The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited 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 consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share amounts or as otherwise noted)
(unaudited)
Anika Therapeutics, Inc. (“the Company”) is a global joint preservation company that creates and delivers meaningful advancements in early intervention orthopedic care, including in the areas of osteoarthritis (“OA”) pain management, regenerative solutions, soft tissue repair and bone preserving joint technologies.
In early 2020, the Company expanded its overall technology platform through its strategic acquisitions of Parcus Medical, LLC (“Parcus Medical”), a sports medicine implant and instrumentation solutions provider focused on sports medicine and soft tissue repair, and Arthrosurface, Inc. (“Arthrosurface”), a company specializing in less invasive, bone preserving partial and total joint replacement solutions. These acquisitions broadened Anika's product portfolio, developed over its nearly 30 years of expertise in hyaluronic acid technology, into joint preservation and restoration, added high-growth revenue streams, increased its commercial capabilities, diversified its revenue base, and expanded its product pipeline and research and development expertise.
The Company is subject to risks common to companies in the biotechnology and medical device industries including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, commercialization of existing and new products, and compliance with U.S. Food and Drug Administration (“FDA”) and foreign regulations and approval requirements, as well as the ability to grow the Company’s business through appropriate commercial strategies.
There continue to be uncertainties regarding the pandemic of the novel coronavirus (“COVID-19”), and the Company is closely monitoring the impact of COVID-19 on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, and business partners. The Company is unable to predict the specific impact that COVID-19 may have on its financial position and operations moving forward due to the numerous uncertainties. Any estimates made herein may change as new events occur and additional information is obtained, and actual results could differ materially from any estimates made herein under different assumptions or conditions. The Company will continue to assess the evolving impact of COVID-19.
The accompanying unaudited consolidated financial statements and related notes have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) 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 or omitted pursuant to SEC rules and regulations relating to interim financial statements. The December 31, 2020 balances reported herein are derived from the audited consolidated financial statements. In the opinion of management, these unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the consolidated financial statements.
The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s annual financial statements filed with its Annual Report on Form 10-K for the year ended December 31, 2020. The results of operations for the three-month period ended March 31, 2021 are not indicative of the results to be expected for the year ending December 31, 2021.
Segment Information
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its President and Chief Executive Officer as of March 31, 2021. 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 December 2019, the 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 GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The Company adopted ASU 2019-12 as of January 1, 2021. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures.
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, assets acquired and liabilities assumed in a business combination must be recorded at their fair value as of the acquisition date. 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, as of January 24, 2020, which consisted of:
Cash consideration
|
|
$
|
32,794
|
|
Deferred consideration
|
|
|
1,642
|
|
Estimated fair value of contingent consideration
|
|
|
40,700
|
|
Estimated total purchase consideration
|
|
$
|
75,136
|
|
Contingent consideration represents additional payments that the Company may be required to make in the future, which totals 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 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 was resolved within one year of the acquisition date in accordance with the Parcus Merger Agreement and was recorded in accounts payable as of December 31, 2020. The liability for contingent and deferred consideration is included in current and long-term liabilities on the consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved. See Note 4, Fair Value Measurements, for additional discussion of contingent consideration as of March 31, 2021 and December 31, 2020.
Acquisition-related costs are not included as a component of consideration transferred but are expensed in the periods in which the costs are incurred. The Company incurred approximately $1.9 million in transaction costs related to the Parcus Medical acquisition during the three-month period ending March 31, 2020. The transaction costs subsequent to March 31, 2020 were immaterial. The transaction costs have been included in selling, general and administrative expenses in the consolidated statements of operations.
Fair Value of Net Assets Acquired
The estimate of fair value as of the acquisition date required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable, however, actual results may differ from these estimates.
The allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on estimates of fair value as of January 24, 2020, and is as follows:
Recognized identifiable assets acquired and liabilities assumed:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
196
|
|
Accounts receivable
|
|
|
2,029
|
|
Inventories
|
|
|
10,968
|
|
Prepaid expenses and other current assets
|
|
|
364
|
|
Property and equipment, net
|
|
|
1,099
|
|
Right-of-use assets
|
|
|
944
|
|
Intangible assets
|
|
|
44,000
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
|
(2,763
|
)
|
Other long-term liabilities
|
|
|
(594
|
)
|
Lease liabilities
|
|
|
(735
|
)
|
Net assets acquired
|
|
|
55,508
|
|
Goodwill
|
|
|
19,628
|
|
Estimated total purchase consideration
|
|
$
|
75,136
|
|
Subsequent to the acquisition date, during the three-month period ended September 30, 2020, the Company completed the identification and confirmation of Parcus Medical inventory in the possession of its direct and distributor sales force, which resulted in an increase to the fair value of inventory of $1.9 million as of the January 24, 2020 acquisition date. As a result, the Company recorded this addition to inventory with a corresponding reduction to goodwill as a measurement period adjustment which was reflected to the Goodwill amount included in the table above. The impact to the consolidated statement of operations related to this adjustment was not material.
The acquired intangible assets based on estimates of fair value as of January 24, 2020 are as follows:
Developed technology
|
|
$
|
41,100
|
|
Trade name
|
|
|
1,800
|
|
Customer relationships
|
|
|
1,100
|
|
Total acquired intangible assets
|
|
$
|
44,000
|
|
The fair value of the developed technology intangible assets has been estimated using the multi-period excess earnings method, which is based on the principle that the value of an intangible asset is equal to the present value of the incremental after-tax cash flow attributable to the asset, after charges for other assets employed by the business. The fair value of the customer relationships has been estimated using the avoided costs/lost profits method, which is based on the principle that the value of an intangible asset is based on consideration of the total costs that would be avoided by having this asset in place. The fair value of the trade name has been estimated using the relief from royalty method of the income approach, which is based on the principle that the value of an intangible asset is equal to the present value of the after-tax royalty savings attributable to owning the intangible asset. Key estimates and assumptions used in these models are projected revenues and expenses related to the asset, estimated contributory asset charges, estimated costs to recreate the asset, and a risk-adjusted discount rate used to calculate the present value of the future expected cash inflows or cash outflows avoided from the asset.
The fair value of developed technology will be amortized over a useful life of 15 years, the fair value of customer relationships over 10 years, and the fair value of the trade name over 5 years.
The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and assigned to the newly established reporting unit for Parcus Medical and Arthrosurface. The goodwill is attributable to the workforce of the business and the value of future technologies expected to arise after the acquisition. Goodwill will not be amortized and is expected to be deductible for income tax purposes as the acquisition of the limited liability company is an asset purchase for tax purposes. See Note 7, Goodwill, for further discussion.
Revenue and Net Loss
The Company recorded revenue from Parcus Medical of $3.9 million and a net loss of ($1.4) million in the three-month period ended March 31, 2021. The Company recorded revenue from Parcus Medical of $2.6 million and a net loss of ($0.9) million in the period from January 24, 2020 through March 31, 2020, excluding the goodwill impairment.
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.
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. 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, 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 in 2020 through 2021. In October 2020, based upon the achievement of a regulatory milestone, the Company paid $5.0 million. 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 net sales was determined based upon a Monte Carlo simulation approach 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. See Note 4, Fair Value Measurements, for additional discussion of contingent consideration as of March 31, 2021 and December 31, 2020.
Acquisition-related costs are not included as a component of consideration transferred but are expensed in the periods in which the costs are incurred. The Company incurred approximately $2.2 million in transaction costs related to the Arthrosurface acquisition during the three-month period ending March 31, 2020. The transaction costs subsequent to March 31, 2020 were immaterial. The transaction costs have been included in selling, general and administrative expenses in the consolidated statements of operations.
Fair Value of Net Assets Acquired
The estimate of fair value required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable. However, actual results may differ from these estimates.
The allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on estimates of fair value as of February 3, 2020, as follows:
Recognized identifiable assets acquired and liabilities assumed:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,072
|
|
Accounts receivable
|
|
|
5,368
|
|
Inventories
|
|
|
15,652
|
|
Prepaid expenses and other current assets
|
|
|
535
|
|
Property, plant and equipment
|
|
|
3,394
|
|
Other long-term assets
|
|
|
7,548
|
|
Intangible assets
|
|
|
48,900
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
(3,929
|
)
|
Deferred tax liabilities
|
|
|
(11,147
|
)
|
Net assets acquired
|
|
|
67,393
|
|
Goodwill
|
|
|
22,892
|
|
Estimated total purchase consideration
|
|
$
|
90,285
|
|
Intangible assets acquired consist of:
|
|
|
|
|
Developed technology
|
|
$
|
37,000
|
|
Trade name
|
|
|
3,400
|
|
Customer relationships
|
|
|
7,900
|
|
IPR&D
|
|
|
600
|
|
Total acquired intangible assets
|
|
$
|
48,900
|
|
The fair value of the developed technology intangible assets has been estimated using the multi-period excess earnings method, which is based on the principle that the value of an intangible asset is equal to the present value of the incremental after-tax cash flow attributable to the asset, after charges for other assets employed by the business. The fair value of the customer relationships has been estimated using the avoided costs/lost profits method, which is based on the principle that the value of an intangible asset is based on consideration of the total costs that would be avoided by having this asset in place. The fair value of the trade name has been estimated using the relief from royalty method of the income approach, which is based on the principle that the value of an intangible asset is equal to the present value of the after-tax royalty savings attributable to owning the intangible asset. Key estimates and assumptions used in these models are projected revenues and expenses related to the asset, estimated contributory asset charges, estimated costs to recreate the asset, and a risk-adjusted discount rate used to calculate the present value of the future expected cash inflows or cash outflows avoided from the asset.
The fair value of developed technology will be amortized over an estimated useful life of 15 years, the fair value of customer relationships over 10 years, and the fair value of trade names over 5 years. A total of $0.6 million represents the fair value of IPR&D with an indefinite useful life that will be evaluated for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.
The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and assigned to the newly established reporting unit for Parcus Medical and Arthrosurface. The goodwill is attributable to the workforce of the business and the value of future technologies expected to arise after the acquisition. Goodwill will not be amortized and is not expected to be deductible for income tax purposes as the acquisition of the corporation is a stock purchase for tax purposes See Note 7, Goodwill, for further discussion.
Revenue and Net Loss
The Company recorded revenue from Arthrosurface of $6.6 million and a net loss of ($2.8) million in the three-month period ending March 31, 2021. The Company recorded revenue from Arthrosurface of $4.2 million and a net loss of ($4.0) million in the period from February 3, 2020 through March 31, 2020, excluding the goodwill impairment.
Pro forma Information
The Parcus Medical and Arthrosurface acquisitions were both completed in the first quarter of 2020. Both acquired companies have similar businesses with all of their products in the Joint Preservation and Restoration product family, serving orthopedic surgeons, ambulatory surgical centers and hospitals. The Company has combined legacy Anika, Parcus Medical and Arthrosurface pro forma supplemental information as follows.
The unaudited pro forma information for the three months ended March 31, 2021 and 2020 was calculated after applying the Company’s accounting policies and the impact of acquisition date fair value adjustments. The pro forma financial information presents the combined results of operations of Anika, Parcus Medical and Arthrosurface as if the acquisitions had occurred on January 1, 2019 after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are factually supportable and directly attributable to the acquisitions.
These pro forma adjustments include: (i) a net increase in amortization expense to record amortization expense for the aforementioned acquired identifiable intangible assets, (ii) an adjustment to cost of revenue based on the preliminary inventory step-up and the anticipated inventory turnover, (iii) a net decrease in interest expense as a result of eliminating interest expense and interest income related to borrowings that were settled in accordance with the respective Parcus Medical Merger Agreement and Arthrosurface Merger Agreement, (iv) an adjustment to record the acquisition-related transaction costs in the period required, and (v) the tax effect of the pro forma adjustments using the anticipated effective tax rate. The effective tax rate of the combined company could be materially different from the rate presented in this unaudited pro forma combined financial information. As a result of the transaction, the combined company may be subject to annual limitations on its ability to utilize pre-acquisition net operating loss carryforwards to offset future taxable income. The amount of the annual limitation is determined based on the value of Anika immediately prior to the acquisition. As further information becomes available, any such adjustment described above could be material to the amounts presented in the unaudited pro forma combined financial statements. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred at the beginning of each period presented, or of future results of the consolidated entities.
