Anika Therapeutics(ANIK) - 2020 Q4 - Annual Report

FORM 10-K Filing Information This section provides key filing details for Anika Therapeutics, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 Registrant Information Anika Therapeutics, Inc. filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The company is incorporated in Delaware, with its common stock traded on the NASDAQ Global Select Market under the symbol ANIK. It is classified as an accelerated filer and has filed all required reports - Anika Therapeutics, Inc. filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2020[1] - The company's common stock is traded on the NASDAQ Global Select Market under the symbol ANIK[1] - Anika Therapeutics is classified as an accelerated filer and has filed all required reports during the preceding 12 months[1][2] Market Value and Shares Outstanding As of June 30, 2020, the aggregate market value of voting common stock held by non-affiliates was approximately $530.8 million. By February 24, 2021, there were 14,329,618 shares of common stock outstanding Market Value and Shares Outstanding | Metric | Value | | :----- | :---- | | Aggregate Market Value (non-affiliates, as of June 30, 2020) | $530,765,794 | | Common Stock Outstanding (as of February 24, 2021) | 14,329,618 shares | Table of Contents This section provides an organized listing of all major parts and items included in the Annual Report on Form 10-K Cautionary Note Regarding Forward-Looking Statements This section highlights that the Annual Report contains forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially. Investors are advised not to rely on these statements and to refer to 'Item 1A. Risk Factors' for important factors - The report contains forward-looking statements subject to risks and uncertainties, which could cause actual results to differ materially[7] - Investors should refer to 'Item 1A. Risk Factors' for important factors that could impact future results[8] PART I Part I covers the company's business operations, risk factors, property, and legal proceedings ITEM 1. Business Anika Therapeutics is a global joint preservation company focused on early intervention orthopedic care. In 2020, strategic acquisitions of Parcus Medical and Arthrosurface significantly expanded its technology platform, commercial infrastructure, and addressable market from OA pain management to the broader joint preservation market. The company leverages its hyaluronic acid (HA) technology and a diversified product portfolio across joint pain management, preservation, and other HA-based solutions, supported by a multi-channel sales approach and ongoing R&D - Anika Therapeutics is a global joint preservation company focused on early intervention orthopedic care, leveraging nearly thirty years of expertise in hyaluronic acid (HA) technology[10][11] - In early 2020, strategic acquisitions of Parcus Medical and Arthrosurface expanded the company's addressable market from over $1 billion in global OA pain management to over $8 billion in joint preservation[12] Overview This section provides a high-level introduction to Anika Therapeutics, its core technology, and market expansion following recent acquisitions - Anika Therapeutics, founded in 1992, is a global joint preservation company focused on early intervention orthopedic care, developing minimally invasive products to restore active living[10] - The company's core technology platform is based on hyaluronic acid (HA), a naturally occurring polymer vital for joint health, with proprietary modifications for various uses including OA pain management and regenerative solutions (HYAFF)[11] Market Expansion Post-Acquisitions (Early 2020) | Metric | Pre-Acquisition Focus | Post-Acquisition Focus | | :----- | :-------------------- | :--------------------- | | Addressable Market | >$1 billion global OA pain management | >$8 billion joint preservation (including sports medicine and extremities) | | Commercial Capabilities | Enhanced, especially in the United States | | Product Pipeline & R&D | Expanded in target markets | Products The company offers a diversified product portfolio across joint pain management, preservation, and other HA-based solutions - The Joint Pain Management family includes Monovisc and Orthovisc (HA-based viscosupplements, US market leaders via Mitek), Cingal (novel single-injection OA product, CE Mark approved, US pipeline), and Hyvisc (veterinary HA product)[15][16] - The Joint Preservation and Restoration family comprises Bone Preserving Joint Technologies (150+ products for upper/lower extremity conditions), Soft Tissue Repair solutions (screws, sutures, anchors for sports injuries), and Regenerative Solutions (Tactoset for bone repair, Hyalofast for cartilage regeneration)[17][18][19] - The 'Other' product family includes legacy HA-based products like Hyalobarrier (anti-adhesion), Hyalomatrix (wound treatment), and ophthalmic products[21] Sales Channels Products are sold through commercial partnerships, direct sales representatives, and independent third-party distributors - Products are sold through multiple channels: commercial partnerships (e.g., Mitek for Joint Pain Management in the US), direct sales representatives, and a network of independent third-party distributors (for Joint Preservation and Restoration in the US, and internationally for most products)[23][24][25] - The company completed the integration of its U.S. commercial organization in 2020, including cross-training to sell the consolidated Joint Preservation and Restoration portfolio[24] Manufacturing The company manufactures HA-based products in Massachusetts and Florida, also utilizing third-party contract manufacturers for certain technologies - HA-based products are manufactured at the Bedford, Massachusetts facility, while a substantial manufacturing presence is maintained in Sarasota, Florida. Third-party contract manufacturers are used for bone preserving joint technologies[27] - The company relies on a small number of suppliers for certain key raw materials and other manufacturing/delivery materials[29] Research and Development R&D efforts focus on advancing clinical trials for key products like Cingal and Hyalofast, alongside new product development from acquisitions Research and Development Expenses (2018-2020) | Year | R&D Expenses (Millions) | | :--- | :---------------------- | | 2020 | $23.4 | | 2019 | $16.7 | | 2018 | $18.2 | - The increase in R&D expenses in 2020 was primarily due to clinical studies for Cingal and Hyalofast in the US, European post-market studies, and new product development initiatives following the Arthrosurface and Parcus Medical acquisitions[30] - Key development focuses include bringing Cingal (Phase III trial initiated, facing COVID-19 related enrollment challenges) and Hyalofast (ongoing clinical trial, also delayed by COVID-19) to the U.S. market, and developing new soft tissue fixation and extremities products like WristMotion (recently received 510(k) clearance)[31][32] Intellectual Property The company protects its technologies and products through patents, trademarks, and trade secrets in the U.S. and internationally - The company seeks patent and trademark protection for its technologies and products in the U.S. and internationally, and also relies on trade secrets and technological innovations[34] Governmental Regulation Products are subject to extensive governmental regulations in the U.S. (FDA) and EU (CE Mark, MDR), alongside healthcare fraud and data privacy laws - Products are subject to extensive governmental regulation in the U.S. (FDA, classified as drugs, biologics, or medical devices) and the European Union (CE Mark, transition from MDD to MDR)[35][36][37] - Regulatory approval processes are lengthy and resource-intensive, with potential for delays, denials, or restrictive conditions. Non-compliance can lead to substantial penalties, including recalls[38][40] - The company is also subject to healthcare fraud and abuse laws (e.g., anti-kickback, false claims) and data privacy regulations (e.g., GDPR)[41] Environmental Laws The company maintains compliance with environmental regulations, with no material impact on operations from associated costs - The company believes it is in compliance with all environmental regulations, and ongoing compliance costs do not materially affect operations[42] Competition Anika competes with numerous pharmaceutical and medical device firms, facing pressures from product efficacy, regulatory approvals, and pricing - Anika competes with numerous companies, including large pharmaceutical and medical device firms, many of which have greater financial and R&D resources. Key competitors for Joint Pain Management include Sanofi Genzyme and Zimmer Biomet, while for Joint Preservation and Restoration, they include Arthrex and DePuy Synthes[43] - Competition factors include product efficacy, safety reputation, portfolio breadth, regulatory approvals, supply, marketing, reimbursement, and patent protection. Industry consolidation and healthcare cost containment initiatives increase pricing pressures[44][46] Seasonality The company's business is generally not seasonal due to its diverse product mix and sales strategies - The company's business is generally not seasonal due to its product mix and sales strategies[47] Human Capital Management Anika focuses on attracting and retaining diverse talent through competitive rewards, development, and a values-driven workplace culture - Anika emphasizes a diverse, talented, and inclusive workplace centered on values like People, Innovation, Quality, Teamwork, Integrity, and Accountability to attract and retain skilled employees[48][49] Employee Statistics (as of December 31, 2020) | Metric | Value | | :----- | :---- | | Total Full-time Employees | 277 | | Employees Added in 2020 | 145 (75 from acquisitions) | | Employees Outside US | 25 | | Primary Facilities | Bedford, MA; Franklin, MA; Sarasota, FL; Padova, Italy | - The company offers competitive total rewards packages (salary, bonus, benefits, equity) and supports employee development. COVID-19 led to augmented safety policies, remote work for administrative staff, and adjusted attendance policies[52][54] Product Liability The company faces inherent product liability risks in healthcare, maintaining insurance coverage, with no material claims to date - The testing, marketing, and sale of healthcare products carry inherent product liability risks. While no material claims have been received to date, there's no assurance that future claims won't arise or that insurance coverage will be adequate[55] Available Information The company's SEC filings and corporate website provide public access to annual, quarterly, and current reports - The company files annual, quarterly, and current reports with the SEC, available on www.sec.gov and its corporate website, www.anika.com[56](index=56&type=chunk) ITEM 1A. Risk Factors This section details significant risks that could materially and adversely affect Anika's business, financial condition, and operating results. These risks span business and industry challenges (e.g., sales growth, competition, customer concentration, supply chain, IT security, impairment charges, personnel, capital), commercialization activities (e.g., Mitek agreements, direct sales, reimbursement), product development and regulatory compliance (e.g., Cingal/Hyalofast approvals, regulatory changes like EU MDR), growth initiatives (e.g., acquisition integration, international operations), intellectual property, and the pervasive impact of the COVID-19 pandemic - The company faces risks related to achieving sales growth and market acceptance for its expanded product portfolio, particularly after the 2020 acquisitions[59][60] - Significant competition from larger companies, healthcare industry consolidation leading to pricing pressures, and high dependence on a few key customers (e.g., Mitek, accounting for 49% of 2020 product revenue) pose substantial financial risks[61][62][67] - Product development and regulatory compliance risks include longer-than-expected pathways for Cingal and Hyalofast US commercialization, potential delays or denials of FDA/foreign approvals, and the costly impact of evolving regulations like the EU MDR[96][97][98][108] - The COVID-19 pandemic has adversely impacted operations, reduced elective surgeries, delayed development activities and clinical trials, and disrupted the global supply chain, creating significant uncertainty for future results[132][135][138][141] Risks Related to Our Business and Industry This section outlines risks concerning sales growth, market competition, customer concentration, supply chain, and capital requirements - Future success depends on sales growth and market acceptance of both legacy and acquired products, with no assurance that growth can be achieved or sustained[59][60] - Substantial competition from companies with greater resources and healthcare industry consolidation leading to increased pricing pressures could materially affect financial performance[61][62][65] - A significant portion of revenue is derived from a small number of customers (Mitek accounted for 49% of 2020 product revenue), making the company vulnerable to loss or renegotiation of these relationships[67][68] - Reliance on a small number of suppliers for key raw materials and contract manufacturers, along with inherent manufacturing risks, could lead to supply disruptions[71][72] - The company is dependent on hiring and retaining qualified management and technical personnel, and the loss of key individuals could have a material adverse effect[80] - The company may require additional capital in the future, which, if raised through equity, could dilute existing ownership, or through debt, could impose restrictive covenants[81][84][85] Risks Related to Our Commercialization Activities Risks include dependence on Mitek agreements, challenges in scaling direct sales, and adverse impacts from third-party reimbursement policies - License agreements with Mitek provide them substantial control over Monovisc and Orthovisc sales, pricing, and promotion in the United States, impacting Anika's revenue predictability[86][87] - Failure to successfully integrate and scale the direct sales channel for Joint Preservation and Restoration products in the United States could negatively impact business and financial results[88][89] - Sales are largely dependent on third-party reimbursement, and healthcare cost containment initiatives or individual payer decisions could adversely affect product sales and pricing[92][93][94] Risks Related to Our Product Development and Regulatory Compliance This section covers risks associated with product approvals, regulatory changes like EU MDR, and compliance with healthcare fraud laws - The pathway to commercialize Cingal in the United States is longer than expected, requiring an additional Phase III trial, with patient enrollment delays due to COVID-19[96][97] - Failure or delay in obtaining FDA or other U.S. and foreign governmental approvals for new or existing products, or withdrawal of existing approvals, could materially impact the business[98][99][100][103] - Extensive regulations, including potential reclassification of HA products as drugs and the implementation of the new European Medical Device Regulation (EU MDR), could increase costs and challenges for product approval and compliance[104][107][108] - Reliance on third parties for clinical trials and compliance with various healthcare fraud and abuse laws, anti-corruption laws, and environmental regulations expose the company to significant liabilities if not adhered to[110][111][112][113][114] Risks Related to Our Growth Initiatives Risks include challenges in managing growth, integrating acquisitions, pursuing future inorganic growth, and expanding international sales - Difficulty managing substantial growth in employees, product portfolio, and operations, particularly post-acquisitions, could adversely affect business[115] - The ongoing integration of Parcus Medical and Arthrosurface acquisitions poses risks such as loss of key employees, unforeseen expenses, disruption of ongoing business, and management distraction, potentially hindering expected benefits[117][118][119] - Pursuing inorganic growth through future acquisitions exposes the company to risks like unanticipated liabilities, diversion of management resources, and challenges in new markets[120][121] - Growing international sales (21% of product sales in 2020) expose the company to economic, political, labor, regulatory, tax, and intellectual property risks in foreign jurisdictions[124] Risks Related to Our Intellectual Property Inadequate protection of intellectual property or infringement on others' rights could materially impact business and financial results - Inadequate protection of intellectual property rights (patents, trademarks, trade secrets) or infringement upon the rights of others could have a material impact on the business and financial results, leading to litigation costs, damages, or inability to market products[126][127][129][130] Risks Related to the COVID-19 Pandemic COVID-19 has adversely affected operations, elective procedures, clinical trials, and the global supply chain, creating significant uncertainty - COVID-19 has adversely affected operations in the U.S. and Italy, causing business interruptions, supply chain disruptions, and impacting commercial day-to-day activities due to cancellation or delay of elective procedures[131][132][133] - The pandemic led to a significant reduction in elective surgeries, negatively impacting revenue and operating results, with future recovery uncertain due to fluctuating infection rates[135][136][137] - Development activities, preclinical studies, and clinical trials have been adversely impacted by COVID-19 due to facility access limitations, patient recruitment challenges, and regulatory agency delays[138][139][140] - The global supply chain faces material adverse impacts from COVID-19, including potential material shortages, capacity issues, and logistics delays from suppliers[141] Risks Related to Ownership of Our Common Stock The company's stock price may be volatile due to various factors, including market conditions and anti-takeover provisions - The company's stock price may be highly volatile due to various factors, including product announcements, clinical trial results, regulatory actions, and general market conditions, exacerbated by investor uncertainty during the COVID-19 pandemic[142] - Charter documents contain anti-takeover provisions that could prevent or delay an acquisition, potentially discouraging non-negotiated takeovers[144] - A decline in stock price and trading volume could occur if securities or industry analysts cease publishing research or adversely change their recommendations[145][146] ITEM 2. Properties Anika Therapeutics leases five facilities, including its corporate headquarters in Bedford, Massachusetts (134,000 sq ft for admin, R&D, manufacturing), and additional facilities in Franklin, Massachusetts, Sarasota, Florida (two locations), and Padova, Italy, totaling over 80,000 square feet - The company leases five facilities, including its 134,000 square foot corporate headquarters in Bedford, Massachusetts, used for administrative, R&D, and manufacturing operations[147] - Additional leased facilities in Franklin, Massachusetts, Sarasota, Florida (two), and Padova, Italy, provide over 80,000 square feet of space, with lease terms extending up to 2038[147] ITEM 3. Legal Proceedings Anika Therapeutics is involved in various legal proceedings in the normal course of business, but does not expect their resolution to have a material adverse effect on its financial position, results of operations, or cash flow - The company is involved in various legal proceedings arising in the normal course of business[148] - The resolution of these proceedings is not expected to have a material adverse effect on the company's financial position, results of operations, or cash flow[148] PART II Part II details market information for common equity, selected financial data, management's discussion and analysis, and market risk disclosures ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Anika Therapeutics' common stock trades on NASDAQ under 'ANIK'. As of December 31, 2020, the closing price was $45.26, with 115 holders of record. The company has never paid cash dividends and intends to retain earnings for business use. A $50.0 million share repurchase program was approved in 2019, with $30.0 million executed via an accelerated share repurchase (ASR) agreement, repurchasing 590,751 shares at an average price of $50.78 - Anika Therapeutics' common stock trades on the NASDAQ Global Select Market under the symbol 'ANIK'[151] Common Stock Information (as of December 31, 2020) | Metric | Value | | :----- | :---- | | Closing Price per Share | $45.26 | | Holders of Record | 115 | - The company has never declared or paid cash dividends and intends to retain earnings for business investment[151] - A $50.0 million share repurchase program was approved in May 2019, including a $30.0 million accelerated share repurchase (ASR) program. Under the ASR, 590,751 shares were repurchased at an average price of approximately $50.78[156] ITEM 6. Selected Financial Data This section provides a summary of selected consolidated financial data for Anika Therapeutics, Inc. for the past five fiscal years, including key figures from the Statements of Operations and Balance Sheets. The data reflects the adoption of new accounting standards (ASC 606, ASC 842, ASC 326) in respective periods Selected Statements of Operations Data (in thousands, except per share data) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :----- | :--- | :--- | :--- | :--- | :--- | | Product revenue | $130,457 | $114,512 | $105,531 | $107,783 | $102,932 | | Total revenue | $130,457 | $114,610 | $105,555 | $113,420 | $103,379 | | Gross profit | $69,026 | $85,863 | $74,275 | $86,056 | $79,352 | | Gross margin | 53% | 75% | 70% | 76% | 77% | | Total operating expenses | $97,348 | $51,615 | $52,526 | $40,327 | $28,745 | | Net income (loss) | $(23,982) | $27,193 | $18,722 | $31,816 | $32,547 | | Diluted net income (loss) per common share | $(1.69) | $1.89 | $1.27 | $2.11 | $2.15 | | Diluted common shares outstanding | 14,222 | 14,374 | 14,689 | 15,068 | 15,116 | Selected Balance Sheet Data (in thousands) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :----- | :--- | :--- | :--- | :--- | :--- | | Cash, cash equivalents and investments | $98,318 | $184,943 | $159,014 | $157,256 | $124,761 | | Working capital | $140,516 | $218,029 | $191,654 | $193,254 | $161,641 | | Total assets | $365,605 | $330,710 | $278,993 | $282,617 | $240,246 | | Long-term liabilities | $56,338 | $26,055 | $4,092 | $6,054 | $8,674 | | Retained earnings | $221,444 | $245,426 | $218,233 | $199,511 | $168,209 | | Stockholders' equity | $272,400 | $288,378 | $263,612 | $263,491 | $222,773 | - The financial data reflects the adoption of ASC 606 (Revenue from Contracts with Customers) in 2018, ASC 842 (Leases) in 2019, and ASC 326 (Credit Losses) in 2020, using modified retrospective methods[161] ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Anika's financial condition and results of operations, highlighting the impact of 2020 acquisitions and the COVID-19 pandemic. It details revenue, gross profit, operating expenses, and net income changes, along with non-GAAP financial measures. The discussion also covers liquidity, capital resources, contractual obligations, and critical accounting policies, emphasizing the significant judgments and estimates involved in financial reporting - The discussion covers the company's transformation into a global joint preservation company through 2020 acquisitions of Parcus Medical and Arthrosurface, expanding its market and capabilities[163][165] - Key developments in 2020 included strengthening the executive team, enhancing commercial infrastructure with over 30 direct sales representatives, launching seven new surgical devices, and progressing clinical studies for Cingal and Hyalofast[168][169] - The COVID-19 pandemic significantly impacted financial condition and operations, leading to volatility in results due to delayed elective procedures and clinical study timelines, though supply to customers was not interrupted[170] Management Overview This overview highlights Anika's transformation into a global joint preservation company through strategic acquisitions and key 2020 developments - Anika Therapeutics, founded in 1992, is a global joint preservation company focused on early intervention orthopedic care, leveraging its hyaluronic acid (HA) technology platform[163][164] - Strategic acquisitions of Parcus Medical and Arthrosurface in early 2020 expanded the addressable market from over $1 billion in OA pain management to over $8 billion in joint preservation[165] - Key developments in 2020 included completing acquisitions, strengthening the executive team, enhancing commercial infrastructure, launching seven Joint Preservation and Restoration surgical devices, and commencing Cingal Pilot Study while continuing Hyalofast clinical trial[168][169] COVID-19 Pandemic The COVID-19 pandemic caused economic downturn, impacting elective procedures and clinical study timelines, with future effects remaining uncertain - The COVID-19 pandemic caused an economic downturn and significant volatility, impacting elective procedure volumes and clinical study timelines, though supply to customers was not disrupted[170] - The company implemented precautions like remote work policies and repaid a $50 million credit facility drawdown in 2020, but future impacts remain uncertain[169][170] Product Categories The company's product families include Joint Pain Management, Joint Preservation and Restoration, and other legacy HA-based solutions - Product families include Joint Pain Management (Monovisc, Orthovisc, Cingal, Hyvisc), Joint Preservation and Restoration (bone preserving joint technology, soft tissue repair, regenerative solutions like Hyalofast and Tactoset), and Other (legacy HA-based products like adhesion barriers and wound care)[171][173] Results of Operations This section analyzes the company's financial performance, detailing changes in revenue, gross profit, and operating expenses over recent fiscal years Year ended December 31, 2020 compared to year ended December 31, 2019 This subsection compares the company's financial performance for the fiscal years 2020 and 2019, highlighting key revenue, expense, and net income changes Statement of Operations Detail (2020 vs. 2019, in thousands) | Metric | 2020 | 2019 | $ Change | % Change | | :----- | :--- | :--- | :------- | :------- | | Product revenue | $130,457 | $114,512 | $15,945 | 14% | | Total revenue | $130,457 | $114,610 | $15,847 | 14% | | Cost of revenue | $61,431 | $28,747 | $32,684 | 114% | | Gross Profit | $69,026 | $85,863 | $(16,837) | (20%) | | Gross margin | 53% | 75% | - | - | | Research & development | $23,431 | $16,665 | $6,766 | 41% | | Selling, general & administrative | $60,063 | $34,950 | $25,113 | 72% | | Goodwill impairment | $42,520 | - | $42,520 | - | | Change in fair value of contingent consideration | $(28,666) | - | $(28,666) | - | | Total operating expenses | $97,348 | $51,615 | $45,733 | 89% | | Income (loss) from operations | $(28,322) | $34,248 | $(62,570) | (183%) | | Net income (loss) | $(23,982) | $27,193 | $(51,175) | (188%) | - Total and Product revenue increased by 14% to $130.5 million, primarily driven by growth in the Joint Preservation and Restoration product family due to acquisitions, offset by a 20% decrease in Joint Pain Management revenue due to COVID-19[177][178] - Gross profit decreased by 20% to $69.0 million, with gross margin falling from 75% to 53%, mainly due to inventory step-up, acquisition-related amortization ($16.9 million), lower volumes from COVID-19, and a $1.9 million inventory impairment charge[179] - Research & development expenses increased by 41% to $23.4 million, driven by clinical studies for Cingal and Hyalofast, European post-market studies, and new product development from acquisitions[30][175] - Selling, general & administrative expenses increased by 72% to $60.1 million, primarily due to operating expenses of acquired companies, commercial infrastructure integration, and incentive compensation[181] - A total non-cash goodwill impairment charge of $42.5 million was recorded in 2020 for the Parcus Medical and Arthrosurface reporting unit, due to decreased near-term revenue projections and a longer-than-expected economic recovery from COVID-19[183] - A $28.7 million net benefit was recorded from the change in fair value of contingent consideration, largely due to decreased revenue projections related to the COVID-19 pandemic. A $5 million regulatory milestone was paid for the WristMotion Total Arthroplasty System[184] - The company reported a net loss of $23.9 million in 2020, compared to a net income of $27.2 million in 2019, primarily due to increased acquisition-related expenses and the unfavorable impact of the COVID-19 pandemic on sales and gross profit[185] Adjusted EBITDA (2020 vs. 2019, in thousands) | Metric | 2020 | 2019 | | :----- | :--- | :--- | | Net income (loss) | $(23,982) | $27,193 | | Adjusted EBITDA | $23,938 | $49,185 | | Change in Adjusted EBITDA | $(25,247) | - | - Adjusted EBITDA decreased by $25.2 million, primarily due to the unfavorable impact of the COVID-19 pandemic on revenues, unfavorable revenue mix, and higher expenses from the Parcus Medical and Arthrosurface acquisitions[192] Adjusted Net Income and EPS (2020 vs. 2019, in thousands, except per share data) | Metric | 2020 | 2019 | | :----- | :--- | :--- | | Net income (loss) | $(23,982) | $27,193 | | Adjusted net income | $10,146 | $29,449 | | Diluted EPS | $(1.69) | $1.89 | | Adjusted diluted EPS | $0.71 | $2.05 | - Adjusted net income decreased by $19.2 million and adjusted diluted EPS decreased by $1.34 per share, driven by COVID-19 impacts on revenue and higher acquisition-related expenses[197] Year ended December 31, 2019 compared to year ended December 31, 2018 This subsection compares the company's financial performance for the fiscal years 2019 and 2018, detailing revenue, gross profit, and net income trends Statement of Operations Detail (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | $ Change | % Change | | :----- | :--- | :--- | :------- | :------- | | Product revenue | $114,512 | $105,531 | $8,981 | 9% | | Total revenue | $114,610 | $105,555 | $9,055 | 9% | | Cost of revenue | $28,747 | $31,280 | $(2,533) | (8%) | | Gross Profit | $85,863 | $74,275 | $11,588 | 16% | | Gross margin | 75% | 70% | - | - | | Research & development | $16,665 | $18,190 | $(1,525) | (8%) | | Selling, general & administrative | $34,950 | $34,336 | $614 | 2% | | Total operating expenses | $51,615 | $52,526 | $(911) | (2%) | | Income from operations | $34,248 | $21,749 | $12,499 | 57% | | Net income | $27,193 | $18,722 | $8,471 | 45% | - Total revenue increased by $9.1 million (9%) to $114.6 million, primarily due to increased global Joint Pain Management revenue and recovery from the 2018 voluntary recall of HYAFF-based products[200][203][205] - Gross profit increased by $11.6 million (16%) to $85.9 million, with gross margin improving from 70% to 75%, driven by a more favorable revenue mix and recovery from the 2018 product recall[205] - Research and development expenses decreased by $1.5 million (8%) to $16.7 million, mainly due to lower clinical trial expenses for Cingal Phase III, partially offset by higher pre-clinical development activities[206] - Net income increased by $8.5 million (45%) to $27.2 million, primarily due to increased total revenue, higher gross profit, and a decrease in one-time expenses from a former CEO's retirement and the 2018 product recall[209] Concentration of Risk The company's significant dependence on a small number of customers, particularly Mitek, poses a material risk to its financial performance - The company historically derived the majority of its revenues from a small number of customers; in 2020, five customers accounted for 58% of product revenue, with Mitek alone representing 49%[210] - Dependence on these large customers, especially Mitek, creates a risk that termination, reduction, or delay in orders could materially impact business, financial condition, and results of operations[210][212] Liquidity and Capital Resources This section analyzes the company's cash position, working capital, and cash flow activities, highlighting impacts from acquisitions and the pandemic Liquidity and Capital Resources (in thousands) | Metric | December 31, 2020 | December 31, 2019 | | :----- | :---------------- | :---------------- | | Cash, cash equivalents, and investments | $98,318 | $184,943 | | Working capital | $140,516 | $218,029 | | Cash provided by operating activities | $13,065 | $37,005 | | Cash used in investing activities | $71,264 | $(39,691) (provided) | | Cash used in financing activities | $3,774 | $8,142 | - Cash provided by operating activities decreased in 2020 due to the COVID-19 pandemic's impact on sales and gross profit, and increased operational spending from acquisitions[215] - Investing activities used $71.3 million in 2020, primarily due to the acquisitions of Parcus Medical and Arthrosurface[215] - The company drew down and repaid $50 million from its credit facility in 2020 as a precautionary measure due to COVID-19, ending the year with no outstanding borrowings[214] Contractual Obligations and Other Commercial Commitments This section details the company's future payment obligations, including operating leases, purchase commitments, and acquisition-related earn-out milestones Contractual Obligations (as of December 31, 2020, in thousands) | Type | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :--- | :---- | :--------------- | :-------- | :-------- | :---------------- | | Operating and Finance Leases | $30,636 | $2,470 | $4,689 | $4,027 | $19,450 | | Purchase Commitments | $2,519 | $1,597 | $611 | $311 | - | | Total | $33,155 | $4,067 | $5,300 | $4,338 | $19,450 | - The company has earn-out milestones totaling up to $100 million payable from 2020 to 2022 related to the Parcus Medical and Arthrosurface mergers, with an estimated $35.4 million remaining as of December 31, 2020[220] Accounting for Off-Balance Sheet Arrangements The company does not utilize special purpose entities or other off-balance sheet financing, except for disclosed operating leases - The company does not use special purpose entities or other off-balance sheet financing techniques, except for operating leases, which are disclosed in contractual obligations[221] Summary of Critical Accounting Policies; Significant Judgments and Estimates This section outlines critical accounting policies involving significant estimates and judgments, such as business combinations, revenue recognition, and impairment assessments - Critical accounting policies involve significant estimates and judgments, including business combinations (purchase price allocation, fair value of intangible assets, contingent consideration), revenue recognition, inventories (write-downs), and goodwill/IPR&D impairment assessments[222][224][228][229][238][240][241] - Fair value measurements for acquired assets and contingent consideration rely on models like multi-period excess earnings, avoided costs/lost profits, relief-from-royalty, and Monte Carlo simulations, requiring assumptions about future cash flows, growth rates, and discount rates[226][228][355][366][379] - Goodwill and IPR&D are not amortized but are tested for impairment annually or more frequently. In 2020, a $42.5 million goodwill impairment charge was recorded for the Parcus Medical and Arthrosurface reporting unit due to COVID-19 impacts[241][246] - Revenue recognition follows a five-step model, distinguishing between commercial partnership sales (e.g., Mitek), sales to hospitals/surgery centers (consignment), and distributor sales, with revenue recognized when the customer obtains control of goods or services[229][231][232][233] Recent Accounting Pronouncements This section details the adoption of new accounting standards (ASU 2018-15, ASU 2016-13, ASU 2017-04, ASU 2018-13) and monitoring of ASU 2020-04 - The company adopted ASU 2018-15 (Internal-Use Software), ASU 2016-13 (Credit Losses), ASU 2017-04 (Goodwill Impairment), and ASU 2018-13 (Fair Value Measurement Disclosure) effective January 1, 2020, with varying impacts on financial statements and disclosures[337][338][341][342] - ASU 2020-04 (Reference Rate Reform) was issued in March 2020, providing optional guidance for contracts referencing LIBOR, which the company has not yet adopted but will continue to monitor[343] ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk This section discusses Anika Therapeutics' exposure to market risks, primarily interest rate risk and foreign currency exchange risk. The company manages its investment portfolio to preserve principal and maintain liquidity, while foreign currency risk arises from international operations and transactions, with no hedging arrangements in place - The company's investment portfolio, consisting of money market funds and U.S. treasury bills, is subject to interest rate fluctuations, with primary objectives to preserve principal, maintain liquidity, and obtain competitive returns[252] - Foreign currency exchange risk arises from international subsidiaries (e.g., Italy) and transactions denominated in foreign currencies, with approximately $5.8 million of revenue in foreign currencies in 2020. The company does not engage in foreign currency hedging[253] ITEM 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and related notes, providing a comprehensive view of its financial performance and position Index to Consolidated Financial Statements This section provides an index to the consolidated financial statements, including the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations and Comprehensive Income (Loss), Stockholders' Equity, Cash Flows, and accompanying Notes - The index lists the audited consolidated financial statements and related notes for Anika Therapeutics, Inc. and Subsidiaries[256] Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on Anika Therapeutics' consolidated financial statements and the effectiveness of its internal control over financial reporting as of December 31, 2020. Critical audit matters included the fair value of developed technology assets and goodwill impairment related to the Arthrosurface and Parcus Medical acquisitions, due to significant management estimates and auditor judgment - Deloitte & Touche LLP provided an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting for Anika Therapeutics as of December 31, 2020[257][258] - Critical audit matters included the fair value of developed technology assets ($78.1 million) and goodwill impairment for the Arthrosurface and Parcus Medical reporting unit, which required significant auditor judgment due to management's estimates of future cash flows and discount rates[262][263][266][268] Consolidated Balance Sheets The Consolidated Balance Sheets present Anika Therapeutics' financial position as of December 31, 2020, and 2019. Key changes in 2020 include a decrease in cash and investments, an increase in inventories and intangible assets due to acquisitions, and a significant increase in current and long-term contingent consideration liabilities Consolidated Balance Sheets (in thousands) | ASSETS | December 31, 2020 | December 31, 2019 | | :----- | :---------------- | :---------------- | | Cash and cash equivalents | $95,817 | $157,463 | | Investments | $2,501 | $27,480 | | Accounts receivable, net | $24,102 | $23,079 | | Inventories, net | $46,209 | $21,995 | | Total current assets | $177,383 | $234,306 | | Property and equipment, net | $50,613 | $50,783 | | Right-of-use assets | $22,619 | $22,864 | | Other long-term assets | $15,420 | $7,478 | | Intangible assets, net | $91,157 | $7,585 | | Goodwill | $8,413 | $7,694 | | Total assets | $365,605 | $330,710 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Accounts payable | $8,984 | $3,832 | | Accrued expenses and other current liabilities | $14,793 | $12,445 | | Contingent consideration – current portion | $13,090 | - | | Total current liabilities | $36,867 | $16,277 | | Other long-term liabilities | $1,244 | $357 | | Contingent consideration – long term portion | $22,320 | - | | Deferred tax liability | $11,895 | $4,331 | | Lease liabilities | $20,879 | $21,367 | | Total stockholders' equity | $272,400 | $288,378 | | Total liabilities and stockholders' equity | $365,605 | $330,710 | - Cash and cash equivalents decreased by $61.6 million, and investments decreased by $24.9 million from 2019 to 2020[273] - Inventories, net, increased by $24.2 million, and intangible assets, net, increased by $83.6 million, primarily due to the acquisitions of Parcus Medical and Arthrosurface in 2020[273] - Contingent consideration liabilities, both current and long-term, totaled $35.4 million in 2020, reflecting earn-out milestones from the acquisitions[273] Consolidated Statements of Operations and Comprehensive Income (Loss) The Consolidated Statements of Operations and Comprehensive Income (Loss) show Anika Therapeutics' financial performance for the years ended December 31, 2020, 2019, and 2018. In 2020, the company reported a net loss of $24.0 million, a significant shift from net incomes in prior years, driven by increased cost of revenue, operating expenses (including goodwill impairment), and a benefit from contingent consideration fair value changes Consolidated Statements of Operations and Comprehensive Income (Loss) (in thousands, except per share data) | Metric | 2020 | 2019 | 2018 | | :----- | :--- | :--- | :--- | | Product revenue | $130,457 | $114,512 | $105,531 | | Total revenue | $130,457 | $114,610 | $105,555 | | Cost of revenue | $61,431 | $28,747 | $31,280 | | Gross profit | $69,026 | $85,863 | $74,275 | | Research & development | $23,431 | $16,665 | $18,190 | | Selling, general & administrative | $60,063 | $34,950 | $34,336 | | Goodwill impairment charge | $42,520 | - | - | | Change in fair value of contingent consideration | $(28,666) | - | - | | Total operating expenses | $97,348 | $51,615 | $52,526 | | Income (loss) from operations | $(28,322) | $34,248 | $21,749 | | Net income (loss) | $(23,982) | $27,193 | $18,722 | | Diluted net income (loss) per share | $(1.69) | $1.89 | $1.27 | | Comprehensive income (loss) | $(22,626) | $26,821 | $17,980 | - In 2020, the company reported a net loss of $23.98 million, a significant decrease from net incomes of $27.19 million in 2019 and $18.72 million in 2018[275] - The shift to a net loss in 2020 was primarily driven by a $42.52 million goodwill impairment charge and a substantial increase in cost of revenue and selling, general & administrative expenses, partially offset by a $28.67 million benefit from the change in fair value of contingent consideration[275] Consolidated Statements of Stockholders' Equity The Consolidated Statements of Stockholders' Equity detail changes in equity for the years ended December 31, 2020, 2019, and 2018. In 2020, total stockholders' equity decreased to $272.4 million from $288.4 million in 2019, primarily due to the net loss incurred, partially offset by stock-based compensation expense and foreign currency translation adjustments Consolidated Statements of Stockholders' Equity (in thousands) | Metric | December 31, 2020 | December 31, 2019 | December 31, 2018 | | :----- | :---------------- | :---------------- | :---------------- | | Common Stock | $143 | $143 | $142 | | Additional Paid-in Capital | $55,355 | $48,707 | $50,763 | | Retained Earnings | $221,444 | $245,426 | $218,233 | | Accumulated Other Comprehensive Loss | $(4,542) | $(5,898) | $(5,526) | | Total Stockholders' Equity | $272,400 | $288,378 | $263,612 | - Total stockholders' equity decreased by $15.98 million in 2020, from $288.38 million in 2019 to $272.40 million, primarily driven by the net loss of $23.98 million[278] - Additional paid-in capital increased by $6.65 million in 2020, reflecting issuance of common stock for equity awards and stock-based compensation expense, partially offset by common stock retirement for tax withholdings[278] Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows show Anika Therapeutics' cash movements for the years ended December 31, 2020, 2019, and 2018. In 2020, cash and cash equivalents decreased significantly by $61.6 million, primarily due to substantial cash used in investing activities for acquisitions, despite positive cash flow from operations and a net decrease in cash used in financing activities Consolidated Statements of Cash Flows (in thousands) | Activity | 2020 | 2019 | 2018 | | :------- | :--- | :--- | :--- | | Net cash provided by operating activities | $13,065 | $37,005 | $34,918 | | Net cash provided by (used in) investing activities | $(71,264) | $39,691 | $(50,257) | | Net cash provided by (used in) financing activities | $(3,774) | $(8,142) | $(28,904) | | Increase (decrease) in cash and cash equivalents | $(61,646) | $68,421 | $(44,214) | | Cash and cash equivalents at end of period | $95,817 | $157,463 | $89,042 | - Cash and cash equivalents decreased by $61.6 million in 2020, ending the year at $95.8 million, compared to an increase of $68.4 million in 2019[280] - Investing activities used $71.3 million in 2020, primarily for the acquisitions of Parcus Medical and Arthrosurface ($94.6 million, net of cash acquired)[280] - Operating activities provided $13.1 million in 2020, a decrease from $37.0 million in 2019, mainly due to the impact of COVID-19 on sales and gross profit, and increased operational spending post-acquisitions[215][280] - Financing activities used $3.8 million in 2020, a decrease from $8.1 million in 2019, primarily due to lower share repurchases and a $5 million regulatory-based milestone payment[216][280] Notes to Consolidated Financial Statements The Notes to Consolidated Financial Statements provide detailed information supporting the financial statements, covering the nature of business, significant accounting policies, business combinations, fair value measurements, inventories, property and equipment, acquired intangible assets, goodwill, leases, accrued expenses, revolving credit agreement, commitments and contingencies, revenue breakdown, equity incentive plan, employee benefit plan, accelerated share repurchases, income taxes, and earnings per share. These notes are crucial for understanding the company's financial health and operational context - The notes detail the company's business as a global joint preservation company, with strategic acquisitions of Parcus Medical and Arthrosurface in early 2020 significantly expanding its product portfolio and market[284][285] - Significant accounting policies include use of estimates, principles of consolidation, foreign currency translation, revenue recognition (commercial partnerships, hospitals, distributors), and valuation of investments and inventories[288][289][291][293][294][305][306][311] - Business combinations in 2020 resulted in total purchase consideration of $75.1 million for Parcus Medical and $90.3 million for Arthrosurface, including significant contingent consideration liabilities[346][347][360][361] - Goodwill impairment charges totaled $42.5 million in 2020 for the newly created reporting unit (Parcus Medical and Arthrosurface) due to COVID-19 impacts on projected cash flows[400] - The company recorded a net loss of $23.98 million in 2020, with diluted EPS of $(1.69), a significant decline from prior years' net income[275] 1. Nature of Business This note describes Anika Therapeutics as a global joint preservation company, detailing its acquisitions and monitoring of the COVID-19 impact - Anika Therapeutics, Inc. is a global joint preservation company focused on early intervention orthopedic care, including OA pain management, regenerative solutions, soft tissue repair, and bone preserving joint technologies[284] - In early 2020, the company acquired Parcus Medical and Arthrosurface, expanding its product portfolio, commercial capabilities, and R&D expertise into joint preservation and restoration[285] - The company is closely monitoring the impact of the COVID-19 pandemic on its business, acknowledging uncertainties regarding its financial position and operations[286] 2. Summary of Significant Accounting Policies This note outlines the company's GAAP-based financial statement preparation, consolidation principles, revenue recognition, and new accounting standard adoptions - The financial statements are prepared using GAAP, requiring management to make estimates and assumptions affecting reported amounts of assets, liabilities, revenues, and expenses[288] - The company consolidates its wholly-owned subsidiaries, including Anika Securities, Anika S.r.l., Anika Therapeutics Limited, Parcus Medical, and Arthrosurface[289] - Revenue is recognized when a customer obtains control of promised goods or services, applying a five-step model. Sales channels include commercial partnerships (e.g., Mitek, 49% of 2020 revenue), hospitals/surgery centers (consignment), and distributors[293][294][297][298][299] - Goodwill and Acquired In-Process Research and Development (IPR&D) are not amortized but are evaluated for impairment annually or more frequently. The company has two reporting units: legacy Anika and a joint preservation and restoration unit (Parcus Medical and Arthrosurface)[319][320] - The company adopted several new accounting standards effective January 1, 2020, including ASU 2018-15 (Internal-Use Software), ASU 2016-13 (Credit Losses), ASU 2017-04 (Goodwill Impairment), and ASU 2018-13 (Fair Value Measurement Disclosure)[337][338][341][342] 3. Business Combinations This note details the 2020 acquisitions of Parcus Medical and Arthrosurface, including purchase considerations, intangible assets, and goodwill - On January 24, 2020, Anika acquired Parcus Medical for an estimated total purchase consideration of $75.1 million, including $32.8 million cash and $40.7 million in estimated contingent consideration[344][346][347] - On February 3, 2020, Anika acquired Arthrosurface for an estimated total purchase consideration of $90.3 million, including $61.9 million cash and $28.4 million in estimated contingent consideration[358][360][361] - The acquisitions significantly increased intangible assets, with developed technology, trade names, customer relationships, and IPR&D being key components of the acquired fair value[354][355][364][366][367] - Acquisition-related costs were expensed, and goodwill was recorded, attributable to the workforce and future technologies. Goodwill from Parcus Medical is tax-deductible, while Arthrosurface's is not[350][356][362][367] Pro Forma Information (in thousands) | Metric | 2020 | 2019 | | :----- | :--- | :--- | | Total revenue | $134,410 | $157,728 | | Net income (loss) | $(22,984) | $7,144 | 4. Fair Value Measurements This note explains the fair value hierarchy for financial assets and liabilities, particularly contingent consideration, and its change due to COVID-19 - The company's financial assets (cash equivalents, investments) are classified as Level 1 in the fair value hierarchy, valued based on quoted prices in active markets[375][376] - Financial liabilities, specifically contingent consideration from business acquisitions, are classified as Level 3, requiring significant judgment and unobservable inputs for fair value determination[375][376] - The fair value of contingent consideration decreased by $28.7 million in 2020, primarily due to reduced near-term revenue projections caused by the COVID-19 pandemic[380] - As of December 31, 2020, the estimated remaining earn-outs for contingent consideration totaled $35.4 million, with probabilities of successful achievement for Arthrosurface regulatory milestones ranging from 60%-75%[379] 5. Inventories This note details the composition and significant increase in inventories in 2020, primarily due to acquisitions and product rationalization efforts Inventories (in thousands) | Category | December 31, 2020 | December 31, 2019 | | :------- | :---------------- | :---------------- | | Raw materials | $14,852 | $12,058 | | Work-in-process | $12,811 | $8,330 | | Finished goods | $33,347 | $8,777 | | Total | $61,010 | $29,165 | | Inventories (current) | $46,209 | $21,995 | | Other long-term assets (inventory) | $14,801 | $7,170 | - Total inventories increased significantly in 2020 to $61.0 million from $29.2 million in 2019, primarily due to the acquisitions of Parcus Medical and Arthrosurface[382][383] - Inventory reserves increased to $6.9 million in 2020 from $3.0 million in 2019, including a $2.8 million reserve due to product rationalization efforts and the decision not to pursue CE Mark renewals for certain legacy products[382][383] 6. Property and Equipment This note provides a breakdown of property and equipment, net, and associated depreciation expenses for recent fiscal years Property and Equipment, Net (in thousands) | Category | December 31, 2020 | December 31, 2019 | | :------- | :---------------- | :---------------- | | Equipment and software | $48,316 | $42,733 | | Fu