What changed in this filing

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Item 1. Financial Statements

2021-08-06 compared with 2021-05-07 · 390 added, 265 removed, 500 unchanged (57% of the section changed)

8 unchanged sentences

$ 95,817  

Accounts receivable, net of reserves of $ 1,411 and $ 1,523 at March 31, 2021 and December 31, 2020, respectively

Accounts receivable, net of reserves of $1,413 and $1,523 at June 30, 2021 and December 31, 2020, respectively

29,426  

48 unchanged sentences

Preferred stock, $0.01 par value;

1,250 shares authorized, no shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

1,250 shares authorized, no shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

Common stock, $0.01 par value;

90,000 shares authorized, 14,366 and 14,329 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

90,000 shares authorized, 14,418 and 14,329 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

Additional paid-in-capital

12 unchanged sentences

$ 365,605  

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

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

Anika Therapeutics, Inc.

2 unchanged sentences

(in thousands, except per share data)

Three Months Ended March 31,

(unaudited)  

Three Months Ended

Six Months Ended

Cost of revenue

Operating expenses:

Research and development

Selling, general and administrative

Research and development

Selling, general and administrative

Goodwill impairment

1 unchanged sentence

Total operating expenses

Income from operations

Interest and other income, net

Income before income taxes

Income (loss) from operations

Interest and other income (expense), net

Income (loss) before income taxes

Provision for (benefit from) income taxes

Net income (loss)

Net income (loss) per share:

Weighted average common shares outstanding:

Net income (loss)

Foreign currency translation adjustment

Comprehensive income

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

Comprehensive income (loss)

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

Anika Therapeutics, Inc.

2 unchanged sentences

(in thousands)

Three Months Ended March 31, 2021

Six Months Ended June 30, 2021

Additional Paid

8 unchanged sentences

Balance, March 31, 2021

Three Months Ended March 31, 2020

Issuance of common stock for equity awards

Vesting of restricted stock units

Stock-based compensation expense

Retirement of common stock for minimum tax withholdings

Other comprehensive income

Balance, June 30, 2021

Six Months Ended June 30, 2020

Additional Paid

2 unchanged sentences

Balance, January 1, 2020

Issuance of common stock for equity awards

Vesting of restricted stock units

3 unchanged sentences

Repurchase of common stock

Other comprehensive income

Other comprehensive loss

Balance, March 31, 2020

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

Issuance of common stock for equity awards

Vesting of restricted stock units

Stock-based compensation expense

Retirement of common stock for minimum tax withholdings

Other comprehensive income

Balance, June 30, 2020

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

Anika Therapeutics, Inc.

2 unchanged sentences

(in thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities:

$ 2,838  

$ 5,793  

Net income (loss)

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

2 unchanged sentences

Goodwill impairment

18,144  

Change in fair value of contingent consideration

3 unchanged sentences

Deferred income taxes

( 1,162 )  

Recovery for doubtful accounts

( 21 )  

Provision (recovery) for doubtful accounts

Provision for inventory

2 unchanged sentences

Accounts receivable

( 2,478 )  

( 4,040 )  

Prepaid expenses, other current and long-term assets

1 unchanged sentence

Operating lease liabilities

( 385 )  

Accrued expenses, other current and long-term liabilities

( 1,254 )  

( 1,242 )  

Net cash (used in) provided by operating activities

( 2,431 )  

Net cash provided by operating activities

Cash flows from investing activities:

Acquisition of Parcus Medical and Arthrosurface, net of cash acquired

( 350 )  

Proceeds from maturities of investments

14,990  

Purchases of investments

Purchases of property and equipment

( 417 )  

Net cash provided by (used in) investing activities

Net cash used in investing activities

Cash flows from financing activities:

Cash paid for tax withheld on vested restricted stock awards

( 332 )  

Payments made on finance leases

( 119 )  

Net cash used in financing activities

( 451 )  

Exchange rate impact on cash

( 70 )  

Decrease in cash and cash equivalents

( 1,218 )  

Repayments of long term debt

Proceeds from long term debt

Cash paid for tax withheld on vested restricted stock awards

Proceeds from exercises of equity awards

Net cash provided by financing activities

Exchange rate impact on cash and cash equivalents

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

95,817  

157,463  

Cash and cash equivalents at end of period

$ 94,599  

$ 65,833  

Supplemental disclosure of cash flow information:

1 unchanged sentence

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

Right of use assets  

Consideration for acquisitions included in accounts payable and accrued expenses

$ 2,085  

Acquisition related contingent consideration

$ 69,076  

Non-cash Financing Activities:

Operating lease liabilities  

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

Operating lease liabilities

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

ANIKA THERAPEUTICS, INC.

7 unchanged sentences

(“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.

These acquisitions broadened the Company’s product portfolio, developed over its nearly 30 years of expertise in hyaluronic acid technology, into joint preservation and restoration, added high-growth revenue streams, increased its commercial capabilities, diversified its revenue base, and expanded its product pipeline and research and development expertise.

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.

6 unchanged sentences

Basis of Presentation

The accompanying unaudited consolidated financial statements and related notes have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and in accordance with accounting principles generally accepted in the United States (“US GAAP”).

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 (“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.

1 unchanged sentence

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.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted from this report pursuant to SEC rules and regulations relating to interim financial statements.

The December 31, 2020 balances reported herein are derived from the audited consolidated financial statements.

2 unchanged sentences

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 

The results of operations for the three - and six -month periods ended June 30, 2021 are not indicative of the results to be expected for the year ending December 

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.

The Company’s chief operating decision maker is its President and Chief Executive Officer as of June 30, 2021.

Based on the criteria established by Accounting Standards Codification (“ASC”) 280,  

1 unchanged sentence

Recent Accounting Adoptions

In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019 - 12, Income Taxes (Topic 740 ) –

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019 - 12, Income Taxes (Topic 740 ) –

Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.

The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

The amendments also improve consistent application of and simplify US GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

ASU 2019 - 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.

Business Combinations

4 unchanged sentences

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.

Under ASC 805, Business Combinations, the assets acquired and liabilities assumed in a business combination must be recorded at their fair value as of the acquisition date.