The following table presents unaudited supplemental pro forma information:
|
|
For the Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Total revenue
|
|
$
|
34,292
|
|
|
$
|
39,350
|
|
Net income
|
|
$
|
2,838
|
|
|
$
|
6,790
|
|
4.
|
Fair Value Measurements
|
The Company held U.S. treasury bills of $2.5 million at December 31, 2020. Unrealized losses and the associated tax impact on the Company’s available-for-sale securities were insignificant as December 31, 2020. There were no available-for-sale securities as of March 31, 2021.
The Company’s investments are all classified within Level 1 of the fair value hierarchy and are valued based quoted prices in active markets. For cash, current receivables, accounts payable, and interest accrual, the carrying amounts approximate fair value, because of the short maturity of these instruments, and therefore fair value information is not included in the table below. Contingent consideration related to the previously described business combinations are classified within Level 3 of the fair value hierarchy as the determination of fair value uses considerable judgement and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability.
The classification of the Company’s cash equivalents and investments within the fair value hierarchy is as follows:
|
|
|
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
for Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
|
|
|
|
March 31, 2021
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Amortized Cost
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
77,030
|
|
|
$
|
77,030
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
77,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current and long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent Consideration - Short Term
|
|
$
|
24,830
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,830
|
|
|
$
|
-
|
|
Contingent Consideration - Long Term
|
|
|
5,760
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,760
|
|
|
|
-
|
|
Total other current and long-term liabilities
|
|
$
|
30,590
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30,590
|
|
|
$
|
-
|
|
|
|
|
|
|
|
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
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
74,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills
|
|
$
|
2,501
|
|
|
$
|
2,501
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current and long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent Consideration - Short Term
|
|
$
|
13,090
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,090
|
|
|
$
|
-
|
|
Contingent Consideration - Long Term
|
|
|
22,320
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,320
|
|
|
|
-
|
|
Total other current and long-term liabilities
|
|
$
|
35,410
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
35,410
|
|
|
$
|
-
|
|
There were no transfers between fair value levels during the three-month period ended March 31, 2021 or in 2020.
Contingent Consideration
The following table provides a rollforward of the contingent consideration related to business acquisitions discussed in Note 3, Business Combinations.
|
|
Three Months Ended
March 31, 2021
|
|
Balance, beginning
|
|
$
|
35,410
|
|
Additions
|
|
|
-
|
|
Payments
|
|
|
-
|
|
Change in fair value
|
|
|
(4,820
|
)
|
Balance, ending
|
|
$
|
30,590
|
|
Under the Parcus Medical Merger Agreement and Arthrosurface Merger Agreement, there are earn-out milestones totaling $100 million payable from 2020 to 2022. Parcus Medical has net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface has both regulatory and net sales earn-out milestones in 2020 and 2021. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model or a Monte Carlo simulation approach. The unobservable inputs used in the fair value measurement of the Company’s contingent consideration are the probabilities of successful achievement, the net sales estimates, the weighted average cost of capital used for the Monte Carlo simulation, discount rate and the periods in which the milestones are expected to be achieved. The discount rates used for the net sales milestones ranged from 2.6% - 2.8%, and for the regulatory earn-out milestones the discount rate was 3.6%. As of March 31, 2021, the probability of successful achievement of the Arthrosurface regulatory earn-out milestones range from 0%-70%, as compared to a range of 60%-75% at the acquisition date. The weighted average cost of capital for Arthrosurface increased from 11.5% on the acquisition date to 12.1% as of March 31, 2021, and for Parcus Medical decreased from 14.5% at the acquisition date to 12.1% as of March 31, 2021. 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.
