10-Q 1 anik20220930_10q.htm FORM 10-Q anik20220930_10q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2022

 

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

 

For the transition period from                  to                  

 

Commission File Number 001-14027

 

Anika Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

04-3145961

(State or Other Jurisdiction of

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

Incorporation or Organization)

 

 

32 Wiggins Avenue, Bedford, Massachusetts 01730

(Address of Principal Executive Offices) (Zip Code)

 

(781) 457-9000

(Registrant’s Telephone Number, Including Area Code)

 

N/A

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

 

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

 

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

   

Common Stock, par value $0.01 per share

ANIK

NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting

company 

Emerging growth

company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes    No ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

 

 

 

 

 

ANIKA THERAPEUTICS, INC.

TABLE OF CONTENTS

 

   

Page

Part I

Financial Information

3

Item 1.

Condensed Consolidated Financial Statements (unaudited):

3
 

Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021

3
 

Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2022 and 2021

4
 

Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021

5
 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021

6
 

Notes to Consolidated Financial Statements

7

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Controls and Procedures

30

Part II

Other Information

31

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 6.

Exhibits

32

Signatures

33

 

References in this Quarterly Report on Form 10-Q to “we,” “us,” “our” and “our company,” and other similar references refer to Anika Therapeutics, Inc. and its subsidiaries unless the context otherwise indicates.

 

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

 

 

 

 

 

 

 

 

PART I:

FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

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

 

  

September 30,

  

December 31,

 

ASSETS

 

2022

  

2021

 

Current assets:

        

Cash and cash equivalents

 $87,777  $94,386 

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

  34,168   29,843 

Inventories, net

  37,237   36,010 

Prepaid expenses and other current assets

  8,579   8,289 

Total current assets

  167,761   168,528 

Property and equipment, net

  47,390   47,602 

Right-of-use assets

  30,987   20,957 

Other long-term assets

  18,342   20,285 

Intangible assets, net

  76,545   82,382 

Goodwill

  6,721   7,781 

Total assets

 $347,746  $347,535 
         

LIABILITIES AND STOCKHOLDERS EQUITY

        

Current liabilities:

        

Accounts payable

 $8,353  $7,633 

Accrued expenses and other current liabilities

  17,999   17,847 

Contingent consideration

  -   4,315 

Total current liabilities

  26,352   29,795 

Other long-term liabilities

  474   1,258 

Deferred tax liability

  6,800   10,157 

Lease liabilities

  29,183   19,240 

Commitments and contingencies (Note 10)

          

Stockholders’ equity:

        

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

  -   - 

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

  146   144 

Additional paid-in-capital

  76,661   67,081 

Accumulated other comprehensive loss

  (7,497

)

  (5,718

)

Retained earnings

  215,627   225,578 

Total stockholders’ equity

  284,937   287,085 

Total liabilities and stockholders’ equity

 $347,746  $347,535 

 

 

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

 

 

3

 

 

 

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share data)

(unaudited) 

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Revenue

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

Cost of revenue

  17,485   16,513   47,169   47,164 

Gross Profit

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

Operating expenses:

                

Research & development

  7,301   7,673   20,433   21,327 

Selling, general & administrative

  21,276   17,500   61,745   53,664 

Change in fair value of contingent consideration

  -   (3,450

)

  -   (21,920

)

Total operating expenses

  28,577   21,723   82,178   53,071 

(Loss) income from operations

  (5,798

)

  1,300   (12,733

)

  11,738 

Interest and other income (expense), net

  436   (48

)

  378   (141

)

(Loss) income before income taxes

  (5,362

)

  1,252   (12,355

)

  11,597 

(Benefit from) provision for income taxes

  (1,187

)

  694   (2,404

)

  1,670 

Net (loss) income

 $(4,175

)

 $558  $(9,951

)

 $9,927 
                 

Net (loss) income per share:

                

Basic

 $(0.29

)

 $0.04  $(0.68

)

 $0.69 

Diluted

 $(0.29

)

 $0.04  $(0.68

)

 $0.68 
                 

Weighted average common shares outstanding:

                

Basic

  14,603   14,429   14,542   14,389 

Diluted

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

Net (loss) income

 $(4,175

)

 $558  $(9,951

)

 $9,927 

Foreign currency translation adjustment

  (851

)

  199   (1,779

)

  (777

)

Comprehensive (loss) income

 $(5,026

)

 $757  $(11,730

)

 $9,150 

 

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

 

 

 

 

4

 

 

Anika Therapeutics, Inc. and Subsidiaries

 

Consolidated Statements of Stockholders' Equity

 

(in thousands)

 
                         
  

Nine Months Ended September 30, 2022

 
                  

Accumulated

     
  

Common Stock

      

Other

  

Total

 
  

Number of

  

$.01 Par

  

Additional Paid

  

Retained

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Value

  

in Capital

  

Earnings

  

Loss

  

Equity

 

Balance, January 1, 2022

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

Issuance of common stock for equity awards

  1   -   15   -   -   15 

Vesting of restricted stock units

  106   1   (1)  -   -   - 

Stock-based compensation expense

  -   -   2,545   -   -   2,545 

Retirement of common stock for minimum tax withholdings

  (30)  -   (844)  -   -   (844)

Net loss

  -   -   -   (2,933)  -   (2,933)

Other comprehensive income

  -   -   -   -   (81)  (81)

Balance, March 31, 2022

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

Vesting of restricted stock units

  61   1   (1)  -   -   - 

Issuance of ESPP shares

  20   -   -   -   -   - 

Stock-based compensation expense

  -   -   4,081   -   -   4,081 

Retirement of common stock for minimum tax withholdings

  (1)  -   (25)  -   -   (25)

Net loss

  -   -   -   (2,843)  -   (2,843)

Other comprehensive income

  -   -   -   -   (847)  (847)

Balance, June 30, 2022

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

Vesting of restricted stock units

  11   -   -   -   -   - 

Issuance of ESPP shares

  -   -   -   -   -   - 

Stock-based compensation expense

  -   -   3,876   -   -   3,876 

Retirement of common stock for minimum tax withholdings

  (2)  -   (66)  -   -   (66)

Net loss

  -   -   -   (4,175)  -   (4,175)

Other comprehensive income

  -   -   -   -   (851)  (851)

Balance, September 30, 2022

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

 

  

Nine Months Ended September 30, 2021

 
                  

Accumulated

     
  

Common Stock

      

Other

  

Total

 
  

Number of

  

$.01 Par

  

Additional Paid

  

Retained

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Value

  

in Capital

  

Earnings

  

Loss

  

Equity

 

Balance, January 1, 2021

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

)

 $272,400 

Issuance of common stock for equity awards

  -   -   1   -   -   1 

Vesting of restricted stock units

  46   1   (1

)

  -   -   - 

Stock-based compensation expense

  -   -   2,259   -   -   2,259 

Retirement of common stock for minimum tax withholdings

  (9

)

  -   (333

)

  -   -   (333

)

Net income

  -   -   -   2,838   -   2,838 

Other comprehensive income

  -   -   -   -   (509

)

  (509

)

Balance, March 31, 2021

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

)

 $276,656 

Issuance of common stock for equity awards

  18   -   640   -   -   640 

Vesting of restricted stock units

  35   -   -   -   -   - 

Stock-based compensation expense

  -   -   2,797   -   -   2,797 

Retirement of common stock for minimum tax withholdings

  (1)  -   (19)  -   -   (19)

Net income

  -   -   -   6,531   -   6,531 

Other comprehensive income

  -   -   -   -   199   199 

Balance, June 30, 2021

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

Issuance of common stock for equity awards

  10   -   373   -   -   373 

Vesting of restricted stock units

  9   -   -   -   -   - 

Stock-based compensation expense

  -   -   2,863   -   -   2,863 

Retirement of common stock for minimum tax withholdings

  (1)  -   (71)  -   -   (71)

Net income

  -   -   -   558   -   558 

Other comprehensive income

  -   -   -   -   (467)  (467)

Balance, September 30, 2021

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

 

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

 

5

 

 

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

   

Nine Months Ended

September 30

 
   

2022

   

2021

 

Cash flows from operating activities:

               

Net (loss) income

  $ (9,951

)

  $ 9,927  

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

               

Depreciation

    4,984       4,702  

Amortization of acquisition related intangible assets

    5,837       5,885  

Amortization of acquisition related inventory step-up

    -       6,244  

Non-cash operating lease cost

    1,322       1,312  

Change in fair value of contingent consideration

    -       (21,920 )

Loss on disposal of fixed assets

    -       831  

Stock-based compensation expense

    10,502       7,919  

Deferred income taxes

    (3,491

)

    1,018  

Provision (recovery) for doubtful accounts

    379       (60 )

Provision for inventory

    3,701       3,702  

Other

          (13 )

Changes in operating assets and liabilities:

               

Accounts receivable

    (4,983

)

    (8,321 )

Inventories

    (3,933

)

    (7,117 )

Prepaid expenses, other current and long-term assets

    (456

)

    1,864  

Accounts payable

    533       (702

)

Operating lease liabilities

    (1,054

)

    (1,247

)

Accrued expenses, other current and long-term liabilities

    115       3,104  

Contingent consideration

    -       (2,780 )

Income taxes

    423       (423

)

Net cash provided by operating activities

    3,928       3,925  
                 

Cash flows from investing activities:

               

Acquisition of Parcus Medical and Arthrosurface, net of cash acquired

    -       (363

)

Proceeds from maturities of investments

    -       2,501  

Purchases of property and equipment

    (4,957

)

    (4,016

)

Net cash used in investing activities

    (4,957

)

    (1,878

)

                 

Cash flows from financing activities:

               

Payments made on finance leases

    (284

)

    (210

)

Cash paid for tax withheld on vested restricted stock awards

    (935

)

    (423

)

Proceeds from exercises of equity awards

    15       1,014  

Contingent consideration payout

    (4,315 )     (7,220 )

Net cash used in financing activities

    (5,519

)

    (6,839 )
                 

Exchange rate impact on cash

    (61

)

    (49

)

                 

Decrease in cash and cash equivalents

    (6,609

)

    (4,841 )

Cash and cash equivalents at beginning of period

    94,386       95,817  

Cash and cash equivalents at end of period

  $ 87,777     $ 90,976  

Supplemental disclosure of cash flow information:

               

Non-cash investing activities:

               

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

  $ 11,589     $ 195  

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

  $ 108     $ 220  

 

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

 

6

 

 

ANIKA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

 

1.

Nature of Business

 

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

 

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

 

The Company is subject to risks common to companies in the life sciences industry including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, commercialization of existing and new products, and compliance with U.S. Food and Drug Administration 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 ongoing coronavirus (“COVID-19”), and the Company is closely monitoring the impact of COVID-19 on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, business partners and a broader impact on elective surgeries. The Company is unable to predict the specific impact that COVID-19 may have on its financial position and operations moving forward due to the numerous uncertainties. Any estimates made herein may change as new events occur and additional information is obtained, and actual results could differ materially from any estimates made herein under different assumptions or conditions. The Company will continue to assess the evolving impact of COVID-19.

 

 

2.

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States (“US GAAP”). The financial statements include the accounts of Anika Therapeutics, Inc. and its subsidiaries. Inter-company transactions and balances have been eliminated. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been or omitted pursuant to SEC rules and regulations relating to interim financial statements. The December 31, 2021 balances reported herein were 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, 2021. The results of operations for the three-month and nine-month periods ended September 30, 2022, are not indicative of the results to be expected for the year ending December 31, 2022

 

Segment Information

 

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its President and Chief Executive Officer as of September 30, 2022. Based on the criteria established by Accounting Standards Codification 280, Segment Reporting, the Company has one operating and reportable segment.

 

7

 
 
 

3.

Business Combinations

 

Parcus Medical, LLC

 

On January 24, 2020, the Company completed the acquisition of Parcus Medical pursuant to the terms of the Agreement and Plan of Merger, dated as of January 4, 2020 (the “Parcus Medical Merger Agreement”). Parcus Medical is a sports medicine implant and instrumentation solutions provider focused on surgical repair and reconstruction of soft tissue.

 

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 

 

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

 

The fair value of contingent consideration related to net sales as of January 24, 2020, and at each reporting date, was determined based on a Monte Carlo simulation model in an option pricing framework, whereby a range of possible scenarios were simulated. The liability for contingent consideration was included in current liabilities on the condensed consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved. During the three months ended September 30, 2022, the Company paid the contingent consideration related to net sales in the amount of $4.3 million which was included in current liabilities as of December 31, 2021. The Company does not expect any further milestones to be achieved.

 

Acquisition-related costs were not included as a component of consideration transferred but were 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.

 

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 was as follows:

 

Recognized identifiable assets acquired and liabilities assumed:

    

Cash and cash equivalents

 $196 

Accounts receivable

  2,029 

Inventories

  10,968 

Prepaid expenses and other current assets

  364 

Property and equipment, net

  1,099 

Right-of-use assets

  944 

Intangible assets

  44,000 

Accounts payable, accrued expenses and other current liabilities

  (2,763

)

Other long-term liabilities

  (594

)

Lease liabilities

  (735

)

Net assets acquired

  55,508 

Goodwill

  19,628 

Estimated total purchase consideration

 $75,136 

 

8

 

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

 

Developed technology

 $41,100 

Trade name

  1,800 

Customer relationships

  1,100 

Total acquired intangible assets

 $44,000 

 

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 was impaired in 2020 and there was no remaining goodwill as of December 31, 2020.

 

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”). Arthrosurface is a joint preservation technology company specializing in less invasive, bone-preserving partial and total joint replacement solutions.

 

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 from 2020 through 2021. The fair value of contingent consideration related to regulatory milestones as of February 3, 2020 was determined through a scenario-based discounted cash flow analysis using scenario probabilities and regulatory milestone dates. The fair value of contingent consideration related to net sales achievement as of February 3, 2020 was determined based upon a Monte Carlo simulation approach at acquisition date, whereby a range of possible scenarios were simulated. The Company paid $5.0 million in October 2020 and $10.0 million in July 2021 based upon the achievement of two distinct regulatory milestones. As of September 30, 2022, there were no milestones remaining.

 

Acquisition-related costs were not included as a component of consideration transferred but were 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.

 

Fair Value of Net Assets Acquired

 

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

 

9

 

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

 

Recognized identifiable assets acquired and liabilities assumed:

    

Cash and cash equivalents

 $1,072 

Accounts receivable

  5,368 

Inventories

  15,652 

Prepaid expenses and other current assets

  535 

Property, plant and equipment

  3,394 

Other long-term assets

  7,548 

Intangible assets

  48,900 

Accounts payable, accrued expenses and other liabilities

  (3,929

)

Deferred tax liabilities

  (11,147

)

Net assets acquired

  67,393 

Goodwill

  22,892 

Estimated total purchase consideration

 $90,285 

Intangible assets acquired consist of:

    

Developed technology

 $37,000 

Trade name

  3,400 

Customer relationships

  7,900 

IPR&D

  600 

Total acquired intangible assets

 $48,900 

 

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 which was impaired during the quarter ended December 31, 2021.

 

The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and assigned to the newly established reporting unit for Parcus Medical and Arthrosurface. The goodwill was impaired in 2020 and there was no remaining goodwill as of December 31, 2020.

 

 

4.

Fair Value Measurements

 

The Company has certain cash equivalents in money market funds that are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets. For cash, accounts receivables, accounts payable, and accrued interest, the carrying amounts approximate fair value, because of the short maturity of these instruments, and therefore fair value information is not included in the table below. Contingent consideration related to the previously described business combinations are classified within Level 3 of the fair value hierarchy as the determination of fair value uses considerable judgement and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability. There were no transfers between fair value levels during the nine-month periods ended September 30, 2022 or 2021. See Note 3, Business Combinations for additional discussion of contingent consideration as of September 30, 2022.

 

10

 
 
      

Active Markets

  

Significant Other

  

Significant

     
      

for Identical

Assets

  

Observable

Inputs

  

Unobservable

Inputs

     
  

September 30, 2022

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Amortized Cost

 

Cash equivalents:

                    

Money Market Funds

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

Other current liabilities:

                    

Contingent Consideration - Short Term

 $-  $-  $-  $-  $- 

 

      

Active Markets

  

Significant Other

  

Significant

     
      

for Identical

Assets

  

Observable

Inputs

  

Unobservable

Inputs

     
  

December 31, 2021

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Amortized Cost

 

Cash equivalents:

                    

Money Market Funds

 $67,046  $67,046  $-  $-  $67,046 
                     

Other current liabilities:

                    

Contingent Consideration - Short Term

 $4,315  $-  $-  $4,315  $- 

 

Contingent Consideration

 

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

 

  

Nine Months Ended

  

Nine Months Ended

 
  

September 30, 2022

  

September 30, 2021

 

Balance, beginning

 $4,315  $35,410 

Payments

  (4,315)  (10,000)

Change in fair value

  -   (21,920)

Balance, ending

 $-  $3,490 

 

 

11

 
 
 

5.

Inventories

 

Inventories consist of the following:

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Raw materials

 $19,015  $16,881 

Work-in-process

  11,650   11,442 

Finished goods

  24,277   26,731 

Total

 $54,941  $55,054 
         

Inventories

 $37,237  $36,010 

Other long-term assets

  17,704   19,044 

Total

 $54,941  $55,054 

 

Inventories are stated net of inventory reserves of $10.0 million and $9.1 million as of September 30, 2022 and December 31, 2021, respectively.

 

 

6.

Intangible Assets

 

      

Nine Months Ended

September 30, 2022

  

December 31,

2021

     
  

Gross
Value

  

Less: Accumulated
Currency Translation
Adjustment

  

Less:
Accumulated
Amortization

  

Net Book
Value

  

Net Book
Value

  

Weighted
Average Useful
Life

 

Developed technology

 $89,580  $(1,607

)

 $(22,238

)

 $65,735  $70,081   15 

IPR&D

  2,656   (1,006

)

  -   1,650   1,650  

Indefinite

 

Customer relationships

  9,000   -   (2,402

)

  6,598   7,273   10 

Distributor relationships

  4,700   (415

)

  (4,285

)

  -   -   5 

Patents

  1,000   (189

)

  (668

)

  143   179   16 

Tradenames

  5,200   -   (2,781

)

  2,419   3,199   5 

Total

 $112,136  $(3,217

)

 $(32,374

)

 $76,545  $82,382   13 

 

The aggregate amortization expense related to intangible assets was $1.9 million and $2.0 million for the three-month periods ended September 30, 2022 and 2021, respectively, and $5.8 million and $5.9 million for each of the nine-month periods ended September 30, 2022 and 2021.

 

 

7.

Goodwill

 

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

 

Changes in the carrying value of goodwill for the nine months ended September 30, 2022 were as follows:

 

  

Nine Months Ended September 30, 2022

 

Balance, beginning

 $7,781 

Effect of foreign currency adjustments

  (1,060

)

Balance, ending

 $6,721 

 

12

 
 

8.

Leases

 

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

 

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

 

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

 

  

Operating Leases

 
     

2022 (Remainder of Year)

 $720 

2023

  3,081 

2024

  3,025 

2025

  3,066 

2026

  2,760 

Thereafter

  27,873 

Present value adjustment

  (9,421

)

Present value of lease payments

  31,105 

Less current portion included in accrued expenses and other current liabilities

  (1,922

)

Total lease liabilities

 $29,183 

 

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

 

 

9.

Accrued Expenses and Other Liabilities

 

Accrued expenses and other liabilities consist of the following:

 

  

September 30, 2022

  

December 31, 2021

 
         

Compensation and related expenses

 $11,166  $9,523 

Professional fees

  3,063   3,590 

Operating lease liability – current

  1,922   1,526 

Clinical trial costs

  1,352   1,961 

Financing lease liability – current

  -   188 

Other

  496   1,059 

Total

 $17,999  $17,847 

 

13

 
 
 

10.

Commitments and Contingencies

 

In certain of its contracts, the Company warrants to its customers that the products it manufactures conform to the product specifications as in effect at the time of delivery of the specific product. The Company may also warrant that the products it manufactures do not infringe, violate, or breach any U.S. or international patent or intellectual property right, trade secret, or other proprietary information of any third party. On occasion, the Company contractually indemnifies its customers against any and all losses arising out of, or in any way connected with, any claim or claims of breach of its warranties or any actual or alleged defect in any product caused by the negligent acts or omissions of the Company. The Company maintains a products liability insurance policy that limits its exposure to these risks. Based on the Company’s historical activity, in combination with its liability insurance coverage, the Company believes the estimated fair value of these indemnification agreements is immaterial. The Company had no accrued warranties as of September 30, 2022 or December 31, 2021 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.

 

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

 

 

11.

Revenue and Geographic Information

 

Revenue by product family was as follows: 

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

OA Pain Management

 $25,665  $26,153  $74,139  $69,790 

Joint Preservation and Restoration

  11,821   11,193   36,055   35,296 

Non-Orthopedics

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

 

Revenue from the Company’s sole significant customer, DePuy Synthes Mitek Sports Medicine (“Mitek”), part of the Johnson & Johnson Medical Companies, as a percentage of the Company’s total revenue was 45% and 51% for the three months ended September 30, 2022 and 2021, respectively, and 43% and 46% for the nine months ended September 30, 2022 and 2021, respectively

 

The Company receives payments from our customers based on billing schedules established in each contract. Up-front payments are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional. Deferred revenue was $0.1 million and $1.0 million as of September 30, 2022 and December 31, 2021, respectively.

 

14

 
 

Total revenue by geographic location was as follows:

 

  

Three Months Ended September 30,

 
  

2022

  

2021

 
  

Total

  

Percentage of

  

Total

  

Percentage of

 
  

Revenue

  

Revenue

  

Revenue

  

Revenue

 

Geographic Location:

                

United States

 $31,093   77

%

 $30,910   78

%

Europe

  4,885   12

%

  4,238   11

%

Other

  4,286   11

%

  4,388   11

%

Total

 $40,264   100

%

 $39,536   100

%

 

  

Nine Months Ended September 30,

 
  

2022

  

2021

 
  

Total

  

Percentage of

  

Total

  

Percentage of

 
  

Revenue

  

Revenue

  

Revenue

  

Revenue

 

Geographic Location:

                

United States

 $87,552   75

%

 $85,984   77

%

Europe

  15,973   14

%

  14,808   13

%

Other

  13,089   11

%

  11,181   10

%

Total

 $116,614   100

%

 $111,973   100

%

 

 

12.

Equity Incentive Plan

 

Equity Incentive Plan

 

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

 

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

 

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

 

15

 
 

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

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Cost of revenue

 $242  $142  $645  $485 

Research & development

  397   360   1,267   1,003 

Selling, general & administrative

  3,237   2,361   8,590   6,431 

Total stock-based compensation expense

 $3,876  $2,863  $10,502  $7,919 

 

Stock Options

 

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

 

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

 

  

Number of Options

  

Weighted Average Exercise Price

  

Weighted Average

Remaining

Contractual

Term (in years)

  

Aggregate Intrinsic

Value

(in thousands)

 

Outstanding as of December 31, 2021

  1,175,993  $39.56         

Granted

  486,901  $27.60         

Exercised

  (437

)

 $9.10      $10 

Forfeited and canceled

  (156,672

)

 $44.08         

Outstanding as of September 30, 2022

  1,505,785  $35.21   8.3  $78 

Vested, September 30, 2022

  499,617  $40.00   7.3  $8 

Vested or expected to vest, September 30, 2022

  1,505,785  $35.21   8.3  $78 

 

The aggregate intrinsic value of options exercised for the nine-month period ended September 30, 2022 was immaterial.

 

The Company granted 486,901 stock options during the nine-month ended September 30, 2022, of which 398,314 shares were premium-priced options.

 

As of September 30, 2022, there was $8.7 million of unrecognized compensation cost related to unvested stock options. This expense is expected to be recognized over a weighted average period of 1.8 years.

 

The Company uses the Black-Scholes pricing model to determine the fair value of options granted. The calculation of the fair value of stock options is affected by the stock price on the grant date, the expected volatility of the Company’s common stock over the expected term of the award, the expected life of the award, the risk-free interest rate and the dividend yield. The Company estimates the fair value of TSRs using Monte-Carlo simulation model where the expected volatility assumption is evaluated over 6.3 years. The actual number of TSR options that may be earned ranges from 0% to 150% of the target number, depending on the total shareholder return of the Company relative to the peer group over the vesting period of 2.7 years. There were 104,638 TSRs as of September 30, 2022.

 

16

 
 

The assumptions used in the Black-Scholes pricing model for options granted during the nine months ended September 30, 2022 and 2021, along with the weighted-average grant-date fair values, were as follows:

 

 

Nine Months Ended September 30,

 

2022

2021

Risk free interest rate

 

1.3%

-

3.4%

 

0.3%

-

0.7%

Expected volatility

 

53.8%

-

55.5%

 

54.8%

-

56.1%

Expected life (years)

  

4.5

   

4.0

 

Expected dividend yield

  

0.0%

   

0.0%

 

Fair value per option

  

$11.26

   

$14.55

 

 

Restricted Stock Units

 

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

 

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

 

  

Number of Shares

  

Weighted Average Fair Value

 

Outstanding as of December 31, 2021

  412,658  $36.33 

Granted

  507,524  $25.14 

Vested

  (159,871

)

 $36.48 

Forfeited and cancelled

  (67,389

)

 $32.45 

Outstanding as of September 30, 2022

  692,922  $28.48 

 

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

 

As of September 30, 2022, there was $14.8 million of unrecognized compensation cost related to time-based RSUs, which was expected to be recognized over a weighted-average period of 2.0 years.

 

Performance Stock Units

 

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

 

  

Number of Shares

  

Weighted Average Fair Value

 

Outstanding as of December 31, 2021

  158,297  $37.44 

Performance factor adjustment

  2,125  $32.53 

Vested

  (19,125

)

 $32.53 

Forfeited and cancelled

  (23,400

)

 $41.86 

Outstanding as of September 30, 2022

  117,897  $34.98 

 

The total fair value of PSUs vested was $0.6 million and $0 for the nine-month period ended September 30, 2022 and 2021, respectively. As of September 30, 2022, none of the milestones related to the outstanding PSUs were expected to be achieved.

 

17

 
 
 

13.

Income Taxes

 

The Company recorded an income tax benefit of $1.2 million and $2.4 million for the three- and nine-month periods ended   September 30, 2022, resulting in effective tax rates of 22.1% and 19.5%, respectively. The Company recorded income tax expense of $0.7 million and $1.7 million for the three- and nine-month periods ended   September 30, 2021, based on effective tax rates of 55.4% and 14.4%, respectively.

 

The decrease in the effective tax rate for the three-month period ended  September 30, 2022, as compared to the same period in 2021, was primarily due to non-deductible stock-option activity during the three-month period ended  September 30, 2021. The increase in the effective tax rate for the nine-month period ended   September 30, 2022, as compared to the same period in 2021, was primarily due to the year-to-date net tax benefit in 2021 on the change in the fair value of contingent consideration, in the amount of $1.1 million, and a year-to-date discrete charge of $0.7 million in 2022 related to non-deductible stock compensation.

 

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

 

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

 

 

14.

Earnings Per Share (EPS)

 

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

 

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

 

  

Three Month Period Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Shares used in the calculation of basic earnings per share

  14,603   14,429   14,542   14,389 

Effect of dilutive securities:

                

Share-based payment awards

  -   218   -   199 

Diluted shares used in the calculation of earnings per share

  14,603   14,647   14,542   14,588 

 

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

 

18

 
 
 

ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

Please also refer to those factors described in “Part I, Item 1A. Risk Factors” of our 2021 Form 10-K for important factors that we believe could cause actual results to differ materially from those in our forward-looking statements. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

 

Management Overview

 

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

 

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

 

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

 

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

 

 

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

 

19

 

 

 

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

 

 

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

     
 

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

 

 

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

 

 

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

 

COVID-19 Pandemic and Resulting Supply Chain and Staffing Challenges

 

In March 2020, the World Health Organization declared the spread of the COVID-19 virus a pandemic. This pandemic has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. There has been significant volatility in our results on a quarterly basis due to the worldwide cancellation or delay of elective procedures, staffing shortages and supply chain disruptions, as well as the impact on timelines associated with certain clinical studies. Resurgence of COVID-19 as a result of emerging variants or other factors could result in additional staffing shortages or supply chain disruptions that could impact our business and operations. We have had some disruption in our ability to supply products to our customers due to supply chain disruptions and staffing shortages which has caused back orders or delays in certain shipments to our customers. The companies that produce our products, product components or otherwise support our manufacturing processes, the distribution centers where we manage our inventory, or the operations of our logistics and other service providers, including third parties that sterilize and store our products, are or could be disrupted, temporarily close or experience worker shortages for a sustained period of time. To date, we believe we have taken adequate precaution to mitigate the impact of the current disruption of key materials, components and parts to the extent possible and reasonable. We expect, however, the current supply chain disruption with certain key suppliers to continue, which could have a material adverse effect on our operations. For additional information on the impact of supply chain disruption related to the COVID-19 pandemic on our manufacturing operations, please refer to the section captioned “Part II, Item 1A. Risk Factors.

 

Our commercial day-to-day operations have been impacted due to the worldwide cancellations and/or delays of elective procedures and restrictions on travel for both our employees and our clinician customers, and timelines associated with certain clinical studies and research and development programs have been delayed. While the impact has been limited to these items to date, we caution that there continues to be a possibility for potential future implementation of certain additional restrictions or other challenges associated with infections, staffing shortages, volatility in elective surgical procedures or supply chain disruptions due to COVID-19 and its current or new variants in certain jurisdictions. In particular, supply constraints that have continued into 2022 that we have partially been able to mitigate to date have impacted and could be expected to impact our ability to produce and supply our products. The impact of these challenges is currently unknown but could be significant.

 

Products

 

OA Pain Management

 

Our OA Pain Management product family consists of:

 

 

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

 

 

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

 

 

Hyvisc, our high molecular weight injectable HA veterinary product approved for the treatment of joint dysfunction in horses due to non-infectious synovitis associated with equine OA.

 

20

 

 

Joint Preservation and Restoration

 

Our Joint Preservation and Restoration product family consists of: 

 

 

Bone Preserving Joint Technologies. Our portfolio of more than 150 bone preserving joint technologies, including partial joint replacement, joint resurfacing, and minimally invasive and bone sparing implants, is designed to treat upper and lower extremity orthopedic conditions as well as knee and hip conditions caused by arthritic disease, acute trauma and injury. These products span multiple joints including the shoulder, foot/ankle, wrist, knee and hip and are generally intended to restore a patient’s natural anatomy and movement. These products are often used to treat patients with OA progression beyond where our OA Pain Management products can allow the patients to retain an active lifestyle when early surgical intervention becomes preferable.

 

 

Soft Tissue Repair. Our line of soft tissue repair solutions is used by surgeons to repair and reconstruct damaged ligaments and tendons resulting from sports injuries, acute trauma and disease. These more traditional sports medicine solutions include screws, sutures, suture anchors, grafts and other surgical systems that facilitate surgical procedures on the shoulder, knee, hip, upper and lower extremities, and other soft tissues.

 

 

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

 

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

 

Non-Orthopedic

 

Our Non-Orthopedic product family consists of legacy HA-based products that are marketed principally for non-orthopedic applications. These products include Hyalobarrier, an anti-adhesion barrier indicated for use after abdomino-pelvic surgeries, Hyalomatrix, used for the treatment of complex wounds such as burns and ulcers, as well as products used in connection with the treatment of ears, nose and throat disorders, and ophthalmic products, including injectable, high molecular weight HA products such as Anikavisc and Nuvisc, used as viscoelastic agents in ophthalmic surgical procedures such as cataract extraction and intraocular lens implantation. These Non-Orthopedic products are sold through commercial sales and marketing partners around the world.

 

 

 

 

21

 

 

Results of Operations

 

Three and Nine Months Ended September 30, 2022 Compared to Three and Nine Months Ended September 30, 2021

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2022

   

2021

   

$ Inc/(Dec)

   

% Inc/(Dec)

   

2022

   

2021

   

$ Inc/(Dec)

   

% Inc/(Dec)

 
   

(in thousands, except percentages)

           

(in thousands, except percentages)

         

Revenue

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

Cost of revenue

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

Gross Profit

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

Gross Margin

    57 %     58 %                     60 %     58 %                

Operating expenses:

                                                               

Research & development

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

Selling, general & administrative

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

Change in fair value of contingent consideration

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

Total operating expenses

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

Interest and other income (expense), net

    436       (48 )     484       (1,008% )     378       (141 )     519       (368% )
(Loss) income before income taxes     (5,361 )     1,252       (6,613 )     (528% )     (12,355 )     11,597       (23,952 )     (207% )
(Benefit from) provision for income taxes     (1,187 )     694       (1,881 )     (271% )     (2,404 )     1,670       (4,074 )     (244%