The Company’s consolidated financial statements include results of operations for Parcus Medical from the January 24, 2020 acquisition date.

Consideration Transferred

1 unchanged sentence

Cash consideration

$ 32,794  

Deferred consideration

Estimated fair value of contingent consideration

40,700  

Estimated total purchase consideration

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.

$ 75,136  

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 was determined based on a Monte Carlo simulation model in an option pricing framework at the acquisition date, whereby a range of possible scenarios were simulated.

There was deferred consideration related to certain purchase price holdbacks, which was resolved within one year of the acquisition date in accordance with the Parcus Merger Agreement and was recorded in accounts payable as of December 31, 2020.

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.

See Note 4, Fair Value Measurements , for additional discussion of contingent consideration as of June 30, 2021 and December 31, 2020.

Acquisition-related costs are not included as a component of consideration transferred but are expensed in the periods in which the costs are incurred.

10 unchanged sentences

Accounts receivable

10,968  

Prepaid expenses and other current assets

2 unchanged sentences

Intangible assets

44,000  

Accounts payable, accrued expenses and other current liabilities

2 unchanged sentences

Net assets acquired

55,508  

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.

3 unchanged sentences

Developed technology

$ 41,100  

Customer relationships

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.

7 unchanged sentences

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.

4 unchanged sentences

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. 

The Company’s consolidated financial statements include results of operations for Arthrosurface from the February 3, 2020 acquisition date. 

Consideration Transferred

1 unchanged sentence

Cash consideration

$ 61,909  

Estimated fair value of contingent consideration

28,376  

Estimated total purchase consideration

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.

$ 90,285  

Pursuant to the Arthrosurface Merger Agreement, the Company could be required to make future payments 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.

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.

In October 2020 and July 2021, based upon the achievement of two distinct regulatory milestones, the Company paid $ 5.0 million and $ 10.0 million, respectively.

The liability for contingent consideration is included in current and long-term liabilities on the consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved.

See Note 4, Fair Value Measurements , for additional discussion of contingent consideration as of March 31, 2021 and December 31, 2020.

See Note 4, Fair Value Measurements , for additional discussion of contingent consideration as of June 30, 2021 and December 31, 2020.

Acquisition-related costs are not included as a component of consideration transferred but are expensed in the periods in which the costs are incurred.

10 unchanged sentences

Cash and cash equivalents

$ 1,072  

Accounts receivable

15,652  

Prepaid expenses and other current assets

2 unchanged sentences

Intangible assets

48,900  

Accounts payable, accrued expenses and other liabilities

1 unchanged sentence

Net assets acquired

67,393  

22,892  

Estimated total purchase consideration

$ 90,285  

Intangible assets acquired consist of:

Developed technology

$ 37,000  

Customer relationships

Total acquired intangible assets

$ 48,900  

2 unchanged sentences

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.

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

2 unchanged sentences

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

2 unchanged sentences

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 unaudited pro forma information for the three - and six -month periods ended June 30, 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.

2 unchanged sentences

(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.

The effective tax rate of the combined company could be materially different from the effective rate presented in this unaudited pro forma combined financial information.

As a result of the transaction, the combined company may be subject to annual limitations on its ability to utilize pre-acquisition net operating loss carryforwards to offset future taxable income.

3 unchanged sentences

The following table presents unaudited supplemental pro forma information:

For the Three Months Ended March 31,

Six Months ended June 30,

Total revenue

$ 72,437  

$ 70,028  

Net income (loss)

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.

The Company held investments in U.S.

treasury bills of $ 2.5 million as available-for-sale securities at December 31, 2020.

Unrealized losses and the associated tax impact on the Company’s available-for-sale securities were insignificant at December 31, 2020.

There were no available-for-sale securities as of June 30, 2021.

The Company’s investments are all classified within Level 1 of the fair value hierarchy and are valued based on 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.

6 unchanged sentences

Unobservable Inputs

March 31, 2021

Amortized Cost

1 unchanged sentence

Money Market Funds

$ 67,038  

Other current and long-term liabilities:

Contingent Consideration - Short Term

$ 16,870  

Contingent Consideration - Long Term

Total other current and long-term liabilities

$ 16,940  

Active Markets

3 unchanged sentences

Unobservable Inputs

December 31, 2020

Amortized Cost

1 unchanged sentence

Money Market Funds

$ 74,522  

Treasury Bills

$ 2,501  

$ 2,524  

Other current and long-term liabilities:

Contingent Consideration - Short Term

$ 13,090  

Contingent Consideration - Long Term

22,320  

Total other current and long-term liabilities

There were no transfers between fair value levels during the three -month period ended March 31, 2021 or in 2020.

$ 35,410  

Contingent Consideration

1 unchanged sentence

Three Months Ended

March 31, 2021

June 30, 2021

Six Months Ended

June 30, 2021

Balance, beginning

$ 30,590  

$ 35,410  

Change in fair value

Balance, ending

$ 16,940  

Under the Parcus Medical Merger Agreement and Arthrosurface Merger Agreement, there are earn-out milestones totaling $ 100 million payable from 2020 to 2022.

Parcus Medical has net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface has both regulatory and net sales earn-out milestones in 2020 and 2021.

Parcus Medical has net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface has both regulatory and net sales earn-out milestones annually in 2020 and 2021.

Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model or a Monte Carlo simulation approach.

1 unchanged sentence

The discount rates used for the net sales milestones ranged from 2.2 % - 2.3 %, and for the regulatory earn-out milestones the discount rate was 2.7 %.

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.

The weighted average cost of capital for Arthrosurface and Parcus increased from 11.4 % as of December 31, 2020 to 11.8 % as of June 30, 2021.

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.

As of December 31, 2020, the probability of successful achievement of the regulatory earn-out milestones was determined to be in a range of 60 %- 75 %.

As of June 30, 2021, the probability of successful achievement of one of the regulatory earn-out milestones was determined to be 100 % as the Company achieved a regulatory milestone prior to June 30, 2021.

The probability of successful achievement of the remaining regulatory milestone was determined to be 0 % as of June 30, 2021.

The overall fair value of the contingent consideration decreased by $ 13.7 million and $ 18.5 million during the three - and six -month periods ended June 30, 2021, respectively, to $ 16.9 million, due primarily to the decrease in the likelihood that certain contingent milestones would be achieved and result in payment.

The fair value of remaining contingent consideration is assessed on a quarterly basis.

The fair value of 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.

In October 2020, the Company made a regulatory-based milestone payment of $ 5.0 million pursuant to the terms of the Arthrosurface Merger Agreement as a result of regulatory clearance for the WristMotion Total Arthroplasty System.

In June 2021, the Company received regulatory clearance for a reverse shoulder implant system, which triggered a $ 10.0 million regulatory milestone payment per the terms of the Arthrosurface Merger Agreement.

This amount is included as contingent consideration in current liabilities in the Company’s consolidated balance sheet as of June 30, 2021 and was paid in July 2021.

Inventories consist of the following:

Raw materials

$ 14,892  

$ 14,852  

Work-in-process

11,818  

12,811  

Finished goods

33,876  

33,347  

$ 60,586  

$ 61,010  

$ 42,857  

$ 46,209  

Other long-term assets

17,729  

14,801  

The Company recorded an inventory reserve of $2.5 million during the three -month period ended June 30, 2021, of which $ 0.4 million was associated with the acquisition related inventory step-up, as a result of the Company's product rationalization efforts.

Intangible Assets

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

Three Months Ended March 31, 2021

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

Six Months Ended June 30, 2021

Currency Translation

1 unchanged sentence

Developed technology

$ 89,580  

$ ( 1,506 )  

$ ( 14,975 )  

$ 73,099  

$ 75,899  

( 926 )  

Customer relationships

( 1,277 )  

Distributor relationships

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

( 415 )  

( 4,285 )  

( 180 )  

( 607 )  

( 1,481 )  

$ 112,736  

$ ( 3,027 )  

$ ( 22,625 )  

$ 87,084  

$ 91,157  

The aggregate amortization expense related to intangible assets was $ 2.0 million and $ 2.2 million for the three -month periods ended June 30, 2021 and 2020, respectively, and $ 3.9 million and $ 3.5 million for the six -month periods ended June 30, 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.

Changes in the carrying value of goodwill for the six months ended June 30, 2021 were as follows:

Six Months Ended

June 30, 2021

Balance, beginning January 1, 2021

$ 8,413  

Effect of foreign currency adjustments

Impairment loss

Balance, ending

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

Accrued expenses consist of the following:

Balance, ending June 30, 2021

$ 8,149  

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:

Compensation and related expenses

$ 7,754  

$ 7,345  

Professional fees

1 unchanged sentence

Clinical trial costs

Financing lease liability - current

$ 16,396  

$ 14,793  

Commitments and Contingencies

5 unchanged sentences

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 had no accrued warranties as of June 30, 2021 and 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,

Three Months Ended June 30,

Six Months Ended June 30,

Joint Pain Management

$ 24,321  

$ 22,247  

$ 43,637  

$ 47,730  

Joint Preservation and Restoration

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.

11,884  

24,103  

14,518  

$ 38,145  

$ 30,678  

$ 72,437  

$ 66,075  

Revenue from the Company’s sole significant customer, DePuy Synthes Mitek Sports Medicine (“Mitek”), part of the Johnson & Johnson Medical Companies, as a percentage of the Company’s total revenue was 46 % and 54 % for the three months ended June 30, 2021 and 2020, respectively, and 44 % and 54 % for the six months ended June 30, 2021 and 2020, respectively

We receive payments from 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.

Up-front payments are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements.

Amounts are recorded as accounts receivable when our right to consideration is unconditional.

Deferred revenue was $ 0.9 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,

Deferred revenue was $ 0.9 million and $ 0.2 million as of June 30, 2021 and December 31, 2020, respectively.

Total revenue by geographic location was as follows:

Three Months Ended June 30,

Percentage of

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United States

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

Risk free interest rate

Expected volatility

Expected life (years)

Expected dividend yield

$ 30,069  

$ 25,133  

$ 38,145  

$ 30,678  

Six Months Ended June 30,

Percentage of

Geographic Location:

United States

$ 55,074  

$ 51,438  

10,570  

$ 72,437  

$ 66,075  

Stock-Based Compensation

On June 16, 2021, the Company’s stockholders approved an amendment to the 2017 Plan.

The amendment increased the number of shares of common stock reserved under the 2017 Plan by 1.1 million shares from 3.5 million shares to 4.6 million shares.

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

Three Months Ended June 30,

Six Months Ended June 30,

Cost of revenue

Research and development

Selling, general and administrative

Research and development

Selling, general and administrative

Total stock-based compensation expense

$ 2,797  

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

Stock options

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.

$ 2,240  

$ 5,056  

$ 2,033  

The Company recorded an income tax provision of $ 2.6 million and $ 1.0 million for the three - and six -month periods ended June 30, 2021, resulting in effective tax rates of 28.5 % and 9.4 %, respectively.

The benefit from income taxes was $ 2.0 million and $ 0.4 million for the three - and six -month periods ended June 30, 2020, based on effective tax rates of 20.6 % and 17.9 %, respectively.

The net increase in the effective tax rate for the three -month period ended June 30, 2021, as compared to the same period in 2020, was primarily due to $ 0.7 million recorded as tax expense for the change in the fair value of the contingent consideration, recognized as a discrete charge in the second quarter of 2021.

The year to date net tax benefit on the change in the fair value of the contingent consideration, in the amount of $ 1.1 million, resulted in a net decrease in the effective tax rate for the six -month period ended June 30, 2021, as compared to the same period in 2020.

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.

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.

Earnings Per Share ( “

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,

Shares used in the calculation of basic earnings per share

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 EPS (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Shares used in the calculation of basic EPS

14,393  

14,199  

14,368  

14,201  

Effect of dilutive securities:

Stock options, RSAs, PSUs and RSUs

Diluted shares used in the calculation of earnings per share

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’

Share based awards

Diluted shares used in the calculation of EPS

14,627  

14,199  

14,583  

14,201  

Stock options of 1.0 million shares were outstanding for each of the three -month periods ended June 30, 2021 and 2020 and were not included in the computation of diluted EPS because the awards’

impact on EPS would have been anti-dilutive. Stock options of 1.1 million and 0.9 million shares were outstanding for the six -month periods ended June 30, 2021 and 2020 and were not included in the computation of diluted EPS because the awards’

impact on EPS would have been anti-dilutive. 

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Risk Factors”

of our 2020 Form 10-K for the year ended December 31, 2020 and in Part II, Item 1A “Risk Factors”

of our 2020 Form 10-K and in Part II, Item 1A “Risk Factors”

of this report for important factors that we believe could cause actual results to differ materially from those in our forward-looking statements.

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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 the platform for our regenerative solutions portfolio.

In early 2020, we expanded our overall technology platform and significantly enhanced our commercial infrastructure, especially in the United States, through our strategic acquisitions of Parcus Medical, LLC, or Parcus Medical, a sports medicine implant and instrumentation solutions provider focused on sports medicine and soft tissue repair, and Arthrosurface, Inc., or Arthrosurface, a company specializing in less invasive, bone preserving partial and total joint replacement solutions.

In early 2020, we expanded our overall technology platform and significantly enhanced our commercial infrastructure, especially in the United States, through our strategic acquisitions of Parcus Medical, LLC, or Parcus Medical, a sports medicine implant and instrumentation solutions provider focused on sports medicine and soft tissue repair, and Arthrosurface, Inc., or Arthrosurface, a company specializing in bone preserving partial and total joint replacement solutions.

Through these acquisitions, we have transformed our company.

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We believe our success will be driven by our:

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

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;

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

Prioritized investment in differentiated research and development programs;

Expansion of our commercial capabilities globally within joint preservation;

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

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

Leveraging global commercial expertise to drive growth across the portfolio;

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

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

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There has been significant volatility in our results on a quarterly basis due to the worldwide cancellation or delay of elective procedures, as well as the impact on timelines associated with certain clinical studies.

While elective procedure volume had a limited recovery after the initial pandemic impacts seen in the first and early parts of second quarter of 2020 due to the easing of COVID-19 related restrictions in certain jurisdictions, areas of the United States and other countries have recently seen, and continue to see, fluctuating infection rates, which makes future results difficult to predict despite recent advances in vaccinations for certain parts of the population.

While elective procedure volume had a limited recovery after the initial pandemic impacts seen in the early parts of second quarter of 2020 due to the easing of COVID-19 related restrictions in certain jurisdictions, areas of the United States and other countries have recently seen, and continue to see, fluctuating infection rates increasing as the result of emerging variants of COVID-19.

These fluctuations make future results difficult to predict despite recent advances in the vaccination rates of certain parts of the population.

In this time of uncertainty as a result of the COVID-19 pandemic, we have taken many precautions to provide a safe work environment for our employees and customers, including the establishment and implementation of a work from home policy, where possible.

We may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.

While increasing vaccination rates and the loosening of restrictions, especially in the United States, have resulted in a return to a more normalized business environment, the pandemic continues to have an impact on our business in certain jurisdictions and a resurgence of COVID-19 as a result of emerging variants or other factors, as is currently occurring in certain jurisdictions, could result in additional government lockdowns, quarantine requirements, or other restrictions that could impact our business and operations.

We may also have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.

To date, we do not anticipate disruption to our ability to supply products to our customers.

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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 in certain jurisdictions.

The impact of these restrictions on our operations, if implemented, is currently unknown, but could be significant.

Joint Pain Management

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In the United States, Monovisc and Orthovisc are marketed exclusively by DePuy Synthes Mitek Sports Medicine, part of the Johnson & Johnson Medical Companies, or Mitek, and have been the market leaders, based on combined overall revenue in the viscosupplement market, since 2018.

Internationally, we market our Joint Pain Management products through a robust and growing worldwide network of commercial distributors.

Internationally, we market our Joint Pain Management products through a worldwide network of commercial distributors.

Cingal, our novel, third-generation, single-injection OA product consisting of our proprietary cross-linked HA material combined with a steroid, is designed to provide both short- and long-term pain relief.

Cingal is CE Mark approved and has been sold outside the United States in over 35 countries through our network of distributors for several years.

In the United States, Cingal is a pipeline product under clinical development.

In the United States, Cingal is a pipeline product under clinical development and is not available for commercial sale.

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

Hyvisc is distributed by Boehringer Ingelheim Vetmedica, Inc., or Boehringer, in the United States.

Hyvisc is distributed by Boehringer Ingelheim Vetmedica, Inc., in the United States.

Joint Preservation and Restoration

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These products span multiple joints including the shoulder, foot/ankle, wrist, knee and hip and are generally intended to mimic a patient’s natural anatomy to the extent feasible.

These products are often used to treat patients with OA progression beyond where our Joint Pain Management products can allow them to retain an active lifestyle and early surgical intervention becomes preferable.

We commercialize these products in the United States and utilize our distributor network for sales in certain international markets.

These products are often used to treat patients with OA progression beyond where our Joint Pain Management products can allow the patients to retain an active lifestyle, when early surgical intervention becomes preferable.

We commercialize these products in the United States by directly selling to hospitals and surgery centers and utilize our distributor network for sales in certain international markets.

Soft Tissue Repair.

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Regenerative Solutions.

Our portfolio of orthopedic regenerative solutions based on our proprietary HA and Hyaff technologies, which is a solid form of HA.

Our portfolio of orthopedic regenerative solutions based on our proprietary technologies based on HA and Hyaff, which is a solid form of HA.

These products include Tactoset, an HA-enhanced injectable bone repair therapy designed to treat insufficiency fractures that we commercialize only in the United States, and Hyalofast, a biodegradable support for human bone marrow mesenchymal stem cells used for cartilage regeneration and as an adjunct for microfracture surgery.

Hyalofast is CE Mark approved and currently available in Europe, South America, Asia, and certain other international markets.

In the United States, Hyalofast is a pipeline product under clinical development.

In the United States, Hyalofast is a pipeline product under clinical development and is not available for commercial sale.

Our Other product family consists of legacy HA-based products that do not fit into one of our other primary product categories.

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Results of Operations

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Three Months Ended March 31,

Three and Six Months Ended June 30, 2021 Compared to Three and Six Months Ended June 30, 2020

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands, except percentages)

Cost of revenue

Operating expenses:

Research and development

Selling, general and administrative

Research and development

Selling, general and administrative

Goodwill impairment

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Total operating expenses

Income from operations

Interest and other (expense) / income, net

Income (before income taxes

(Benefit from) provision for income taxes

Revenue for the three-month period ended March 31, 2021 was $34.3 million, a decrease of $1.1 million as compared to $35.4 million for the three-month period ended March 31, 2020, primarily as a result of the impact of COVID-19 on procedure volumes and Mitek’s related ordering patterns, offset by the inclusion of full quarter results of Parcus Medical and Arthrosurface, which we acquired on January 24, 2020 and February 3, 2020, respectively.

Our consolidated financial statements include the results of operations for these acquired businesses from their respective acquisition dates.

Three Months Ended March 31,

Income (loss) from operations

Interest and other income (expense), net

Income (loss) before income taxes

Provision for (benefit from) income taxes

Net income (loss)

Revenue for the three-month period ended June 30, 2021 was $38.2 million, an increase of $7.5 million as compared to $30.7 million for the three-month period ended June 30, 2020.

Revenue for the six-month period ended June 30, 2021 was $72.4 million, an increase of $6.4 million as compared to $66.1 million for the six-month period ended June 30, 2020.

For the three- and six-month periods ended June 30, 2021, the increases in revenue were primarily driven by recovery from the initial impact of COVID on prior year sales volumes.

The increase for the six-month period ended June 30, 2021, was also in part due to inclusion of full first quarter results of Parcus Medical and Arthrosurface, which we acquired on January 24, 2020 and February 3, 2020, respectively. 

The following tables present product revenue by product family:

Three Months Ended June 30,

(in thousands, except percentages)

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Joint Preservation and Restoration

Revenue from our Joint Pain Management product family decreased, primarily due to the worldwide impact of the COVID-19 pandemic on elective procedure volumes and associated ordering patterns from Mitek.

Revenue from our Joint Preservation and Restoration product family increased primarily due to the inclusion of full quarter results from Parcus Medical and Arthrosurface, as well as organic growth.

Revenue from our Other product family increased due to the sell through of legacy wound care products.

Six Months Ended June 30,

(in thousands, except percentages)

Joint Pain Management

Joint Preservation and Restoration

Revenue from our Joint Pain Management product family increased 9% for the three-month period ended June 30, 2021 as compared to the same period in 2020 due primarily to recovery from the initial impact of the COVID-19 pandemic on sales volumes.

For the six-month period ended June 30, 2021, revenue decreased 9% as compared to the same period in 2020 primarily due to the overall unfavorable impact of the COVID-19 pandemic in the same period of 2020. 

Revenue from our Joint Preservation and Restoration product family increased 79% and 66% for the three- and six-month periods ended June 30, 2021, respectively, as compared to the same periods in 2020 primarily due to organic growth as the impact of the COVID-19 pandemic on elective procedures begins to lift in various worldwide jurisdictions, especially in the United States, and for the six-month period, due also to the inclusion of full quarter results from Parcus Medical and Arthrosurface in the first quarter.

Revenue from our Other product family increased 7% for the three-month period ended June 30, 2021, as compared to the same period in 2020 primarily due to timing of distributor sales.

For the six-month period ended June 30, 2021 revenue increased 23% as compared to the same period in 2020 primarily due to the sell through of legacy wound care products.

Gross Profit and Margin

Gross profit for the three-month period ended March 31, 2021 decreased $0.2 million to $21.0 million, representing a 61% gross margin, for the period.

The decrease in gross profit for the three-month period ended March 31, 2021, as compared to the same period in 2020, was primarily a result of the impact of COVID-19 on volumes offset by full quarter results of acquired businesses. The gross margin included the impact of inventory step-up associated with the Arthrosurface and Parcus Medical acquisitions, as well as acquisition-related amortization expenses, which together increased cost of revenue by $4.1 million, or 12 points of gross margin, for the three-month period ended March 31, 2021, as compared to increased cost of revenue of $3.0 million, or 9 points of gross margin, for the same period in 2020.

Gross profit for the three- and six-month periods ended June 30, 2021 increased $7.1 million and $6.9 million to $20.8 million and $41.8 million, respectively, representing 55% and 58% of revenue.

Gross profit for the three- and six-month periods ended June 30, 2020 was $13.7 million and $34.9 million, respectively, or 45% and 53% of revenue for the periods, respectively.

These increases in gross profit for the three- and six-month periods ended June 30, 2021, primarily resulted from increased revenue, partially offset by product rationalization charges in the second quarter of 2021.

We recorded an inventory reserve of $2.5 million during the three-month period ended June 30, 2021, of which $0.4 million was associated with the acquisition related inventory step-up, as a result of our product rationalization efforts.

Gross margins include the impact of inventory step-up associated with the Arthrosurface and Parcus Medical acquisitions, as well as acquisition-related amortization expenses.

These expenses together increased cost of revenue by $3.8 million, or 10 points of gross margin and $8.0 million, or 11 points of gross margin, for the three- and six-month periods ended June 30, 2021, respectively, as compared to increased cost of revenue of $3.8 million, or 13 points of gross margin, and $6.8 million, or 10 points of gross margin, respectively, for the same periods in 2020.

Research and Development

Research and development expenses for the three-month period ended March 31, 2021 were $6.4 million, an increase of $0.3 million as compared to the same period in 2020.

This increase was primarily due to full quarter results from Parcus Medical and Arthrosurface.

Research and development expenses for the three- and six-month periods ended June 30, 2021 were $7.3 million and $13.7 million, representing an increase of $2.8 million and $3.1 million, respectively, as compared to the same periods in 2020.

The increase in research and development expense for the three- and six-month periods ended June 30, 2021 was primarily due to product development activities associated with the development of new product candidates in our research and development pipeline, preparation activities for the CINGAL Pilot study and certain European post-market clinical studies.

Research and development activities were curtailed in the three- and six-months ended June 30, 2020 due to cost optimization in the light of the early stages of the COVID-19 pandemic.

Selling, General and Administrative

Selling, general and administrative expenses for the three-month period ended March 31, 2021 were $18.2 million, an increase of $3.7 million, as compared to the same period in 2020.

This increase for the three-month period ended March 31, 2021 was due to full quarter results from Parcus Medical and Arthrosurface, increased spending to support our commercial capability in the United States, an increase in incentive-based compensation, an increase in share based compensation expense due to the forfeiture of unvested shares during the comparable period, and a non-cash impairment charge related to fixed assets, partially offset by the absence of transaction costs related to acquisition of Parcus and Arthrosurface.

Selling, general and administrative, or SG&A expenses for the three- and six-month periods ended June 30, 2021 were $18.0 and $36.2 million, an increase of $3.4 million and $7.2 million, respectively, as compared to the same periods in 2020.

The increase in SG&A expenses for the three-month period ended June 30, 2021 was primarily related to increased spending to support our commercial capability through the expansion of our commercial team in the United States, partially offset by the absence of transaction costs incurred in 2020 related to the acquisitions of Parcus Medical and Arthrosurface. 

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

Goodwill Impairment Charge

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

government policy responses to the COVID-19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of domestic elective surgical procedures.

We assess goodwill for impairment annually, as of end of November, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment.

and other country government policy responses to the COVID-19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of domestic elective surgical procedures.

As a result of these events, during the three-month period ended March 31, 2020, we performed a quantitative assessment of goodwill impairment related to the Parcus and Arthrosurface reporting unit as of March 31, 2020.

The results of these interim impairment tests indicated that the estimated fair value of this reporting unit was less than its carrying value.

Consequently, a non-cash goodwill impairment charge of $18.1 million was recorded in the three-month period ended March 31, 2020.

The decline in fair value was primarily due to decreases in immediate term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures which directly impact the Parcus and Arthrosurface reporting unit.

There were no indicators of goodwill impairment and therefore no goodwill impairment charges were recorded during the three-month period ended March 31, 2021.

Consequently, a non-cash goodwill impairment charge of $18.1 million was recorded in the three-month period ended June 30, 2020.

The decline in fair value was primarily due to a decrease in immediate term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures, which directly impacted the Parcus and Arthrosurface reporting units.

There were no goodwill impairment charges during the three- and six-month period ended June 30, 2021. 

Contingent Consideration Fair Value Change

In the quarter ended March 31, 2021, we recorded a net benefit of $4.8 million related to the change in fair value of our contingent consideration liabilities incurred as a result of the acquisition of Parcus Medical and Arthrosurface in January and February of 2020, respectively.

The liability for contingent consideration is remeasured at each reporting period until the contingency is resolved.

The net decrease in fair value of the contingent consideration as of March 31, 2021 is due primarily to the decrease in the likelihood that certain contingent milestones would be achieved and result in payment.

The benefit from income taxes was $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 effective tax rates 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.

We recorded a $13.7 million and $18.5 million net benefit related to changes in the fair value of contingent consideration for the three- and six-month periods ended June 30, 2021, respectively.

We recorded a $4.2 million net expense and $20.3 million net benefit related to changes in the fair value of contingent consideration for the three- and six-month periods ended June 30, 2020, respectively.

The increase in net benefit in the three-month period ended June 30, 2021 compared to the same period in 2020 is due primarily to the decrease in the likelihood that certain contingent milestones would be achieved and result in payment.

The decrease in net benefit in the six-month period ended June 30, 2021 compared to the same period in 2020, is due primarily to the achievement of a regulatory milestone in June 2021, which partially offset the decrease in the likelihood that certain other contingent milestones would be achieved and result in payment.

The provision for income taxes was $2.6 million and $1.0 million for the three- and six-month periods ended June 30, 2021, based on effective tax rates of 28.5% and 9.4%, respectively. The benefit from income taxes was $2.0 million and $0.4 million for the three- and six-month periods ended June 30, 2020, based on effective tax rates of 20.6% and 17.9%, respectively.

The net increase in the effective tax rate for the three-month period ended June 30, 2021, as compared to the same period in 2020, was primarily due to the $0.7 million tax expense on the change in the fair value of the contingent consideration, recognized as a discrete charge in the second quarter of 2021.

The net tax benefit for the six-month period ended June 30, 2021 on the decrease in the fair value of the contingent consideration, in the amount of $1.1 million, resulted in a net decrease in the effective tax rate for the six-month period ended June 30, 2021, as compared to the same period in 2020.

Non-GAAP Financial Measures

We present certain information with respect to adjusted EBITDA, adjusted net income, and adjusted earnings per share, which are financial measures not based on any standardized methodology prescribed by accounting principles generally accepted in the United States, or GAAP, and is not necessarily comparable to similarly titled measures presented by other companies.

We have presented adjusted EBITDA, adjusted net income (loss), and adjusted earnings per share because they are key measures used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business.

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

We have presented adjusted gross profit and adjusted gross margin, adjusted EBITDA, adjusted net income, adjusted EPS, because they are key measures used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business.

We believe these financial measures help identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude.

In particular, we believe that the exclusion of the expenses eliminated in calculating these measures can provide a useful tool for period-to-period comparisons of our core operating performance.

In particular, we believe that the exclusion of these items in calculating these measures can provide a useful tool for period-to-period comparisons of our core operating performance.

Accordingly, we believe that these measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making.

Adjusted Gross Profit and Adjusted Gross Margin

We define adjusted gross profit as our gross profit excluding amortization of certain acquired assets, the impact of inventory fair-value step up associated with our recent acquisitions and product rationalization charges.

The amortized assets contribute to revenue generation, and the amortization of such assets will recur in future periods until such assets are fully amortized.

These assets include fair value of certain identified assets acquired in acquisitions, including developed technology and acquired tradenames.

We define adjusted gross margin as adjusted gross profit divided by total revenue.