In October 2020, the Company made a regulatory-based milestone payment of $5 million pursuant to the terms of the Arthrosurface Merger Agreement as a result of regulatory clearance for the WristMotion Total Arthroplasty System. The fair value of remaining contingent consideration is assessed on a quarterly basis. The fair value of the contingent consideration decreased by $4.8 million during the three-month period ended March 31, 2021 due primarily to the decrease in the likelihood that certain contingent milestones would be achieved and result in payment.
Inventories consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Raw materials
|
|
$
|
15,565
|
|
|
$
|
14,852
|
|
Work-in-process
|
|
|
11,262
|
|
|
|
12,811
|
|
Finished goods
|
|
|
35,336
|
|
|
|
33,347
|
|
Total
|
|
$
|
62,163
|
|
|
$
|
61,010
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
42,718
|
|
|
$
|
46,209
|
|
Other long-term assets
|
|
|
19,445
|
|
|
|
14,801
|
|
Intangible assets as of March 31, 2021 and December 31, 2020 consisted of the following:
|
|
|
|
|
|
Three Months Ended March 31, 2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
Gross
Value
|
|
|
Less: Accumulated
Currency Translation
Adjustment
|
|
|
Less:
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
|
Net Book
Value
|
|
|
Weighted
Average Useful
Life
|
|
Developed technology
|
|
$
|
89,580
|
|
|
$
|
(1,539
|
)
|
|
$
|
(13,510
|
)
|
|
$
|
74,531
|
|
|
$
|
75,899
|
|
|
|
15
|
|
IPR&D
|
|
|
3,256
|
|
|
|
(951
|
)
|
|
|
-
|
|
|
|
2,305
|
|
|
|
2,587
|
|
|
Indefinite
|
|
Customer relationships
|
|
|
9,000
|
|
|
|
-
|
|
|
|
(1,052
|
)
|
|
|
7,948
|
|
|
|
8,173
|
|
|
|
10
|
|
Distributor relationships
|
|
|
4,700
|
|
|
|
(415
|
)
|
|
|
(4,285
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
Patents
|
|
|
1,000
|
|
|
|
(183
|
)
|
|
|
(594
|
)
|
|
|
223
|
|
|
|
259
|
|
|
|
16
|
|
Tradenames
|
|
|
5,200
|
|
|
|
-
|
|
|
|
(1,221
|
)
|
|
|
3,979
|
|
|
|
4,239
|
|
|
|
5
|
|
Total
|
|
$
|
112,736
|
|
|
$
|
(3,088
|
)
|
|
$
|
(20,662
|
)
|
|
$
|
88,986
|
|
|
$
|
91,157
|
|
|
|
13
|
|
The aggregate amortization expense related to intangible assets was $1.9 million and $1.3 million for the three-month periods ended March 31, 2021 and 2020, respectively.
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. The Company has two reporting units: the legacy Anika reporting unit, which specializes in therapies based on its hyaluronic acid, or HA, technology platform, and a joint preservation and restoration reporting unit established in 2020 upon the acquisitions of Parcus Medical and Arthrosurface.
Changes in the carrying value of goodwill for the three months ended March 31, 2021 and year ended December 31, 2020 were as follows:
|
|
Three Months Ended
March 31, 2021
|
|
Balance, beginning
|
|
$
|
8,413
|
|
Effect of foreign currency adjustments
|
|
|
(368
|
)
|
Acquisitions
|
|
|
-
|
|
Impairment loss
|
|
|
-
|
|
Balance, ending
|
|
$
|
8,045
|
|
The increase in goodwill in 2020 is related to the acquisitions of Parcus Medical and Arthrosurface Inc. in January and February 2020, as further discussed in Note 3, Business Combinations. The Company performed an interim quantitative assessment of goodwill impairment as March 31, 2020, in addition to its annual impairment testing as of November 30, 2020, with respect to the joint preservation and restoration reporting unit. The results of the impairment tests indicated that the estimated fair value of the reporting unit was less than its carrying value. This was primarily due to decreases in near term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures which directly impact the reporting unit. Consequently, a non-cash goodwill impairment charge was recorded in the amount of $42.5 million during 2020. The Company did not record any goodwill impairment charge with respect to legacy Anika reporting unit in 2020.
Accrued expenses consist of the following:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
|
|
|
Compensation and related expenses
|
|
$
|
5,726
|
|
|
$
|
7,345
|
|
Professional fees
|
|
|
2,904
|
|
|
|
3,438
|
|
Operating lease liability - current
|
|
|
1,517
|
|
|
|
1,437
|
|
Clinical trial costs
|
|
|
1,746
|
|
|
|
1,429
|
|
Financing lease liability - current
|
|
|
119
|
|
|
|
148
|
|
Other
|
|
|
1,448
|
|
|
|
996
|
|
Total
|
|
$
|
13,460
|
|
|
$
|
14,793
|
|
9.
|
Commitments and Contingencies
|
In certain of its contracts, the Company warrants to its customers that the products it manufactures conform to the product specifications as in effect at the time of delivery of the specific product. The Company may also warrant that the products it manufactures do not infringe, violate, or breach any U.S. or international patent or intellectual property right, trade secret, or other proprietary information of any third party. On occasion, the Company contractually indemnifies its customers against any and all losses arising out of, or in any way connected with, any claim or claims of breach of its warranties or any actual or alleged defect in any product caused by the negligent acts or omissions of the Company. The Company maintains a products liability insurance policy that limits its exposure to these risks. Based on the Company’s historical activity, in combination with its liability insurance coverage, the Company believes the estimated fair value of these indemnification agreements is immaterial. The Company had no accrued warranties as of March 31, 2021 or December 31, 2020 and has no history of claims paid.
The Company is also involved from time-to-time in various legal proceedings arising in the normal course of business. Although the outcomes of these legal proceedings are inherently difficult to predict, the Company does not expect the resolution of these occasional legal proceedings to have a material adverse effect on its financial position, results of operations, or cash flow.
Revenue by product family was as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Joint Pain Management
|
|
$
|
19,316
|
|
|
$
|
25,483
|
|
Joint Preservation and Restoration
|
|
|
12,219
|
|
|
|
7,896
|
|
Other
|
|
|
2,757
|
|
|
|
2,018
|
|
|
|
$
|
34,292
|
|
|
$
|
35,397
|
|
Revenue from the Company’s sole significant customer, DePuy Synthes Mitek Sports Medicine, part of the Johnson & Johnson Medical Companies (Mitek), as a percentage of the Company’s total revenue was 41% and 54% for the three months ended March 31, 2021 and 2020, respectively.
We receive payments from our customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional. Deferred revenue was $0.9 million and $0.2 million as of March 31, 2021 and December 31, 2020, respectively.
Revenue by geographic location was as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
Geographic Location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
25,005
|
|
|
|
73
|
%
|
|
$
|
26,306
|
|
|
|
74
|
%
|
Europe
|
|
|
5,480
|
|
|
|
16
|
%
|
|
|
5,276
|
|
|
|
15
|
%
|
Other
|
|
|
3,807
|
|
|
|
11
|
%
|
|
|
3,815
|
|
|
|
11
|
%
|
Total
|
|
$
|
34,292
|
|
|
|
100
|
%
|
|
$
|
35,397
|
|
|
|
100
|
%
|
11.
|
Equity Incentive Plan
|
The Company estimates the fair value of stock options using the Black-Scholes valuation model. Fair value of total shareholder return options (“TSR”) is measured by using a Monte-Carlo simulation model. 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 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.
The expected volatility assumption is evaluated against the historical volatility of the Company’s common stock over a 4-year average, except for TSRs which is evaluated over 6.3 years, and it is adjusted if there are material changes in historical volatility. The risk-free interest rate assumption is based on U.S. Treasury interest rates at the time of grant.
The fair value of each stock option award during the three-month periods ended March 31, 2021 and 2020 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
|
|
Three Months Ended
March 31,
|
|
|
2021
|
|
2020
|
Risk free interest rate
|
|
0.3%
|
-
|
0.6%
|
|
0.4%
|
-
|
1.6%
|
Expected volatility
|
|
54.8%
|
-
|
55.4%
|
|
46.5%
|
-
|
49.4%
|
Expected life (years)
|
|
|
4.0
|
|
|
|
4.0
|
|
Expected dividend yield
|
|
|
0.0%
|
|
|
|
0.0%
|
|
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
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Cost of revenue
|
|
$
|
129
|
|
|
$
|
146
|
|
Research and development
|
|
|
241
|
|
|
|
196
|
|
Selling, general and administrative
|
|
|
1,889
|
|
|
|
(549
|
)
|
Total stock-based compensation expense
|
|
$
|
2,259
|
|
|
$
|
(207
|
)
|
On January 29, 2020, the Company announced the unexpected death of its former President and Chief Executive Officer, Joseph Darling. According to the terms of Mr. Darling’s equity award grants and the Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan (the “2017 Plan”), the unvested portion of his stock-based compensation was forfeited upon his death, resulting in a one-time benefit of $1.8 million that was fully recognized during the three-month period ended March 31, 2020 within selling, general and administrative expenses.
The following table sets forth share information for stock-based compensation awards granted and exercised during the three-month periods ended March 31, 2021 and 2020:
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Grants:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
421,463
|
|
|
|
210,775
|
|
RSUs
|
|
|
258,417
|
|
|
|
100,631
|
|
PSUs
|
|
|
-
|
|
|
|
57,400
|
|
Exercises:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
125
|
|
|
|
-
|
|
Forfeitures:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
73,156
|
|
|
|
33,478
|
|
RSAs
|
|
|
-
|
|
|
|
8,574
|
|
RSUs
|
|
|
4,092
|
|
|
|
63,683
|
|
PSUs
|
|
|
2,500
|
|
|
|
63,000
|
|
Expirations:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,667
|
|
|
|
363
|
|
During the three-month period ended March 31, 2021, the Company granted stock-based compensation awards in the form of stock options, and RSUs to employees and RSUs to non-employee directors, the majority of which become exercisable or vest ratably over a three-year period. Of the 421,463 stock options granted during the first quarter of 2021, 301,845 shares were premium-priced options which were granted with an exercise price at 110% of the market price of the Company’s stock on the date of grant.
The Company recorded an income tax benefit of $1.6 million for the three-month period ended March 31, 2021, resulting in an effective tax rate of (133.6%). The provision for income taxes was $1.6 million for the three-month period ended March 31, 2020, based on an effective tax rate of 21.4%. The net decrease in the effective tax rate for the three-month period ended March 31, 2021, as compared to the same period in 2020, was primarily due to the $1.7 million tax benefit on the decrease in the fair value of the contingent consideration, recognized as a discrete benefit in the first quarter of 2021.
The Company files income tax returns in the United States on a federal basis, in certain U.S. states, and in certain foreign jurisdictions. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate.
In connection with the preparation of the financial statements, the Company assessed whether it is more likely than not that it will be able to utilize, in future periods, the deferred income taxes to offset future taxable income. The Company has concluded that it is more likely than not that the majority of its deferred tax assets will be realized through consideration of both the positive and negative evidence. At December 31, 2020, the Company recorded a valuation allowance in the amount of $0.9 million related to net operating loss carryforwards at its Italian subsidiary due to the uncertainty regarding their realization. The Company did not record an additional valuation allowance at March 31, 2021.
13.
|
Earnings Per Share (“EPS”)
|
Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period. Unvested restricted shares, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic earnings per share. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options (including TSRs), SARs, RSAs, RSUs, 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 per share (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Shares used in the calculation of basic earnings per share
|
|
|
14,343
|
|
|
|
14,202
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options, RSAs, PSUs and RSUs
|
|
|
92
|
|
|
|
151
|
|
Diluted shares used in the calculation of earnings per share
|
|
|
14,435
|
|
|
|
14,353
|
|
Stock options of 1.2 million and 0.6 million shares were outstanding for the three-month periods ended March 31, 2021 and 2020, respectively, and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive.