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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

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

 

For the quarterly period ended June 30, 2020

 

 

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

 

For the transition period from                  to                  

 

Commission File Number 000-21326

 

Anika Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

04-3145961

(State or Other Jurisdiction of

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

Incorporation or Organization)

 

 

 

32 Wiggins Avenue, Bedford, Massachusetts

01730

(Address of Principal Executive Offices)

(Zip Code)

 

(781457-9000

(Registrant’s Telephone Number, Including Area Code)

 

N/A

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

 

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

 

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

 

 

 

Common Stock, par value $0.01 per share

ANIK

NASDAQ Global Select Market

 

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

 

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

 

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

 

Large accelerated filer  ☐

 

Accelerated filer ☒

 

Non-accelerated filer ☐

 

Smaller reporting

company 

Emerging growth

company 

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

As of July 27, 2020, there were 14,207,419 outstanding shares of Common Stock, par value $0.01 per share.

 

 

 

 

 

 

ANIKA THERAPEUTICS, INC.

TABLE OF CONTENTS

 

 

 

Page

Part I

Financial Information

 

Item 1.

Financial Statements (unaudited):

3

 

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

3

 

Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2020 and 2019

4

 

Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2020 and 2019

5

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4.

Controls and Procedures

36

Part II

Other Information

 

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 6.

Exhibits

40

Signatures

41

 

 

 

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

 

ANIKA, ARTHROSURFACE, ANIKA THERAPEUTICS, CINGAL, HYAFF, MONOVISC, ORTHOVISC, PARCUS MEDICAL, and TACTOSET are our registered trademarks. This Quarterly Report on Form 10-Q also contains additional registered marks, trademarks, and trade names, including ones that are the property of other companies and licensed to us.

 

 

 

 

 

PART I:

FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

 

Anika Therapeutics, Inc. and Subsidiaries

 

Consolidated Balance Sheets

 

(in thousands, except per share data)

 

(unaudited)

 
         
  

June 30,

  

December 31,

 

ASSETS

 

2020

  

2019

 

Current assets:

        

Cash and cash equivalents

 $116,746  $157,463 

Investments

  27,624   27,480 

Accounts receivable, net of reserves of $981 and $962 at June 30, 2020 and December 31, 2019, respectively

  24,094   23,079 

Inventories, net

  46,479   21,995 

Prepaid expenses and other current assets

  6,340   4,289 

Total current assets

  221,283   234,306 

Property and equipment, net

  52,659   50,783 

Right-of-use assets

  23,196   22,864 

Other long-term assets

  13,451   7,478 

Intangible assets, net

  95,978   7,585 

Goodwill

  33,958   7,694 

Total assets

 $440,525  $330,710 
         

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable

 $6,162  $3,832 

Accrued expenses and other current liabilities

  21,745   12,445 

Total current liabilities

  27,907   16,277 

Other long-term liabilities

  843   357 

Contingent consideration

  37,062   - 

Long-term debt

  50,000   - 

Deferred tax liability

  14,855   4,331 

Lease liabilities

  21,414   21,367 

Commitments and contingencies (Note 10)

        

Stockholders’ equity:

        

Preferred stock, $0.01 par value; 1,250 shares authorized, no shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

  -   - 

Common stock, $0.01 par value; 90,000 shares authorized, 14,204 and 14,308 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

  142   143 

Additional paid-in-capital

  50,609   48,707 

Accumulated other comprehensive loss

  (5,818)  (5,898)

Retained earnings

  243,511   245,426 

Total stockholders’ equity

  288,444   288,378 

Total liabilities and stockholders’ equity

 $440,525  $330,710 

 

 

 

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

 

3

 

 

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share data)

(unaudited) 

 

   

For the Three Months Ended June 30,

   

For the Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Product revenue

  $ 30,678     $ 30,413     $ 66,075     $ 55,130  

Licensing, milestone and contract revenue

    -       5       -       11  

Total revenue

    30,678       30,418       66,075       55,141  
                                 

Operating expenses:

                               

Cost of product revenue

    16,936       6,836       31,136       14,147  

Research & development

    4,532       4,165       10,582       8,423  

Selling, general & administrative

    14,550       7,502       28,981       15,174  

Goodwill impairment

    -       -       18,144       -  

Change in fair value of contingent consideration

    4,196       -       (20,326 )     -  

Total operating expenses

    40,214       18,503       68,517       37,744  

Income (loss) from operations

    (9,536 )     11,915       (2,442 )     17,397  

Interest and other income (expense), net

    (169 )     533       110       1,031  

Income (loss) before income taxes

    (9,705 )     12,448       (2,332 )     18,428  

Provision for (benefit from) income taxes

    (1,997 )     3,013       (417 )     4,486  

Net income (loss)

  $ (7,708 )   $ 9,435     $ (1,915 )   $ 13,942  
                                 

Basic net income (loss) per share:

                               

Net income (loss)

  $ (0.54 )   $ 0.68     $ (0.13 )   $ 0.99  

Basic weighted average common shares outstanding

    14,199       13,916       14,201       14,054  

Diluted net income (loss) per share:

                               

Net income (loss)

  $ (0.54 )   $ 0.67     $ (0.13 )   $ 0.98  

Diluted weighted average common shares outstanding

    14,199       14,088       14,201       14,203  
                                 

Net income (loss)

  $ (7,708 )   $ 9,435     $ (1,915 )   $ 13,942  

Foreign currency translation adjustment

    209       145       80       (170 )

Comprehensive income (loss)

  $ (7,499 )   $ 9,580     $ (1,835 )   $ 13,772  

 

 

 

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

 

4

 

 

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(in thousands)

(unaudited)

 

   

For the Six Months Ended June 30, 2020

 
                                   

Accumulated

         
   

Common Stock

           

Other

   

Total

 
   

Number of

   

$.01 Par

   

Additional Paid

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Value

   

in Capital

   

Earnings

   

Loss

   

Equity

 

Balance, January 1, 2020

    14,308     $ 143     $ 48,707     $ 245,426     $ (5,898 )   $ 288,378  

Vesting of restricted stock units

    42       -       -       -       -       -  

Forfeiture of restricted stock awards

    (9 )     -       -       -       -       -  

Stock-based compensation expense

    -       -       (207 )     -       -       (207 )

Retirement of common stock for minimum tax withholdings

    (4 )     -       (141 )     -       -       (141 )

Repurchase of common stock

    (139 )     (1 )     1       -       -       -  

Net income

    -       -       -       5,793       -       5,793  

Other comprehensive loss

    -       -       -       -       (129 )     (129 )

Balance, March 31, 2020

    14,198     $ 142     $ 48,360     $ 251,219     $ (6,027 )   $ 293,694  

Issuance of common stock for equity awards

    2       -       68       -       -       68  

Vesting of restricted stock units

    7       -       -       -       -       -  

Stock-based compensation expense

    -       -       2,240       -       -       2,240  

Retirement of common stock for minimum tax withholdings

    (3 )     -       (59 )     -       -       (59 )

Net loss

    -       -       -       (7,708 )     -       (7,708 )

Other comprehensive income

    -       -       -       -       209       209  

Balance, June 30, 2020

    14,204     $ 142     $ 50,609     $ 243,511     $ (5,818 )   $ 288,444  

 

 

   

For the Six Months Ended June 30, 2019

 
                                   

Accumulated

         
   

Common Stock

           

Other

   

Total

 
   

Number of

   

$.01 Par

   

Additional Paid

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Value

   

in Capital

   

Earnings

   

Loss

   

Equity

 

Balance, January 1, 2019

    14,210     $ 142     $ 50,763     $ 218,233     $ (5,526 )   $ 263,612  

Issuance of common stock for equity awards

    7       -       5       -       -       5  

Retirement of common stock for minimum tax withholdings

    (3 )     -       (124 )     -       -       (124 )

Stock-based compensation expense

    -       -       1,386       -       -       1,386  

Net income

    -       -       -       4,507       -       4,507  

Other comprehensive loss

    -       -       -       -       (315 )     (315 )

Balance, March 31, 2019

    14,214     $ 142     $ 52,030     $ 222,740     $ (5,841 )   $ 269,071  

Issuance of common stock for equity awards

    30       1       851       -       -       852  

Forfeiture of restricted stock

    (7 )     -       -       -       -       -  

Stock-based compensation expense

    -       -       1,443       -       -       1,443  

Repurchase of common stock

    (452 )     (5 )     (29,995 )     -       -       (30,000 )

Net income

    -       -       -       9,435       -       9,435  

Other comprehensive income

    -       -       -       -       145       145  

Balance, June 30, 2019

    13,785     $ 138     $ 24,329     $ 232,175     $ (5,696 )   $ 250,946  

 

 

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

 

 

5

 

 

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

  

Six Months Ended June 30,

 
  

2020

  

2019

 

Cash flows from operating activities:

        

Net income (loss)

 $(1,915) $13,942 

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

        

Depreciation and amortization

  6,459   2,943 

Non-cash operating lease cost

  725   591 

Goodwill impairment

  18,144   - 

Change in fair value of contingent consideration

  (20,326)  - 

Loss on disposal of fixed assets

  265   721 

Loss on impairment of intangible asset

  1,025   281 

Stock-based compensation expense

  2,033   2,829 

Deferred income taxes

  (907)  120 

Provision (recovery) for doubtful accounts

  (36)  - 

Provision for inventory

  3,259   601 

Amortization of acquisition related inventory step-up

  4,123   - 

Accretion of amortized cost of investments

  -   (757)

Changes in operating assets and liabilities:

        

Accounts receivable

  6,208   (2,293)

Inventories

  (5,410)  (3,033)

Prepaid expenses, other current and long-term assets

  (373)  356 

Accounts payable

  (2,462)  (906)

Operating lease liabilities

  (675)  (534)

Accrued expenses, other current and long-term liabilities

  (5,135)  (1,300)

Income taxes

  (389)  371 

Net cash provided by operating activities

  4,613   13,932 
         

Cash flows from investing activities:

        

Acquisition of Parcus Medical and Arthrosurface, net of cash acquired

  (93,859)  - 

Proceeds from maturities of investments

  20,000   72,594 

Purchases of investments

  (20,035)  (73,896)

Purchases of property and equipment

  (908)  (2,131)

Net cash used in investing activities

  (94,802)  (3,433)
         

Cash flows from financing activities:

        

Repurchases of common stock

  -   (30,000)

Repayments of long term debt

  (351)  - 

Proceeds from long term debt

  50,000   - 

Cash paid for tax withheld on vested restricted stock awards

  (200)  (125)

Proceeds from exercises of equity awards

  68   6 

Net cash provided by (used in) financing activities

  49,517   (30,119)
         

Exchange rate impact on cash

  (45)  (15)
         

Decrease in cash and cash equivalents

  (40,717)  (19,635)

Cash and cash equivalents at beginning of period

  157,463   89,042 

Cash and cash equivalents at end of period

 $116,746  $69,407 

Supplemental disclosure of cash flow information:

        

Right-of-use assets obtained in exchange for operating lease liabilities as of January 1, 2019

 $-  $24,110 

Non-cash Investing Activities:

        

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

 $61  $211 

Consideration for acquisitions included in accounts payable and accrued expenses

 $1,209  $- 

Acquisition related contingent consideration

 $69,076  $- 

  

 

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

 

6

 

 ANIKA THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

 

 

1.

Nature of Business

 

Anika Therapeutics, Inc., or the Company, is a global, integrated joint preservation, restoration and regenerative solutions company based in Bedford, Massachusetts. The Company’s mission is to be the global leader in orthopedic joint solutions and sports medicine with innovative technologies that exceed its customers’ expectations. Anika is committed to delivering solutions to improve the lives of patients across the orthopedic early-intervention continuum of care, ranging from joint pain management and regenerative products to sports medicine and orthopedic joint preservation and restoration. With close to three decades of expertise commercializing innovative products, Anika has expanded beyond its hyaluronic acid ("HA") technology platform, to add innovative and differentiated offerings to a consolidated orthopedic portfolio. Today, the Company is supported by direct and distributor sales forces and an active R&D engine focused on delivering innovative orthopedics solutions.

 

In early 2020, the Company expanded its overall technology platform through its strategic acquisitions of Parcus Medical, LLC (“Parcus Medical”), a sports medicine implant and instrumentation solutions provider focused on surgical repair and reconstruction of ligaments and tendons and Arthrosurface, Incorporated (“Arthrosurface”), a joint preservation technology company specializing in less invasive joint replacement solutions. The Company expects the Parcus Medical and Arthrosurface acquisitions to drive growth by broadening Anika's product portfolio into joint preservation and restoration, adding high-growth revenue streams, expanding its commercial capabilities, diversifying its revenue base, and expanding its product pipeline and research and development expertise.

 

There continues to be uncertainties regarding the pandemic of the novel coronavirus (“COVID-19”), and the Company is closely monitoring the impact of COVID-19 on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, and business partners. The Company is unable to predict the impact that COVID-19 may have on its financial position and operations moving forward due to the numerous uncertainties. Any estimates made herein may change as new events occur and additional information is obtained, and actual results could differ materially from any estimates made herein under different assumptions or conditions. The Company will continue to assess the evolving impact of COVID-19.

 

The Company is subject to risks common to companies in the biotechnology and medical device industries including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, commercialization of existing and new products, and compliance with U.S. Food and Drug Administration (“FDA”) and foreign regulations and approval requirements, as well as the ability to grow the Company’s business through appropriate commercial strategies.

 

 

2.

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and in accordance with accounting principles generally accepted in the United States (“US GAAP”). The financial statements include the accounts of Anika Therapeutics, Inc. and its subsidiaries. Inter-company transactions and balances have been eliminated. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to SEC rules and regulations relating to interim financial statements. The December 31, 2019 balances reported herein are derived from the audited consolidated financial statements. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the condensed consolidated financial statements.

 

The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company’s annual financial statements filed with its Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for the three- and six-month periods ended June 30, 2020 are not indicative of the results to be expected for the year ending December 31, 2020.

 

7

 

Segment Information

 

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is its President and Chief Executive Officer, Cheryl R. Blanchard, Ph.D., who has held that role since her appointment on April 26, 2020. Based on the criteria established by Accounting Standards Codification (“ASC”) 280, Segment Reporting, the Company has one operating and reportable segment.

 

Recent Accounting Adoptions

 

In August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40), which amends ASU No. 2015-05, Customers Accounting for Fees in a Cloud Computing Agreement, to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The most significant change aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. Accordingly, the amendments in ASU 2018-15 require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as assets related to the service contract and which costs to expense. ASU 2018-15 is effective for fiscal years and interim periods beginning after December 15, 2019. The Company adopted ASU 2018-15 using the prospective method as of January 1, 2020. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures.

 

In  June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses. The standard, including subsequently issued amendments, requires a financial asset measured at amortized cost basis, such as accounts receivable and certain other financial assets, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for fiscal years and interim periods beginning after December 15, 2019 and requires the modified retrospective approach. The Company adopted ASU 2016-13 as of January 1, 2020. The adoption primarily impacted its trade receivables. The Company assesses its customer's ability to pay by conducting a credit review which includes an assessment of the customer's creditworthiness. The Company monitors the credit exposure through active review of customer balances. The Company's expected loss methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' account balances. Concentrations of credit risks are limited due to the large number of customers and their dispersion across a number of geographic areas.  The historical credit losses have not been significant due to this dispersion and the financial stability of its customers.  The Company considers credit losses immaterial to its business and, therefore, has not provided all the disclosures otherwise required by the standard.  

 

 

3.

Business Combinations

 

Parcus Medical, LLC

 

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

 

The acquisition of Parcus Medical has been accounted for as a business combination under ASC 805. Under ASC 805, assets acquired and liabilities assumed in a business combination must be recorded at their fair value as of the acquisition date. Recorded fair valuation of assets acquired and liabilities assumed related to the acquisition of Parcus Medical is preliminary and will be completed as soon as practicable, but no later than one year after the consummation of the transaction. Anika’s consolidated financial statements include results of operations for Parcus Medical from the January 24, 2020 acquisition date.

 

8

 

Consideration Transferred

 

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

 

Cash consideration

 $32,794 

Deferred consideration

  1,642 

Estimated fair value of contingent consideration

  40,700 

Estimated total purchase consideration

 $75,136 

 

Contingent consideration represents additional payments that the Company may be required to make in the future, which totals up to $60.0 million depending on the level of net sales generated in 2020 through 2022. The fair value of contingent consideration related to net sales was determined based on a Monte Carlo simulation model in an option pricing framework at the acquisition date, whereby a range of possible scenarios were simulated. Deferred consideration is related to certain purchase price holdbacks which will be resolved within one year of the acquisition date and were recorded in accounts payable as of June 30, 2020. The liability for contingent and deferred consideration is included in current and long-term liabilities on the consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved.

 

Acquisition related costs are not included as a component of consideration transferred but are expensed in the periods in which the costs are incurred. The Company incurred approximately $1.9 million in transaction costs related to the Parcus Medical acquisition during the three-month period ending March 31, 2020. The transaction costs for the three-month period ending June 30, 2020 were immaterial. The transaction costs are included in selling, general and administrative expenses in the consolidated statements of operations.

 

Fair Value of Net Assets Acquired

 

The preliminary estimate of fair value required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable, however, actual results may differ from these estimates. The assessment of fair value is preliminary and is based on information that was available to management at the time the condensed consolidated financial statements were prepared. Those estimates and assumptions are subject to change as the Company obtains additional information related to those estimates during the applicable measurement periods (up to one year from the acquisition date). The most significant open items necessary to complete are related to intangible assets and tax related matters.

 

9

 

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

 

Recognized identifiable assets acquired and liabilities assumed:

    

Cash and cash equivalents

 $196 

Accounts receivable

  2,029 

Inventories

  9,088 

Prepaid expenses and other current assets

  364 

Property and equipment, net

  1,099 

Right-of-use assets

  944 

Intangible assets

  44,000 

Accounts payable, accrued expenses and other current liabilities

  (2,763)

Other long-term liabilities

  (594)

Lease liabilities

  (735)

Net assets acquired

  53,628 

Goodwill

  21,508 

Estimated total purchase consideration

 $75,136 

 

The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and assigned to the newly established reporting unit for Parcus Medical and Arthrosurface. The goodwill is attributable to the workforce of the business and the value of future technologies expected to arise after the acquisition. Goodwill will not be amortized and is expected to be deductible for income tax purposes as the acquisition of the limited liability company is an asset purchase for tax purposes. The acquired intangible assets based on preliminary estimates of fair value as of January 24, 2020 are as follows:

 

Intangible assets acquired consist of:

    

Developed technology

 $41,100 

Trade name

  1,800 

Customer relationships

  1,100 

Total intangible assets

 $44,000 

 

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

 

The final fair value determination of the identified intangible assets may differ from this preliminary determination, and such differences could be material. Based on the preliminary valuation, approximately $44.0 million represents the fair value of identifiable intangible assets. Approximately $41.1 million represents the fair value of developed technology that will be amortized over a useful life of 15 years, $1.1 million represents the fair value of customer relationships that will be amortized over a useful life of 10 years, and $1.8 million represents the fair value of the trade name that will be amortized over a useful life of 5 years.

 

10

 

Revenue and Net Loss

 

The Company recorded revenue from Parcus Medical of $2.0 million and a net loss of $2.0 million in the three-month period ended June 30, 2020. The Company recorded revenue from Parcus Medical of $4.6 million and a net loss of $2.9 million in the period from January 24 through June 30, 2020.

 

Arthrosurface, Incorporated

 

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

 

The acquisition of Arthrosurface has been accounted for as a business combination under ASC 805. Under ASC 805, assets acquired and liabilities assumed in a business combination must be recorded at their fair values as of the acquisition date. The final valuation of assets acquired and liabilities assumed related to the acquisition of Arthrosurface is expected to be completed as soon as practicable, but no later than one year after the consummation of the transaction. Anika’s consolidated financial statements include results of operations for Arthrosurface from the February 3, 2020 acquisition date.

  

Consideration Transferred

 

Pursuant to the Arthrosurface Merger Agreement, the Company acquired all outstanding equity of Arthrosurface for estimated total purchase consideration of $90.3 million, which consists of:

 

11

 

 

Cash consideration

 $61,909 

Estimated fair value of contingent consideration

  28,376 

Estimated total purchase consideration

 $90,285 

 

 The Company may be required to make future payments of up to $40.0 million depending on the achievement of regulatory milestones and the level of net sales generated in 2020 through 2021. The fair value of contingent consideration related to regulatory milestones was determined through a scenario-based discounted cash flow analysis using scenario probabilities and regulatory milestone dates. The fair value of contingent consideration related to certain net sales levels from 2020 through 2021 was determined based upon a Monte Carlo simulation approach in an option pricing framework at acquisition date, whereby a range of possible scenarios were simulated. The liability for contingent consideration is included in current and long-term liabilities on the consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved.

 

Acquisition related costs are not included as a component of consideration transferred but are expensed in the periods in which the costs are incurred. The Company incurred approximately $2.2 million in transaction costs related to the Arthrosurface acquisition during the three-month period ending March 31, 2020. The transaction costs for the three-month period ending June 30, 2020 were immaterial. The transaction costs are included in selling, general and administrative expenses in the consolidated statements of operations.

 

Fair Value of Net Assets Acquired

 

The preliminary estimate of fair value required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable. However, actual results may differ from these estimates. The assessment of fair value is preliminary and is based on information that was available to management at the time the condensed consolidated financial statements were prepared. Those estimates and assumptions are subject to change as the Company obtains additional information related to those estimates during the applicable measurement periods (up to one year from the acquisition date). The most significant open items are related to intangible assets, property, plant and equipment and tax related matters.

 

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

 

Recognized identifiable assets acquired and liabilities assumed:

    

Cash and cash equivalents

 $1,072 

Accounts receivable

  5,368 

Inventories

  15,652 

Prepaid expenses and other current assets

  535 

Property, plant and equipment

  3,394 

Other long-term assets

  7,548 

Intangible assets

  48,900 

Accounts payable, accrued expenses and other liabilities

  (3,929)

Deferred tax liabilities

  (11,147)

Net assets acquired

  67,393 

Goodwill

  22,892 

Estimated total purchase consideration

 $90,285 

 

 

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

 

12

 

Intangible assets acquired consist of:

    

Developed technology

 $37,000 

Trade name

  3,400 

Customer relationships

  7,900 

IPR&D

  600 

Total intangible assets

 $48,900 

 

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

 

The final fair value determination of the identified intangible assets may differ from this preliminary determination, and such differences could be material. Based on the preliminary valuation, approximately $48.9 million represents the fair value of identifiable intangible assets. Approximately $37.0 million represents the fair value of developed technology that will be amortized over an estimated useful life of 15 years, $7.9 million represents the fair value of customer relationships that will be amortized over an estimated useful life of 10 years, and $3.4 million represents the fair value of trade names that will be amortized over an estimated useful life of 5 years. A total of $0.6 million represents the fair value of in-process research and development (“IPR&D”) with an indefinite useful life that will be evaluated for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

 

Revenue and Net Loss

 

The Company recorded revenue from Arthrosurface of $4.2 million and a net loss of $2.8 million in the three-month period ended June 30, 2020. The Company recorded revenue from Arthrosurface of $8.4 million and a net loss of $6.8 million in the period from February 3 through June 30, 2020.

 

Pro-forma Information

 

The Parcus Medical and Arthrosurface acquisitions were both completed in the first quarter of 2020.  Both acquired companies have similar businesses with all of their products in the Orthopedic Joint Preservation and Restoration product family as discussed in Note 11, serving orthopedic surgeons, ambulatory surgical centers and hospitals.  We have combined legacy Anika, Parcus Medical and Arthrosurface proforma supplemental information as follows.

 

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

 

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

 

 

13

 

The following table presents unaudited supplemental pro forma information:

 

  

For the Three Months ended June 30,

  

For the Six Months ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Total revenue

 $30,678  $40,428  $70,028  $75,133 

Net income (loss)

  (7,708)  5,073   (917)  2,387 

 

 

4.

Fair Value Measurements

 

The Company held U.S. treasury bills of $20.1 million and certificates of deposit of $7.5 million at June 30, 2020. The Company held U.S. treasury bills of $27.5 million at December 31, 2019. Unrealized losses and the associated tax impact on the Company’s available-for-sale securities were insignificant as of June 30, 2020 and December 31, 2019, respectively.

 

The Company’s investments are all classified within Levels 1 and 2 of the fair value hierarchy. The Company’s investments classified within Level 1 of the fair value hierarchy are valued based on quoted prices in active markets. Level 2 investments are based on matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. For cash, current receivables, accounts payable, long-term debt and interest accrual, the carrying amounts approximate fair value, because of the short maturity of these instruments, and therefore fair value information is not included in the table below. Contingent consideration related to the previously described business combinations are classified within Level 3 of the fair value hierarchy as the determination of fair value uses considerable judgement and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability.

 

The fair value hierarchy of the Company's cash equivalents, investments and liabilities at fair value was as follows:

 

      

Fair Value Measurements at Reporting Date Using

     
      

Quoted Prices in

Active Markets

  

Significant Other

  

Significant

     
      

for Identical Assets

  

Observable Inputs

  

Unobservable Inputs

     
  

June 30, 2020

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Amortized Cost

 

Cash equivalents:

                    

Money market funds

 $49,357  $49,357  $-  $-  $49,357 
                     

Investments:

                    

Bank certificates of deposit

 $7,514  $-  $7,514  $-  $7,524 

U.S. treasury bills

  20,110   20,110   -   -   20,178 

Total investments

 $27,624  $20,110  $7,514  $-  $27,702 
                     

Other current and long-term liabilities:

                    

Contingent consideration- short term

 $11,688  $-  $-  $11,688  $- 

Contingent consideration- long term

  37,062   -   -   37,062   - 

Total other current and long-term liabilities

 $48,750  $-  $-  $48,750  $- 

 

      

Fair Value Measurements at Reporting Date Using

     
      

Quoted Prices in

Active Markets

  

Significant Other

  

Significant

     
      

for Identical Assets

  

Observable Inputs

  

Unobservable Inputs

     
  

December 31, 2019

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Amortized Cost

 

Cash equivalents:

                    

Money Market Funds

 $48,971  $48,971  $-  $-  $48,971 
                     

Investments:

                    

U.S. Treasury Bills

 $27,480  $27,480  $-  $-  $27,479 

 

      There were no transfers between fair value levels during the six-month period ended June 30, 2020 or in 2019.

 

14

 

Contingent Consideration

 

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

 

   

Six Months Ended

 
   

June 30, 2020

 

Balance, beginning January 1, 2020

  $ -  

Additions

    69,076  

Payments

    -  

Change in fair value

    (20,326 )

Balance, ending June 30, 2020

  $ 48,750  

 

Under the Parcus Medical and Arthrosurface merger agreements, there are earn-out milestones totaling $100 million payable from 2020 to 2022. Parcus Medical and Arthrosurface each have net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface has regulatory earn-out milestones in 2020 and 2021. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model or a Monte Carlo simulation approach. The unobservable inputs used in the fair value measurement of the Company’s contingent consideration are the probabilities of successful achievement, the weighted average cost of capital used for the Monte Carlo simulation, discount rate and the periods in which the milestones are expected to be achieved. The discount rates used for the net sales and regulatory earn-out milestones ranged from 3.3% - 3.8%. The probability of successful achievement of the regulatory earn-out milestones range from 60%-90% for Arthrosurface, which remained unchanged from the acquisition date to June 30, 2020. The key variables that led to a decrease in contingent consideration versus the acquisition date are the decrease in near term revenues due to the COVID-19 pandemic and an increase in the weighted average cost of capital from 11.5% to 14.0% for Arthrosurface and 14.5% to 16.0% for Parcus Medical. Increases or decreases in any of the probabilities of success in which milestones are expected to be achieved would result in a higher or lower fair value measurement, respectively. Increases or decreases in the discount rate would result in a lower or higher fair value measurement, respectively.

 

The fair value of contingent consideration is assessed on a quarterly basis. The $4.2 million increase in fair value of the contingent consideration for the three-month period ended June 30, 2020 was primarily due to an increase in revenue assumptions based on second quarter results and future projections, and other assumption changes as a result of events that occurred in the quarter. The $20.3 million decrease in fair value of the contingent consideration for six-month period ended June 30, 2020 was due to a decrease in the near term projections of revenue due to the COVID-19 pandemic.

 

 

5.

Inventories

 

Inventories consist of the following:

 

 

  

June 30,

  

December 31,

 
  

2020

  

2019

 

Raw materials

 $13,851  $12,058 

Work-in-process

  11,914   8,330 

Finished goods

  33,680   8,777 

Total

 $59,445  $29,165 
         

Inventories

 $46,479  $21,995 

Other long-term assets

  12,966   7,170 

 

 

15

 

The increase in inventories for the six months ended June 30, 2020 is due to the acquisitions of Parcus Medical and Arthrosurface in January and February 2020 discussed in Note 3.

 

The Company recorded an inventory reserve of $1.9 million during the three-month period ended June 30, 2020 as the Company will not pursue CE mark renewals, primarily for certain advanced wound care products as a result of the Company's product rationalization efforts. The additional inventory reserve represents excess inventory which will not be sold prior to expiration of the applicable CE mark based on current projections.

 

 

6.

Intangible Assets

 

Intangible assets as of June 30, 2020 and December 31, 2019 consisted of the following:

 

      

Six Months Ended June 30, 2020

 
  

Gross Value

  

Less: Accumulated Currency Translation Adjustment

  

Less: Current Period Impairment Charge

  

Less: Accumulated Amortization

  

Net Book Value

  

Weighted Average Useful Life

 

Developed technology

 $93,953  $(2,904) $(1,025) $(11,460) $78,564   15 

In-process research & development

  5,006   (1,242)  -   -   3,764  

Indefinite

 

Customer relationships

  9,000   -   -   (377)  8,623   10 

Distributor relationships

  4,700   (415)  -   (4,285)  -   5 

Patents

  1,000   (177)  -   (555)  268   16 

Tradenames

  5,200   -   -   (441)  4,759   5 

Total

 $118,859  $(4,738) $(1,025) $(17,118) $95,978   13 

 

 

      

Year ended December 31, 2019

 
  

Gross Value

  

Less: Accumulated Currency Translation Adjustment

  

Less: Current Period Impairment Charge

  

Less: Accumulated Amortization

  

Net Book Value

  

Weighted Average Useful Life

 

Developed technology

 $17,100  $(2,934) $(389) $(9,657) $4,120   15 

In-process research & development

  4,406   (1,234)  -   -   3,172  

Indefinite

 

Distributor relationships

  4,700   (415)  -   (4,285)  -   5 

Patents

  1,000   (176)  -   (531)  293   16 

Elevess Tradename

  1,000   -   -   (1,000)  -   9 

Total

 $28,206  $(4,759) $(389) $(15,473) $7,585   11 

 

The aggregate amortization expense related to intangible assets was $2.2 million and $0.2 million for the three-month periods ended June 30, 2020 and 2019, respectively, and $3.5 million and $0.5 million for the six-month periods ended June 30, 2020 and 2019, respectively.

 

In the first quarter of 2020, the Company acquired Parcus Medical and Arthrosurface as discussed in Note 3, which resulted in an increase of $92.9 million of gross value in intangible assets. During the six-month period ended June 30, 2020, the Company determined that it will not pursue CE Mark renewals for certain of its products, which resulted in an impairment of $1.0 million of which $0.3 million was recognized in the first quarter of 2020. The impairments are included in the selling, general & administrative expenses on its condensed consolidated statements of operations.

 

The Company assessed the recoverability of intangible and long-lived assets besides goodwill and concluded no impairments existed as of March 31, 2020. If the pandemic's economic impact is more severe, or if the economic recovery takes longer to materialize or does not materialize as strongly as anticipated, this could result in intangible or long-lived asset impairment charges. For the quarter ended June 30, 2020, there were no impairments related to the pandemic’s economic impact. However, the Company did identify certain intangible asset impairments as a result of product rationalization and the related decision to not pursue certain related CE Mark renewals.

 

 

7.

Goodwill

 

The Company assesses goodwill for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment on each reporting unit. In connection with the evaluation of goodwill for impairment, the Company may first consider qualitative factors to assess whether there are any indicators to suggest it is more likely than not that the fair value of a reporting unit may not exceed its carrying amount. If after assessing such factors or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then a quantitative assessment is not required. If the Company chooses to bypass the qualitative assessment, or if it chooses to perform a qualitative assessment but is unable to qualitatively conclude that no impairment has occurred, then the Company will perform a quantitative assessment. If the estimated fair value of a reporting unit is less than its carrying value, an impairment charge is recognized for the excess of the reporting unit’s carrying value over its fair value.

 

16

 

As of December 31, 2019, the Company concluded that it operated as a single reporting unit and performed the 2019 goodwill impairment test using a single reporting unit.

 

Changes in the carrying value of goodwill were as follows:

 

   

Six Months Ended

June 30, 2020

   

Year Ended

December 31, 2019

 

Balance, beginning

  $ 7,694     $ 7,851  

Effect of foreign currency adjustments

    8       (157 )

Acquisitions

    44,400       -  

Impairment

    (18,144 )     -  

Balance, ending

  $ 33,958     $ 7,694  

 

The increase in goodwill for the six months ended June 30, 2020 is related to the acquisitions of Parcus Medical and Arthrosurface in January and February 2020 as further discussed in Note 3. As a result of the acquisitions, the Company now has two reporting units. The newly formed reporting unit includes Parcus Medical and Arthrosurface, which share similar economic and qualitative characteristics. This reporting unit produces sports medicine surgical tools, instruments and joint implants. The legacy Anika business remains in one reporting unit, which specializes in therapies based on its hyaluronic acid, or HA, technology platform.

 

The widespread economic volatility resulting from the COVID-19 pandemic triggered impairment testing in the first quarter of 2020, and accordingly, the Company performed interim impairment testing on the goodwill balances of its reporting units. For the legacy Anika reporting unit, the Company performed a qualitative assessment including consideration of 1) general macroeconomic factors, 2) industry and market conditions, and 3) the extent of the excess of the fair value over the carrying value indicated in prior impairment testing. The Company determined it was not more likely than not that the fair value of the legacy Anika reporting unit is less than its carry amount and thus, goodwill was not impaired as of March 31, 2020. Through June 30, 2020, there have been no events or changes in circumstances that indicate that the carrying value of goodwill may not be recoverable.

 

U.S. government policy responses to the COVID-19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of domestic elective surgical procedures. As a result of these events during the first quarter of 2020, the Company performed a quantitative assessment of goodwill impairment related to the Parcus Medical and Arthrosurface reporting unit as of March 31, 2020. The Company then estimated the fair value of the Parcus Medical and Arthrosurface reporting unit using a discounted cash flow method, which is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the reporting units beyond the cash flows from the discrete projection period. The Company determined that a discounted cash flow model provided the best approximation of fair value of the reporting unit for the purpose of performing the interim impairment test.

 

This approach incorporates significant estimates and assumptions related to the forecasted results including revenues, expenses, the achievement of certain cost synergies, terminal growth rates and discount rates to estimate future cash flows. While assumptions utilized are subject to a high degree of judgment and complexity, the Company made reasonable assumptions to best estimate future cash flows under a high degree of economic uncertainty that existed as of March 31, 2020. In developing its assumptions, the Company also considered observed trends of its industry participants.

 

17

 

The results of the interim impairment test indicated that the estimated fair value of the Parcus and Arthrosurface reporting unit was less than its carrying value. This is primarily due to decreases in near term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures which directly impact the Parcus and Arthrosurface reporting unit. Consequently, a non-cash goodwill impairment charge was recorded as reflected in the table above as of March 31, 2020. For the quarter ended June 30, 2020, there have been no events or changes in circumstances that indicate that the carrying value of goodwill as determined on March 31, 2020 may not be recoverable. If the pandemic's economic impact is more severe, or if the economic recovery takes longer to materialize or does not materialize as strongly as anticipated, this could result in further goodwill impairment charges.

 

 

8.

Leases

 

The components of lease expense and other information are as follows: 

 

 

  

For the Three Months Ended

  

For the Six Months Ended

 
  

June 30, 2020

  

June 30, 2019

  

June 30, 2020

  

June 30, 2019

 

Amortization of ROU Assets

  49   -   86   - 

Interest on finance lease liabilities

  8   -   15   - 

Finance lease expense

 $57  $-  $101  $- 

Operating lease expense

  595   521   1,169   1,043 

Short-term lease expense

  -   4   -   6 

Variable lease expense

  74   60   137   112 

Total lease expense

 $726  $585  $1,407  $1,161 

 

   

For the Three Months Ended

   

For the Six months ended

 
   

June 30, 2020

   

June 30, 2019

   

June 30, 2020

   

June 30, 2019

 

Weighted Average Remaining Lease Term (in years)

                               

Operating leases

    16.1       17.3       16.1       17.3  

Financing leases

    3.7       -       3.7       -  

Weighted Average Discount Rate

                               

Operating leases

    4.1 %     4.1 %     4.1 %     4.1 %

Financing leases

    5.0 %     -       5.0 %     -  

Other information

                               

Operating cash flows from operating leases

  $ 593     $ 497     $ 1,137     $ 994  

Operating cash flows from financing leases

  $ 59     $ -     $ 110     $ -  

 

 

Future commitments due under these lease agreements as of June 30, 2020 are as follows:

 

Years ended December 31,

 

Operating Leases

  

Financing Leases

  

Total

 

2020 (Remaining 6 months)

 $1,195  $128  $1,323 

2021

  2,304   174   2,478 

2022

  2,240   166   2,406 

2023

  2,123   160   2,283 

2024

  2,059   44   2,103 

Thereafter

  21,374   -   21,374 

Present value adjustment

  (8,405)  (57)  (8,462)

Present value of lease payments

  22,890   615   23,505 

Less current portion included in accrued expenses and other current liabilities

  (1,476)  (186)  (1,662)

Total lease liabilities

 $21,414  $429  $21,843 

 

 

 

9.

Accrued Expenses

 

Accrued expenses consist of the following:

 

   

June 30,
2020

   

December 31,
2019

 

Compensation and related expenses

  $ 3,212     $ 5,830  

Professional fees

    3,052       3,850  

Operating lease liability - current

    1,476       1,141  

Clinical trial costs

    1,113       788  

Current portion of acquisition related contingent consideration (Note 4)

    11,688       -  

Finance lease liability - current

    186       -  

Other

    1,018       836  

Total

  $ 21,745     $ 12,445  

 

 

18

 
 

10.

Commitments and Contingencies

 

In certain of its contracts, the Company warrants to its customers that the products it manufactures conform to the product specifications as in effect at the time of delivery of the specific product. The Company may also warrant that the products it manufactures do not infringe, violate, or breach any U.S. or international patent or intellectual property right, trade secret, or other proprietary information of any third party. On occasion, the Company contractually indemnifies its customers against any and all losses arising out of, or in any way connected with, any claim or claims of breach of its warranties or any actual or alleged defect in any product caused by the negligent acts or omissions of the Company. The Company maintains a products liability insurance policy that limits its exposure to these risks. Based on the Company’s historical activity, in combination with its liability insurance coverage, the Company believes the estimated fair value of these indemnification agreements is immaterial. The Company had no accrued warranties as of June 30, 2020 or December 31, 2019 and has no history of claims paid.

 

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

 

 

11.

Revenue

 

The Company receives payments from its customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. As of June 30, 2020, deferred revenue was immaterial.

 

The Company has agreements with DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopaedics, Inc. (“Mitek”) that include the grant of certain licenses, performance of development services, and supply of product. Revenues from the agreements with Mitek represent 54% of total Company revenues for the three- and six-month periods ended June 30, 2020. The Company has agreements with other customers that may include the delivery of a license and supply of product.

 

Product and Total Revenue

 

Historically, the Company categorized its product offerings into four product families: Orthobiologics, Dermal, Surgical, and Other, which included its ophthalmic and veterinary products. As a result of the Company’s acquisitions of Parcus Medical and Arthrosurface during the first quarter of 2020, the Company now divides the product portfolio into three product families: Joint Pain Management, Orthopedic Joint Preservation and Restoration, and Other.

 

Product revenue by product family was as follows: 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Joint pain management

  $ 22,247     $ 26,632     $ 47,730     $ 49,482  

Orthopedic joint preservation and restoration

    6,622       802       14,518       966  

Other

    1,809       2,979       3,827       4,682  
    $