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

Three Months Ended June 30,

Six Months Ended June 30,

Product rationalization charges

Acquisition related intangible asset amortization

Acquisition related inventory step up

Adjusted gross profit

Adjusted gross margin

Adjusted gross profit for the three- and six-month periods ended June 30, 2021 increased $7.2 million and $8.1 million to $26.7 million and $51.8 million, respectively, representing 70% and 71% of revenue.

Adjusted gross profit for the three- and six-month periods ended June 30, 2020 was $19.5 million and $43.7 million, respectively, or 64% and 66% of revenue for the periods, respectively.

This increase in gross profit for the three- and six-month periods ended June 30, 2021, primarily resulted from higher revenue due to the inclusion of full period results from Parcus Medical and Arthrosurface in 2021 as we acquired these businesses in early 2020 and organic growth in existing legacy business as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially in the United States.

Adjusted EBITDA

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In light of the COVID-19 pandemic, we have also excluded the impacts of goodwill impairment charges and changes in the fair value of contingent consideration associated with our acquisition transactions in early 2020.

Adjusted EBITDA is not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP.

There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest GAAP equivalent.

Adjusted EBITDA is not prepared in accordance with US GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with US GAAP.

There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest US GAAP equivalent.

Some of these limitations are:

adjusted EBITDA excludes depreciation and amortization, and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future, the cash requirements for which are not reflected in adjusted EBITDA;

we exclude stock-based compensation expense from adjusted EBITDA although (a) it has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses would be higher, which would affect our cash position;

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

we exclude certain impairment charges, including certain product rationalization charges related to non-core legacy assets as a result of managing our financial position in light of our recent acquisitions, the impact of COVID-19 and changing regulatory requirements;

we exclude stock-based compensation expense from adjusted EBITDA although (a) it has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our employee compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses likely would be higher, which would affect our cash position;

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

we exclude certain impairment charges, including certain product rationalization charges as a result of managing our financial position in light of our recent acquisitions, the impact of COVID-19 and changing regulatory requirements;

we exclude goodwill impairment charges and changes in the fair value of contingent consideration;

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adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments.

The following is a reconciliation of net income (loss) to adjusted EBITDA for the three-month periods ended March 31, 2021 and 2020, respectively:

Three Months Ended March 31,

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

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Interest and other income, net

(Benefit from) provision for income taxes

Net income (loss)

Interest and other (income) expense, net

Provision for (benefit) from income taxes

Depreciation and amortization

Share-based compensation

Stock-based compensation

Product rationalization charges

Acquisition related expenses

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Adjusted EBITDA

Adjusted EBITDA in the three-month period ended March 31, 2021 decreased $4.7 million as compared with the same period in 2020.

The decrease in adjusted EBITDA for the period was primarily due to lower revenues as a result of the impact of the COVID-19 pandemic, an increase in selling and marketing expenses primarily attributable to increased cost to support our direct sales force for the Joint Preservation and Restoration product family, as well as a non-cash impairment charge related to fixed assets.

Adjusted EBITDA for the three-month period ended June 30, 2021, increased $0.5 million as compared with the same periods in 2020.

The increase in adjusted EBITDA for the period was primarily due to higher revenues as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially in the United States, partially offset by an increase in operating expenses primarily attributable to the expansion of our commercial capability in the United States and increase in clinical trial activity.

Adjusted EBITDA for the six-month period ended June 30, 2021, decreased $4.2 million as compared with the same period in 2020.

The decrease in adjusted EBITDA for the period was primarily due to an increase in operating expenses primarily attributable to expansion of our commercial capability in the United States, increase in clinical trial activity, as well as a non-cash impairment charge related to fixed assets, partially offset by increase in revenue.

Adjusted Net Income and Adjusted EPS

We present information below with respect to adjusted net income and adjusted diluted earnings per share, which we refer to as adjusted EPS.

We define adjusted net income as our net income excluding acquisition-related expenses, amortization and depreciation of acquired assets, the impact of inventory fair-value step up on cost of revenue and the impacts of goodwill impairment charges and changes in the fair value of contingent consideration, as well as certain impairment charges, including non-cash product rationalization charges associated with certain non-core legacy products, on a tax effected basis.

Acquisition related expenses are those that the we would not have incurred except as a direct result of acquisition transactions.

We present information below with respect to adjusted net income and adjusted EPS.

We define adjusted net income as our net income excluding acquisition-related expenses, amortization and depreciation of acquired assets, the impact of inventory fair-value step up on cost of revenue and the impacts of goodwill impairment charges and changes in the fair value of contingent consideration, as well as certain impairment charges, including product rationalization charges, on a tax effected basis.

Acquisition related expenses are those that we would not have incurred except as a direct result of acquisition transactions.

Acquisition related expenses consist of investment banking, legal, accounting, and other professional and related expenses.

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These assets include the estimated fair value of certain identified assets acquired in acquisitions, including in-process research and development, developed technology, customer relationships and acquired tradenames.

We define adjusted EPS as GAAP diluted earnings per share excluding the above adjustments to net income used in calculating adjusted net income, each on a per share and tax effected basis.

The following is a reconciliation of adjusted net income to net income for the three-month periods ended March 31, 2021 and 2020, respectively:

Three Months Ended March 31,

We define adjusted EPS as US GAAP diluted earnings (loss) per share excluding the above adjustments to net income used in calculating adjusted net income, each on a per share and tax effected basis.

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

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Net income (loss)

Product rationalization charges, tax effected

Acquisition related expenses, tax effected

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Goodwill impairment, tax effected

Change in fair value contingent consideration, tax effected

Change in fair value of contingent consideration, tax effected

Adjusted net income

The following is a reconciliation of adjusted diluted EPS to diluted EPS for the three-month periods ended March 31, 2021 and 2020, respectively:

Three Months Ended March 31,

Diluted earnings per share (EPS)

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

Three Months Ended June 30,

Six Months Ended June 30,

Diluted earnings (loss) per share

Product rationalization charges, tax effected

Acquisition related expenses per share, tax effected

Acquisition related intangible asset amortization, tax effected

Acquisition related inventory step up

Goodwill impairment per share, tax effected

Change in fair value contingent consideration per share, tax effected

Adjusted diluted EPS

Adjusted net income and adjusted diluted EPS in the three-month period ended March 31, 2021 decreased $5.7 million and $0.39, respectively, as compared with the same period in 2020.

