable Margin ranges from 0.25% to 1.75% based on the Company’s consolidated leverage ratios at the time of the borrowings under the Credit Agreement. The Company has agreed to pay a commitment fee in an amount that is equal to 0.25% per annum on the actual daily unused amount of the credit facility and that is due and payable quarterly in arrears. Loan origination costs are included in Other long-term assets and are being amortized over the five-year term of the Credit Agreement. As of December 31, 2019 and 2018, there were no outstanding borrowings under the Credit Agreement and the Company was in compliance with the terms of the Credit Agreement. The Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including financial covenants, events of default, and indemnification provisions in favor of the Lenders. These include restrictive covenants that require the Company not to exceed certain maximum leverage and interest coverage ratios, limit its incurrence of liens and indebtedness, and its entry into certain merger and acquisition transactions or dispositions and place additional restrictions on other matters, all subject to certain exceptions. The Lender has been granted a first priority lien and security interest in substantially all of the Company’s assets, except for certain intangible assets.