The decrease for the period was primarily due to lower revenues as a result of the impact of the COVID-19 pandemic, an increase in selling and marketing expenses primarily attributable to increased costs to support our direct sales force for the Joint Preservation and Restoration product family, increase in share based compensation expense due to the forfeiture of unvested shares during the comparable period and a non-cash impairment charge related to fixed assets.

Acquisition related inventory step up, tax effected

Goodwill impairment, tax effected

Change in fair of value contingent consideration, tax effected

Adjusted net income in the three- month period ended June 30, 2021, increased $0.1 million as compared with the same period in 2020.

The increase in adjusted net income for the period was primarily due to higher revenues as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially in the United States partially offset by an increase in selling and marketing expenses primarily attributable to increased cost to support our commercial capability in the United States, an increase in research and development expenses and an increase in tax expenses.

Adjusted net income in the six-month period ended June 30, 2021, decreased $5.6 million as compared with the same period in 2020.

The decrease in adjusted net income for the period was primarily due to an increase in selling and marketing expenses primarily attributable to increased cost to support our commercial capability in the United States, an increase in research and development expenses, an increase in share-based compensation expense due to the forfeiture of unvested shares during the comparable period, a non-cash impairment charge related to fixed assets and an increase in tax expenses.

Liquidity and Capital Resources

We require cash to fund our operating expenses and to make capital expenditures.

We require cash to fund our operating expenses and to make capital expenditures and other investments in the business.

We expect that our requirements for cash to fund these uses will increase as our operations expand.

Historically we have generated positive cash flow from operations, which, together with our available cash, investments, and debt, have met our cash requirements.

Cash, cash equivalents, and investments aggregated $94.6 million and $98.3 million, and working capital totaled $126.5 million and $140.5 million as of March 31, 2021 and December 31, 2020, respectively. We are closely monitoring our liquidity and capital resources for any potential impact that the COVID-19 pandemic may have on our operations.

Cash used in operating activities was $2.4 million for the three-month period ended March 31, 2021, as compared to cash provided by operating activities of $1.0 million for the same period in 2020. The change was primarily attributable to lower sales due to the COVID-19 pandemic, an increase in accounts receivable due to timing of collections, increase in inventories and timing of certain state tax payments, partially off-set by a decrease in cash outflows related to acquisition related expenses for the three-month period ended March 31, 2021.

Cash provided by investing activities was $1.7 million for the three-month period ended March 31, 2021, as compared to cash used in investing activities of $92.5 million for the same period in 2020.

The change was primarily due to the consideration paid for the acquisitions of Parcus Medical and Arthrosurface in the three-month period ended March 31, 2020.

Cash used in financing activities was $0.5 million for the three-month period ended March 31, 2021, as compared to cash used in financing activities of $0.1 million for the same period in 2020.

In both periods, the cash used in financing activities was primarily attributable to utilization of cash for employee tax withholding in exchange for shares surrendered by equity award holders.

Historically we have generated positive cash flow from operations, which, together with our available cash, cash equivalents, investments, and debt, have met our cash requirements.

Cash, cash equivalents, and investments aggregated $97.2 million and $98.3 million, and working capital totaled $136.4 million and $140.5 million as of June 30, 2021 and December 31, 2020, respectively. We are closely monitoring our liquidity and capital resources for any potential impact that the COVID-19 pandemic may have on our operations.

Cash provided by operating activities was $1.9 million for the six-month period ended June 30, 2021, as compared to cash provided by operating activities of $4.6 million for the same period in 2020. The change was primarily attributable to timing of collections, increase in inventories and timing of certain state tax payments, partially off-set by a decrease in cash outflows related to acquisition related expenses for the six-month period ended June 30, 2021.

Cash used in investing activities was $0.6 million for the six-month period ended June 30, 2021, as compared to cash used in investing activities of $94.8 million for the same period in 2020.

The change was primarily due to the consideration paid for the acquisitions of Parcus Medical and Arthrosurface in the six-month period ended June 30, 2020.

Cash provided by financing activities was $0.1 million for the six-month period ended June 30, 2021, as compared to cash provided by financing activities of $49.5 million for the same period in 2020.

The change was primarily due to a drawdown of $50.0 million from our existing credit facility in the six-month period ended June 30, 2020.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.

The preparation of our consolidated financial statements in conformity with US GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.

We believe that our accounting policies for revenue recognition, accounts receivable and allowance for credit losses, goodwill, acquired in-process research and development, inventory and contingencies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties.

There have been no significant changes to the above critical accounting policies or in the underlying accounting assumptions and estimates used in such policies from those disclosed in our annual consolidated financial statements and accompanying notes included in our 2020 Form 10-K for the year ended December 31, 2020, except for adoption of Accounting Standards Update, or ASU, 2019-12, Income Taxes (Topic 740) –

Simplifying the Accounting for Income Taxes, as described in Note 2 to the consolidated financial statements in this report.

We monitor our estimates on an ongoing basis for changes in facts and circumstances, and material changes in these estimates could occur in the future.

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We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances.

Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.

Actual results may differ from our estimates, if past experience or other assumptions do not turn out to be substantially accurate.  

Recent Accounting Pronouncements

A discussion of Recent Accounting Pronouncements is included in our 2020 Form 10-K for the fiscal year ended December 31, 2020 and is updated in the Notes to the consolidated financial statements included in this report.

A discussion of Recent Accounting Pronouncements is included in our 2020 Form 10-K and is updated in the Notes to the consolidated financial statements included in this report.

Contractual Obligations and Other Commercial Commitments

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Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations and Other Commercial Commitments”

in our 2020 Form 10-K for the year ended December 31, 2020.

There were no material changes to our contractual obligations reported in our 2020 Form 10-K during the three months ended March 31, 2021.

in our 2020 Form 10-K.

There were no material changes to our contractual obligations reported in our 2020 Form 10-K during the six months ended June 30, 2021.

For additional discussion, see Note 9 to the consolidated financial statements included in this report.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements