2017
ANNUAL REPORT
ANIKA THERAPEUTICS, INC.
Anika Therapeutics, Inc.
2017 Letter to Shareholders
Dear Anika Shareholders,
2017 was an important year for Anika Therapeutics as we achieved several key milestones associated with our strategy
of creating greater enduring shareholder value through the transformation from an operating company to a full
commercial organization with exciting new products. After joining the Company as its President during the second half
of 2017, I was appointed CEO by the Board of Directors in March 2018. Since joining Anika, I have fully immersed
myself in its products, operations, and culture, and I am excited and proud to address my fellow shareholders for the first
time in this annual report. It is an honor and a great opportunity to lead Anika through the next phase of its evolution, as
we invest in and build our pipeline to deliver a series of innovative new treatments to the global orthopedic community
over the coming years. We are entering a new chapter of the Anika story – one that I anticipate will bring about
foundational and exciting changes at the Company, while maintaining its central themes of financial discipline and
delivering long-term value to our shareholders.
2017 was a year of significant commercial, operational, and financial achievement, highlighted by double-digit revenue
growth, expansion of Monovisc and Cingal into new international markets, and rapid advancement of our second pivotal
Phase III trial of Cingal. Orthovisc and Monovisc continued to maintain a combined market leading position in the United
States, and we delivered substantial international growth driven primarily by the global expansion of Monovisc and
Cingal.
Our mandate going forward is clear. We will work to make Anika's HA-based solutions a standard of care for many of
the most common conditions associated with aging and orthopedic injury. Through the planned U.S. launch of Cingal
and other new therapies to follow, we believe that we are positioning Anika for multi-year success. We will strive to
create and deliver additional innovative solutions to our physician customers to treat the growing legion of patients with
joint pain and injuries, and to translate those solutions into accelerated revenue and earnings growth over the next several
years, which will ultimately deliver sustained value and returns to our shareholders.
While we take nothing for granted and execution in the marketplace is never a given, Anika is poised to deliver several
key innovations to the market over the next several years. Our entire leadership team is focused on four strategies to drive
sustained growth. First, we will continue to aggressively execute all activities required to gain FDA approval of Cingal,
a potential game-changing, first-of-its-kind combination therapy for the treatment of osteoarthritis. Second, we will
further expand our global commercial footprint to accelerate international growth of Monovisc and Cingal. Third, we
will finish building the infrastructure necessary to directly commercialize Cingal in the United States. Fourth, we will
continue to drive new product innovation and advance our orthobiologics and regenerative medicine product candidates
through clinical development.
2017 Financial Results
In 2017, product revenue increased 5% and total revenue grew 10% to $113.4 million. Product revenue growth for the
year was driven primarily by a 29% increase in worldwide Monovisc revenue. International orthobiologics revenue
increased 22% for the year, due to our global expansion efforts and increasing demand for Monovisc and Cingal. We also
delivered a strong product gross margin of 75% and operating margin of 40% for 2017. Net income was $31.8 million and
diluted earnings per share was $2.18 for the year. Additionally, we generated strong operating cash flow of $41 million
for 2017, and ended the year with approximately $157 million in cash and investments.
We expect that we will continue to generate strong cash from operations in 2018, despite the substantial and disciplined
investments we are making in the people, processes, and equipment needed for our global launch plans. These include
accelerating R&D investment to execute our Cingal and Hyalofast Phase III trials, and to prepare for and commence our
tennis elbow post-market clinical study. We will also continue to make the outlays necessary to build our direct
commercialization infrastructure and capability in the United States. 2018 will be a year of accelerated strategic investment
as we reshape Anika into a true commercial organization capable of supporting a series of novel technologies that can both
disrupt and expand the growing need for non-opioid pain solutions and more effective regenerative healing technologies
for active aging patients.
Positioned for Transformational Growth in Years Ahead
2017 marked an inflection point in Anika’s growth. We aggressively advanced our most promising pipeline candidates
and began to execute our plan for the establishment of a direct commercialization capability, including bolstering our
executive team and sharpening our commercial launch plan for Cingal. In addition to myself, we strengthened our
executive leadership team by appointing two seasoned executives, Steven Chartier as Vice President of Regulatory,
Clinical, and Quality functions, and Thomas Finnerty as Chief Human Resources Officer. These seasoned and talented
professionals come to Anika from commercial-stage companies, and their contributions will be critical to our success
and growth.
With the pending launches of both Cingal and Hyalofast, Anika has the rare opportunity to deliver two breakthrough
technologies to the market within a relatively short timeframe.
• Cingal is poised to be the first and only viscosupplement in the U.S. market to combine an FDA-approved steroid
utilized to treat inflammation along with Anika's proprietary non-animal-derived hyaluronic acid. It will provide
patients with near-term pain relief through the steroid in conjunction with the long-term benefit of our hyaluronic
acid. We expect to complete the Cingal Phase III trial in the first half of 2018, and we currently anticipate FDA
approval around mid-2019. We are also pursuing the extension of a pain relief claim for an additional 3 months,
potentially providing patients with 9 months free of pain from osteoarthritis.
• Hyalofast, our lead cartilage regenerative therapy, is also undergoing its Phase III clinical trial, and we expect
completion of patient enrollment by the end of this year. Hyalofast is a non-woven, biodegradable, hyaluronic
acid-based scaffold utilized to treat cartilage injuries and defects. While not yet cleared by the FDA for sale in
the United States, this advanced, off-the-shelf, one-step technology has been used in more than 14,000 patient
procedures by leading physicians through minimally invasive surgery in more than 15 countries.
In 2018, we intend to complete the design of a national sales organization to maximize and optimize our penetration
into the U.S. market. The U.S. sales organization will be deployed following FDA approval of Cingal in 2019. We
plan to partner with a contract sales organization and several other service providers to complete preparatory work
on pricing, reimbursement, and market access, as well as defining an optimal structure for third party logistics. The
ability to deploy a direct sales force for certain product categories empowers us to own end-user relationships, provides
us better access to patients, and allows Anika to capture all end-user revenues for those products. This strategy
gives us the potential opportunity to more than double our revenues over the next 2 to 3 years.
Last year, Anika celebrated its 25th anniversary as an innovative orthopedic medicines company. The Company’s
evolution has been remarkable, and Anika is at the cusp of transformational growth. I would like to thank Dr. Charles
Sherwood for his innovation, leadership, and countless contributions to Anika over his nearly 20-year career with Anika,
and to wish him all the best in his retirement. I would also like to extend our gratitude and appreciation for the hard work
of our employees, the commitment of our clinical investigators and patients, and the continued interest from our loyal
investors. On behalf of our entire management team and the Board of Directors, I thank you for your trust and confidence
in Anika Therapeutics, and I look forward to 2018 as we continue to achieve our key milestones towards the
transformation of Anika Therapeutics.
Sincerely,
Joseph G. Darling
Joseph G. Darling
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
For the transition period from to
Commission File Number 000-21326
Anika Therapeutics, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts
(State or Other Jurisdiction of Incorporation or Organization)
04-3145961
(IRS Employer Identification No.)
32 Wiggins Avenue, Bedford, Massachusetts 01730
(Address of Principal Executive Offices) (Zip Code)
(781) 457-9000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.01 per share
Preferred Stock Purchase Rights
Name of Each Exchange on Which Registered
NASDAQ Global Select Market
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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 and posted on its corporate website, if any, every Interactive Data File
required to be submitted and posted pursuant 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 and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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.
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
Large accelerated filer
Accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of voting and non-voting equity held by non-affiliates of the Registrant (without admitting that any person whose
shares are not included in such calculation is an affiliate) as of June 30, 2017, the last day of the Registrant’s most recently completed second fiscal quarter,
was $702,114,713 based on the close price per share of common stock of $49.34 as of such date as reported on the NASDAQ Global Select Market.
At February 9, 2018, there were issued and outstanding 14,693,928 shares of common stock, par value $0.01 per share.
Documents Incorporated By Reference
The registrant intends to file a proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2017. Portions of
such proxy statement are incorporated by reference into Part III of this Annual Report on Form 10-K.
ANIKA THERAPEUTICS, INC.
TABLE OF CONTENTS
Page
Cautionary Note Regarding Forward-Looking Statements .............................................................................
3
Part I
Item 1. Business ..........................................................................................................................................................
4
Item 1A. Risk Factors .................................................................................................................................................... 12
Item 1B. Unresolved Staff Comments ........................................................................................................................... 24
Item 2.
Properties ........................................................................................................................................................ 24
Legal Proceedings ........................................................................................................................................... 25
Item 3.
Item 4. Mine Safety Disclosures ................................................................................................................................. 25
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ........................................................................................................................................................ 25
Item 6.
Selected Financial Data .................................................................................................................................. 26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ......................... 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........................................................................ 42
Item 8.
Financial Statements and Supplementary Data ............................................................................................... 43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......................... 71
Item 9A. Controls and Procedures ................................................................................................................................. 71
Item 9B. Other Information ........................................................................................................................................... 73
Part III
Item 10. Directors, Executive Officers and Corporate Governance .............................................................................. 73
Item 11. Executive Compensation ................................................................................................................................ 73
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ....... 73
Item 13. Certain Relationships and Related Transactions, and Director Independence ................................................ 73
Item 14. Principal Accounting Fees and Services ......................................................................................................... 73
Part IV
Item 15. Exhibits and Financial Statement Schedules .................................................................................................. 74
Item 16. Form 10-K Summary ...................................................................................................................................... 77
Signatures ............................................................................................................................................................................. 78
References in this Annual Report on Form 10-K to “we,” “us,” “our,” “our company,” and other similar references refer to Anika
Therapeutics, Inc. and its subsidiaries unless the context otherwise indicates.
ANIKA, ANIKA THERAPEUTICS, ANIKAVISC, CINGAL, HYAFF, HYDRELLE, HYVISC, INCERT, MONOVISC, and
ORTHOVISC are our registered trademarks, and HYALOSS, ELEVESS, OPTIVISC, and SHELLGEL are our trademarks. This
Annual Report on Form 10-K also contains registered marks, trademarks, and trade names that are the property of other
companies and licensed to us.
2
FORM 10-K
ANIKA THERAPEUTICS, INC.
For Fiscal Year Ended December 31, 2017
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning our business, consolidated financial
condition, and results of operations. The Securities and Exchange Commission ("SEC") encourages companies to disclose
forward-looking statements so that investors can better understand a company’s future prospects and make informed investment
decisions. Forward-looking statements are subject to risks and uncertainties, many of which are outside our control, which could
cause actual results to differ materially from these statements. Therefore, you should not rely on any of these forward-looking
statements. Forward-looking statements can be identified by such words as "will," "likely," "may," "believe," "expect,"
"anticipate," "intend," "seek," "designed," "develop," "would," "future," "can," "could," and other expressions that are predictions
of or indicate future events and trends and that do not relate to historical matters. All statements other than statements of historical
facts included in this Annual Report regarding our strategies, prospects, financial condition, operations, costs, plans, and
objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements regarding
expected future operating results, expectations regarding the timing and receipt of regulatory results, anticipated levels of capital
expenditures, and expectations of the effect on our financial condition of claims, litigation, and governmental and regulatory
proceedings.
Please refer to "Risk Factors" for important factors that we believe could cause actual results to differ materially from
those in our forward-looking statements. Any forward-looking statement made by us in this Annual Report on Form 10-K is
based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation
to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a
result of new information, future developments, or otherwise.
3
ITEM 1. BUSINESS
Overview
PART I
We are a global, integrated orthopedic medicines company committed to improving the lives of patients with
degenerative orthopedic diseases and traumatic conditions with clinically meaningful therapies along the continuum of care, from
palliative pain management to regenerative tissue repair. We have over two decades of global expertise developing,
manufacturing, and commercializing products based on our proprietary hyaluronic acid (“HA”) technology. Our orthopedic
medicine portfolio includes ORTHOVISC, MONOVISC, and CINGAL, which alleviate pain and restore joint function by
replenishing depleted HA, and HYALOFAST, a solid HA-based scaffold to aid cartilage repair and regeneration.
Our therapeutic offerings consist of products in the following areas: Orthobiologics, Dermal, Surgical, and Other, which
includes our ophthalmic and veterinary products. All of our products are based on HA, a naturally occurring, biocompatible
polymer found throughout the body. Due to its unique biophysical and biochemical properties, HA plays an important role in a
number of physiological functions such as the protection and lubrication of soft tissues and joints, the maintenance of the
structural integrity of tissues, and the transport of molecules to and within cells.
Our proprietary technologies for modifying the HA molecule allow product properties to be tailored specifically to
therapeutic use. Our patented technology chemically modifies HA to allow for longer residence time in the body. We also offer
products made from HA based on two other technologies: HYAFF, which is a solid form of HA, and ACP gel, an autocross-
linked polymer of HA. Our technologies are protected by an extensive portfolio of owned and licensed patents.
Since our inception as a Massachusetts corporation in 1992, we have utilized a commercial partnership model for the
distribution of our products to end users. Our strong, worldwide network of distributors has historically provided, and continues
to provide, a solid foundation for our revenue growth and territorial expansion. In 2015, we made the strategic decision to
commercialize our next generation viscosupplementation product, CINGAL, in the United States by utilizing a direct sales model,
initially through the engagement of a contract sales organization. Ultimately, we intend to transition the direct sales function into
our company as part of a broader buildout of our commercial capabilities. We believe that the combination of the direct and
distribution commercial models will maximize the revenue and profitability potential from our current and future product
portfolio.
In the fourth quarter of 2017, we completed all planned activities related to the strategic project we began in 2015 to
insource the manufacturing of our HYAFF-based products to our Bedford, Massachusetts global headquarters facility. Final costs
totaled $23.0 million for this project. These products were previously manufactured by a third-party contract manufacturer in
Italy. Our main purposes behind this strategic initiative are to enhance our research and development capabilities with the aim of
accelerating future product development and to improve the efficiency of our manufacturing processes.
The following sections provide more specific information about our products and related activities:
Orthobiologics
Our Orthobiologics products primarily consist of viscosupplementation and regenerative orthopedic products. These
products are used in a wide range of treatments, from providing pain relief from osteoarthritis to regenerating damaged tissue
such as cartilage. Osteoarthritis is a debilitating disease causing pain, swelling, and restricted movement in joints. It occurs when
the cartilage in a joint gradually deteriorates due to the effects of mechanical stress, which can be caused by a variety of factors,
including the normal aging process. In an osteoarthritic joint, particular regions of articulating surfaces are exposed to irregular
forces, which results in the remodeling of tissue surfaces that disrupt the normal equilibrium or mechanical function. As
osteoarthritis advances, the joint gradually loses its ability to regenerate cartilage tissue, and the cartilage layer attached to the
bone eventually deteriorates to the point that the bone becomes exposed. Advanced osteoarthritis often requires surgery and the
possible implantation of artificial joints. The current treatment options for osteoarthritis, prior to joint replacement surgery,
include viscosupplementation, analgesics, non-steroidal anti-inflammatory drugs, and steroid injections.
4
Our viscosupplementation franchise includes ORTHOVISC, ORTHOVISC mini, MONOVISC, and CINGAL.
ORTHOVISC is available in the United States, Canada, and other international markets for the treatment of osteoarthritis of the
knee, and in Europe and certain international markets for the treatment of osteoarthritis in all synovial joints. ORTHOVISC mini
is available in Europe, and it is designed for the treatment of osteoarthritis in small joints. MONOVISC is our single injection
osteoarthritis treatment indicated for all synovial joints in Europe and certain international markets, including India and Australia,
and for the knee in the United States, Turkey, and Canada. ORTHOVISC has been marketed by us internationally since 1996,
and it was approved by the FDA for sale in the United States in 2004. ORTHOVISC mini and MONOVISC became available in
certain international markets in the second quarter of 2008. MONOVISC was approved by the FDA for sale in the United States
in February 2014, and the related U.S. commercial introduction of the product occurred in April 2014. In the United States, our
viscosupplementation franchise, consisting of our ORTHOVISC and MONOVISC products, continues to maintain a market
leadership position. CINGAL, our second single-injection osteoarthritis product, received regulatory approval from Health
Canada in November 2015 for the treatment of pain associated with osteoarthritis of the knee. In March 2016, we received CE
Mark approval of CINGAL as a viscoelastic supplement or as a replacement for synovial fluid in human joints. We successfully
achieved commercial launch of the product in Canada during May 2016 and in the European Union during June 2016. CINGAL
is also distributed in certain countries in Asia. Upon achievement, if any, of regulatory approval in the United States, we plan to
commercialize the product through a direct sales model, initially through the engagement of a contract sales organization, with
the ultimate goal of transitioning the direct sales function into our company as part of a broader buildout of our commercial
capabilities. For additional information about CINGAL in the United States, see the section captioned “Business—Research and
Development of Potential Products.”
In the United States, ORTHOVISC is indicated for the treatment of pain caused by osteoarthritis of the knee in patients
who have failed to respond adequately to conservative, non-pharmacologic therapy and to simple analgesics, such as
acetaminophen. ORTHOVISC is a sterile, clear, viscous solution of hyaluronan dissolved in physiological saline and dispensed
in a single-use syringe. A complex sugar of the glycosaminoglycan family, hyaluronan is a high-molecular-weight polysaccharide
composed of repeating disaccharide units of sodium glucuronate and N-acetyl glucosamine. ORTHOVISC is injected into joints
in a series of three intra-articular injections one week apart. ORTHOVISC became available for sale in the United States on
March 1, 2004, and it is marketed by DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopaedics, Inc. (“Mitek”)
under the terms of an initial ten-year licensing, distribution, supply, and marketing agreement which was entered into in
December 2003 (the “Mitek ORTHOVISC Agreement”). The Mitek ORTHOVISC Agreement has been extended for two
additional five-year terms, and it will now expire on December 20, 2023, unless it is further extended by Mitek. Outside of the
U.S., we have a number of distribution relationships servicing international markets including Canada, Europe, the Middle East,
Latin America, and Asia. We will continue to seek to establish distribution relationships in other key markets. See the sections
captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management Overview”
and “Risk Factors.”
In the United States, MONOVISC is also indicated for the treatment of pain caused by osteoarthritis of the knee in
patients who have failed to respond adequately to conservative, non-pharmacologic therapy and to simple analgesics, such as
acetaminophen. MONOVISC is a sterile, clear, viscous solution of partially cross-linked sodium hyaluronate in a phosphate
buffered saline solution. A treatment of MONOVISC is comprised of one injection of the product delivered directly into the
affected joint. MONOVISC became available for sale in the United States in April 2014, and it is also marketed by Mitek under
the terms of a fifteen-year licensing, distribution, supply, and marketing agreement, which was entered into on December 21,
2011 (the “Mitek MONOVISC Agreement”). Outside of the United States, we have a number of distribution relationships
servicing international markets including Canada, Europe, the Middle East, Latin America, Asia, Australia, and certain other
international countries. We continue to seek to establish distribution relationships in other key markets. See the sections captioned
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management Overview” and “Risk
Factors.”
5
In addition to the four viscosupplementation products discussed above, we also offer several additional products used
in connection with orthopedic regenerative medicine. These products are based on the HYAFF technology and are currently
available in Europe, South America, Asia, and certain other international markets. They include HYALOFAST, a biodegradable
support for human bone marrow mesenchymal stem cells used for cartilage regeneration and as an adjunct for microfracture
surgery; HYALONECT, a resorbable knitted fabric mesh for use in orthopedic and trauma reconstructive procedures to maintain
the relative position of engrafted bone tissue or bone fragments from comminuted fractures; and HYALOSS MATRIX, HYAFF
fibers used to mix blood/bone grafts to form a paste for bone regeneration. We also offer HYALOGLIDE, an ACP gel used in
tenolysis treatment, with the potential for use in flexor tendon adhesion prevention and for use in the shoulder for prevention of
adhesive capsulitis with additional clinical data. This product is commercialized through a network of distributors, primarily in
Europe and the Middle East. We also received CE Mark approval in December 2016 for a product which utilizes our proprietary
HA technology to treat pain associated with lateral epicondylitis, better known as tennis elbow. Outside of the United States, this
product is marketed under the trade name ORTHOVISC-T. Additionally, in the second quarter of 2016, we submitted an
Investigational Device Exemption (“IDE”) to the FDA to conduct a Phase III clinical trial for this treatment, and the IDE was
approved by the FDA in June 2016. In addition to these products, we also received 510(k) clearance for an injectable HA-based
bone repair treatment in December 2017. In total, Orthobiologics products accounted for 87%, 87%, and 84% of our product
revenue in 2017, 2016, and 2015 respectively.
Dermal
Our dermal products consist of advanced wound care products, based on the HYAFF technology, and an aesthetic
dermal filler, based on our proprietary chemically modified, cross-linked HA technology. Products utilizing our HYAFF
technology are used for the treatment of skin wounds, ranging from burns to diabetic ulcers. The products cover a variety of
wound treatment solutions including debridement agents, advanced therapies to aid healing, and scaffolds used as skin
substitutes. Leading products include HYALOMATRIX and HYALOFILL, for the treatment of complex wounds such as burns
and ulcers. The dermal products are commercialized through a network of distributors, primarily in the United States, Europe,
Latin America, and the Middle East. Products cleared for sale in the United States include HYALOMATRIX, HYALOFILL,
HYALOGRAN, HYALOSAFE, and HYALOMATRIX 3D. In 2014, we entered into an agreement with Medline Industries, Inc.
with a current expiration date of December 31, 2022 to commercialize HYALOMATRIX in the United States.
Our aesthetic dermatology product is a dermal filler based on our proprietary, chemically modified, cross-linked HA,
and it is commercially available in select countries in the Middle East. Internationally, this product is marketed under the
ELEVESS name. In the United States, the trade name is HYDRELLE, although the product is not currently marketed in the
United States.
Surgical
Our surgical business consists of products used to prevent post-surgical adhesions after abdominal-pelvic, spinal, and
ear, nose, and throat (“ENT”) surgeries. HYALOBARRIER is a clinically proven, post-operative adhesion barrier for use in the
abdominopelvic area. The product is currently commercialized in Europe, the Middle East, and certain African and Asian
countries through a distribution network, but it is not approved for sale in the United States. INCERT, approved for sale and
commercialized through a network of distributors in Europe and Malaysia, is a chemically modified, cross-linked HA product,
for the prevention of spinal post-surgical adhesions. There are currently no plans at this time to distribute INCERT in the United
States.
Surgical adhesions occur when fibrous bands of tissues form between adjacent tissue layers during the wound healing
process. Although surgeons attempt to minimize the formation of adhesions, they nevertheless occur quite frequently after
surgery. Adhesions in the abdominal and pelvic cavity can cause particularly serious problems such as intestinal blockage
following abdominal surgery and infertility following pelvic surgery. Fibrosis following spinal surgery can complicate re-
operation and may cause pain.
We also offer several products used in connection with the treatment of ENT disorders. The lead products are
MEROGEL, a woven fleece nasal packing, and MEROGEL INJECTABLE, a thick, viscous hydrogel composed of cross-linked
hyaluronic acid—a biocompatible agent that creates a moist wound-healing environment. We have partnered with Medtronic
XoMed, Inc. (“Medtronic”) for worldwide distribution of these ENT products.
6
Other
Our other products include our ophthalmic and veterinary products, which are legacy products and not a part of our core
business. Our ophthalmic business includes injectable, high molecular weight HA products used as viscoelastic agents in
ophthalmic surgical procedures such as cataract extraction and intraocular lens implantation. These products coat, lubricate, and
protect sensitive tissue such as the endothelium, and they function to maintain the shape of the eye, thereby facilitating ophthalmic
surgical procedures. Our veterinary product, HYVISC, is a high molecular weight injectable HA product for the treatment of
joint dysfunction in horses due to non-infectious synovitis associated with equine osteoarthritis. HYVISC has viscoelastic
properties that lubricate and protect the tissues in horse joints. HYVISC is distributed by Boehringer Ingelheim Vetmedica, Inc.
(“Boehringer”) in the United States and in selected countries in the Middle East.
See Note 15 “Revenue by Product Group, by Significant Customer and by Geographic Location; Geographic
Information” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion
regarding our segments and geographic sales.
See also the section captioned “Risk Factors—Risks Related to Our Business and Industry—We experience quarterly
sales volume variation, which makes our future results difficult to predict and makes period-to-period comparisons potentially
not meaningful” for a discussion regarding the effect that quarterly sales volume variation could have on our business and
financial performance.
See also the section captioned “Risk Factors —Risks Related to Our Business and Industry—A significant portion of
our revenues are derived from a small number of customers, the loss of which could materially adversely affect our business,
financial condition and results of operations” for a discussion regarding our dependence on large-volume customers and the
effects that the loss of any such customer could have on our business and financial performance.
See also the section captioned “Risk Factors—Risks Related to Our Business and Industry—Our manufacturing
processes involve inherent risks, and disruption could materially adversely affect our business, financial condition and results
of operations” for a discussion of the sources and availability of raw materials related to the manufacture of our products.
Research and Development of Potential Products
Our research and development efforts primarily consist of the development of new medical applications for our HA-
based technology, the management of clinical trials for certain product candidates, the preparation and processing of applications
for regulatory approvals or clearances at all relevant stages of product development, and process development and scale-up
manufacturing activities for our existing and new products. Our development focus includes products for tissue protection, repair,
and regeneration. For the years ended December 31, 2017, 2016 and 2015, these expenses were $18.8 million, $10.7 million, and
$9.0 million, respectively. We anticipate that we will continue to commit significant resources to, and increase our aggregate
spending on, research and development activities, including in relation to preclinical activities and clinical trials, in the future.
Our second single-injection osteoarthritis product under development in the United States is CINGAL, which is
composed of our proprietary cross-linked HA material combined with an approved steroid, and it is designed to provide both
short- and long-term pain relief to patients. We completed an initial CINGAL phase III clinical trial, including the associated
statistical analysis for 368 enrolled patients, during the fourth quarter of 2014 with data indicating that the product met all primary
and secondary endpoints relative to placebo set forth for the trial. During the first half of 2015, we completed a CINGAL
retreatment study with 242 patients who had participated in the phase III clinical trial and reported safety data related to the
retreatment study. This initial phase III clinical trial and the associated retreatment study supported the Health Canada and CE
Mark approvals of the product. The commercial launch of the product in both Canada and the European Union occurred in the
second quarter of 2016. In the United States, after discussions with the U.S. Food and Drug Administration (“FDA”) related to
the regulatory pathway for CINGAL, we conducted a formal meeting with the FDA’s Office of Combination Products (“OCP”)
to present and discuss our data in September 2015, and we submitted a formal request for designation with OCP a month later.
In its response to our formal request for designation, OCP assigned the product to the FDA’s Center for Drug Evaluation and
Research (“CDER”) as the lead agency center for premarket review and regulation. We held a meeting with CDER in September
2016 to align on an approval framework and on submission requirements for a New Drug Application (“NDA”) for CINGAL,
including the execution of an additional Phase III clinical trial to supplement our existing CINGAL pivotal study data. We
submitted an Investigational New Drug Application (“IND”) in late 2016, and discussions with CDER indicated no objections
to our clinical protocol design. As a result, we commenced work on this second Phase III clinical trial in the first quarter of 2017,
and the first patient was treated in the second quarter of 2017. Enrollment of 576 patients in this second Phase III clinical trial
was completed during October 2017. We expect to complete the six-month follow-up in this Phase III clinical trial during the
second quarter of 2018 and to submit our NDA to FDA as expeditiously as possible thereafter. We have also initiated an additional
three-month extended follow-up study in conjunction with the second Phase III clinical trial to investigate the efficacy of
7
CINGAL over this longer period, and the first patients were enrolled in this follow-up study in the fourth quarter of 2017. This
extended follow-up study will not impact the timeline for submission of the NDA for CINGAL following the completion of the
second Phase III clinical trial.
We have several research and development programs underway for new products, including for HYALOFAST (in the
United States), an innovative product for cartilage tissue repair, and other early stage regenerative medicine development
programs. HYALOFAST received CE Mark approval in September 2009, and it is commercially available in Europe and certain
international countries. During the first quarter of 2015, we submitted an Investigational Device Exemption (“IDE”) for
HYALOFAST to the FDA, which was approved in July 2015. We commenced patient enrollment in a clinical trial in December
2015, and we are advancing site initiations and patient enrollment activities. In the second quarter of 2016, a supplement to the
HYALOFAST IDE was approved to expand the inclusion criteria for the clinical study. The purpose of this supplement is to
allow us to increase enrollment rates with the ultimate goal of decreasing the time needed to complete the clinical trial. In addition,
we are currently proceeding with other research and development programs, one of which utilizes our proprietary HA technology
to treat pain associated with common repetitive overuse injuries, such as lateral epicondylitis, also known as tennis elbow. We
submitted a CE Mark application for this treatment during the first quarter of 2016 and received a CE Mark for the treatment of
pain associated with tennis elbow in December 2016. We expect to begin enrolling patients in a post-market clinical study in
relation to the CE Mark for this product before the end of the second quarter of 2018. Outside of the United States, this product
will be marketed under the trade name ORTHOVISC-T. In the second quarter of 2016, we submitted an IDE to the FDA to
conduct a phase III clinical trial for this treatment, which was approved by the FDA in June 2016. We also have other research
and development programs underway focused on expanding the indications of our current products, including one program being
conducted and funded by our U.S. MONOVISC distribution partner, Mitek, seeking to expand MONOVISC’s indication to
include the treatment of pain associated with osteoarthritis of the hip. In the third quarter of 2017, we also submitted an application
to the FDA for 510(k) clearance of an injectable HA-based bone repair treatment. The 510(k) clearance was received from FDA
in December 2017. In addition to other early stage research and developments initiatives we are currently undertaking, we are
working to expand our regenerative medicine pipeline with a new product candidate in the form of an implant for rotator cuff
repair utilizing our proprietary solid HA.
In June 2015, we entered into an agreement with the Institute for Applied Life Sciences at the University of
Massachusetts Amherst to collaborate on research to develop a novel modality for the treatment of rheumatoid arthritis. The
agreement with the University of Massachusetts Amherst was extended in January 2018, and the next phase of the research will
focus on optimizing the drug delivery system with the goal of advancing a novel therapeutic candidate into clinical trials to
support regulatory submission. We also recently entered into an agreement with the University of Liverpool to develop an
injectable mesenchymal stem cell therapy for the treatment of age-related osteoarthritis with the goal of bringing a therapeutics
candidate through clinical trials to market to meet an unmet therapeutic need.
Our research and development efforts may not be successful in (1) developing our existing product candidates,
(2) expanding the therapeutic applications of our existing products, or (3) resulting in new applications for our HA technology.
There is also a risk that we may choose not to pursue development of potential product candidates. We may not be able to obtain
regulatory approval for any new applications we develop. Furthermore, even if all regulatory approvals are obtained, there can
be no assurances that we will achieve meaningful sales of such products or applications.
See also the section captioned “Risk Factors—Risks Related to Our Business and Industry—Failure to obtain, or any
delay in obtaining, FDA or other U.S. and foreign governmental approvals for our products may have a material adverse effect
on our business, financial condition and results of operations.” for a discussion regarding the impact of government
regulations on our product development activities.
8
Patent and Proprietary Rights
Our products and trademarks, including our corporate name, product names, and logos, are proprietary. We rely on a
combination of patent protection, trade secrets and trademark laws, license agreements, and confidentiality and other contractual
provisions to protect our proprietary information.
We have a policy of seeking patent protection for patentable aspects of our proprietary technology. In the United States,
we own 20 patents, 1 of which is co-owned with other parties, license 12 patents, and have 4 patent applications currently
pending. These U.S. patents have expiration dates through 2030. Internationally, we own 167 patents, 7 of which are co-owned
with other parties, license 79 patents, and have 12 patent applications currently pending. Outside of the United States, we own,
co-own, license, or have filed for patents in 34 jurisdictions. Our international patents have expiration dates through 2032. In
2017, we were granted 18 new patents in Austria, Belgium, Brazil, Czech Republic, Denmark, France, Germany, Great Britain,
Hungary, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Spain, Sweden, and Switzerland. Many of these patents,
including all licensed patents, belong to the Anika S.r.l. patent estate, which is extensive and partly intertwined with its former
parent company Fidia Farmaceutici S.p.A. (“Fidia”) through a patent licensing agreement that provides Anika S.r.l. with access
to certain of Fidia’s patents to the extent required to support Anika S.r.l.’s products. In 2017, 2 of the patents belonging to the
Anika S.r.l. patent estate expired in the United States, and 4 expired internationally. We intend to seek patent protection for
products and processes developed in the course of our activities when we believe such protection is in our best interests and when
the cost of seeking such protection is not inordinate relative to the potential benefits.
Other entities have filed patent applications for, or have been issued patents concerning, various aspects of HA-related
products or processes. In addition, the products or processes we develop may infringe the patent rights of others in the future.
Any such infringement may have a material adverse effect on our business, financial condition, and results of operations.
We rely upon trade secrets and proprietary know-how for certain non-patented aspects of our technology. To protect
such information, we require certain customers and vendors, and all employees, consultants, and licensees to enter into
confidentiality agreements limiting the disclosure and use of such information. These agreements, however, may not provide
adequate protection.
See also the section captioned “Risk Factors—Risks Related to Our Intellectual Property—We may be unable to
adequately protect our intellectual property rights, which could have a material impact on our business and future financial
results” for a discussion of the risks we face with respect to protecting intellectual property we develop.
We have granted Mitek an exclusive and non-transferable, royalty-bearing license to develop, commercialize, and sell
ORTHOVISC and MONOVISC in the United States pursuant to the Mitek ORTHOVISC Agreement and the Mitek MONOVISC
Agreement. These agreements include a license to manufacture and have manufactured such products in the event that we are
unable to supply Mitek with ORTHOVISC or MONOVISC in accordance with the terms of the relevant agreement. We have
also granted Mitek the exclusive, royalty free right to use the trademarks ORTHOVISC and MONOVISC in connection with the
marketing, distribution, and sale of the licensed products within the United States.
Government Regulation
The clinical development, manufacturing, and marketing of our products are subject to governmental regulation in the
United States, the European Union, and other territories worldwide. Various statutes, regulations, directives, and guidelines,
including the Food, Drug, and Cosmetic Act in the United States, govern the development, design, non-clinical and clinical
research, testing, manufacture, safety, efficacy, labeling, packaging, storage, record keeping, premarket clearance or approval,
adverse event reporting, advertising, and promotion of our products. Product development and approval within these various
regulatory frameworks takes a number of years and involves the expenditure of substantial resources. Pharmaceutical and medical
device manufacturers are also inspected regularly by the FDA and other applicable regulatory bodies.
9
Medical products regulated by the FDA are generally classified as drugs, biologics, or medical devices. Drugs and
biologic products undergo rigorous preclinical testing prior to beginning clinical trials. Clinical trials for new drugs or biologic
products include Phase I trials in healthy volunteers to understand safety, dosage tolerance, and pharmacokinetics, Phase II trials
in a limited patient population to identify initial efficacy and side effects, and Phase III pivotal trials to statistically evaluate the
safety and efficacy of the product. Medical devices intended for human use are classified into three categories (Class I, II or III)
on the basis of the controls deemed reasonably necessary by the FDA to assure their safety and effectiveness. Class II devices
are cleared for marketing under the premarket notification 510(k) regulatory pathway, which may include clinical testing.
Class III devices require pre-market approval based on valid scientific evidence of safety and effectiveness, including evidence
elicited through appropriate clinical testing. The failure to adequately demonstrate the quality, safety, and efficacy of a product
under development can delay or prevent regulatory approval of the product. In order to gain marketing approval, we must submit
to the relevant regulatory authority for review information on the quality aspects of the product as well as the non-clinical and
clinical data. The FDA undertakes this review in the United States.
In the European Union, medical devices must be CE Marked in order to be marketed. CE marking a device involves
working with a Notified Body, and in some cases a Competent Authority, to demonstrate that the device meets all applicable
requirements of the Medical Devices Directive and that our Quality Management System is compliant. Drug approval in the
European Union follows one of several possible processes: (i) a centralized procedure involving members of the European
Medicines Agency’s Committee for Medicinal Products for Human Use; (ii) a “mutual recognition procedure” in which an
individual country's regulatory agency approves the product followed by “mutual recognition” of this approval by regulatory
agencies of other countries; or (iii) a decentralized procedure in which the approval is sought through the regulatory agencies of
multiple countries at the same time.
Approval timelines can range from several months to several years, or applications can be denied entirely. The approval
process can be affected by a number of factors. For example, additional studies or clinical trials may be requested during the
review, which may delay marketing approval and involve unbudgeted costs. As a condition of approval, the regulatory agency
may require post-marketing surveillance to monitor for adverse effects, and may require other additional studies, as it deems
appropriate. After approval for an initial indication, further clinical studies are generally necessary to gain approval for any
additional indications. The terms of any approval, including labeling content, may be more restrictive than expected and could
affect the marketability of a product.
As a condition of approval, the relevant regulatory agency requires that the product continues to meet applicable
regulatory requirements related to quality, safety, and efficacy, and it requires strict procedures to monitor and report any adverse
effects. Where adverse effects occur or may occur, the regulatory agency may require additional studies or changes to the
labeling. Compelling new “adverse” data may result in a product approval being withdrawn at any stage following review by an
agency and discussion with the product manufacturer.
The branch of the FDA responsible for product marketing oversight routinely reviews company marketing practices and
also may impose pre-clearance requirements on materials intended for use in marketing of approved drug products. We are also
subject to various U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback and false claims
laws. Similar review and regulation of advertising and marketing practices exists in the other geographic areas where we operate.
The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that we failed to comply
with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, including, without limitation,
issuing an FDA Form 483 notice of inspectional observations or a warning letter, imposing civil money penalties, suspending or
delaying issuance of approvals, requiring product recall, imposing a total or partial shutdown of production, withdrawal of
approvals or clearances already granted, pursuing product seizures, consent decrees or other injunctive relief, or criminal
prosecution through the Department of Justice. The FDA can also require us to repair, replace, or refund the cost of products that
we manufactured or distributed. Outside the United States, regulatory agencies may exert a range of similar powers.
10
See also the sections captioned “Risk Factors—Risks Related to Our Business and Industry—Failure to obtain, or any
delay in obtaining, FDA or other U.S. and foreign governmental approvals for our products may have a material adverse effect
on our business, financial condition and results of operations,” “Risk Factors—Risks Related to Our Business and Industry—
Once obtained, we cannot guarantee that FDA or international product approvals will not be withdrawn or that relevant agencies
will not require other corrective action, and any withdrawal or corrective action could materially affect our business and
financial results,” “Risk Factors—Risks Related to Our Business and Industry—Our operations and products are subject to
extensive regulation, compliance with which is costly and time consuming, and our failure to comply may result in substantial
penalties, including recalls of our products,” and “Risk Factors—Risks Related to Our Business and Industry—Any changes in
FDA or international regulations related to product approval, including those that apply retroactively, could adversely affect
our competitive position and materially affect our business and financial results” for a discussion regarding the potential impact
of government regulations on our business and financial results.
Competition
We compete with many companies including large pharmaceutical firms and specialized medical products companies
across all of our product lines. Many of these companies have substantially greater financial resources, larger research and
development staffs, more extensive marketing and manufacturing organizations, and more experience in the regulatory processes
than we have. We also compete with academic institutions, government agencies, and other research organizations, which may
be involved in the research and development and commercialization of products. Many of our competitors also compete against
us in securing relationships with collaborators for their research and development and commercialization programs.
We compete with other market participants primarily on the efficacy of our products, our products’ reputation for safety,
our focus on HA-based products, and the breadth of our HA-based product portfolio. Other factors that impact competition in
our industry are the timing and scope of regulatory approvals, the availability of raw material and finished product supply,
marketing and sales capability, reimbursement coverage, product pricing, and patent protection. Some of the principal factors
that may affect our ability to compete in the HA development and commercialization markets include:
• The quality and breadth of our continued development of our technology portfolio;
• Our ability to complete successful clinical studies and obtain FDA marketing and foreign regulatory approvals prior
to our competitors;
• The successful execution of our commercial strategies, including our direct commercialization initiative for
CINGAL;
• Our ability to recruit and retain skilled employees; and
• The availability of capital resources to fund strategic activities related to the significant expansion of our business
or product portfolio.
We are aware of several companies that are developing and/or marketing products utilizing HA for a variety of human
applications. In some cases, competitors have already obtained product approvals, submitted applications for approval, or
commenced human clinical studies, either in the United States or in certain foreign countries. All of our products face substantial
competition. There exist major worldwide competing products, made from HA and other materials, for use in orthopedics,
surgical adhesion prevention, advanced wound care, ENT, cosmetic dermatology, ophthalmic surgery, and the treatment of
equine osteoarthritis. There is a risk that we will be unable to compete effectively against our current or future competitors.
Additionally, legislation and regulation aimed at curbing rising healthcare costs has resulted in a consolidation trend in the
healthcare industry to create larger companies, including hospitals, with greater market power. In turn, this has led to greater and
more intense competition in the provision of products and services to market participants. Important market makers, like group
purchasing organizations, have increased their negotiating leverage, and if these market makers demand significant price
concessions or if we are excluded as a supplier by these market makers, our product revenue could be adversely impacted.
11
See also the sections captioned “Risk Factors—Risks Related to Our Business and Industry—Substantial competition
could materially affect our financial performance” and “Risk Factors—Risks Related to Our Business and Industry—Our
business may be adversely affected if consolidation in the healthcare industry leads to demand for price concessions or if we are
excluded from being a supplier by a group purchasing organization or similar entity” for additional discussion of the impact
competition could have on our business and financial results.
Employees
As of December 31, 2017, we had 123 employees, 21 of whom were located outside the United States. We consider our
relations with our employees to be good. None of our U.S. employees are represented by labor unions, but certain employees
based in Italy are represented by unions, adding complexity and additional risks to the wage and employment decision processes.
Environmental Laws
We believe that we are in compliance with all foreign, federal, state, and local environmental regulations with respect
to our manufacturing facilities and that the cost of ongoing compliance with such regulations does not have a material effect on
our operations.
Product Liability
The testing, marketing, and sale of human health care products entails an inherent risk of allegations of product liability,
and we cannot assure that substantial product liability claims will not be asserted against us. Although we have not received any
material product liability claims to date and have coverage under our insurance policy of $5.0 million per occurrence and $5.0
million in the aggregate, we cannot assure that if material claims arise in the future, our insurance will be adequate to cover all
situations. Moreover, we cannot assure that such insurance, or additional insurance, if required, will be available in the future or,
if available, will be available on commercially reasonable terms. Any product liability claim, if successful, could have a material
adverse effect on our business, financial condition, and results of operation.
Available Information
Our Annual Reports on Form 10-K, including our consolidated financial statements, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and other information, including amendments and exhibits to such reports, filed or furnished
pursuant to the Securities Exchange Act of 1934, as amended, are available free of charge in the “SEC Filings” section of our
website located at http://www.anikatherapeutics.com, as soon as reasonably practicable after the reports are filed with or
furnished to the SEC. The information on our website is not part of this Annual Report on Form 10-K. Reports filed with the
SEC may be viewed at www.sec.gov or obtained at the SEC Public Reference Room at 100 F Street NE, Washington, D.C.
20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-
0330.
ITEM 1A. RISK FACTORS
Our operating results and financial condition have varied in the past and could vary significantly in the future depending
on a number of factors. You should consider carefully the risks and uncertainties described below, in addition to the other
information contained in this Annual Report on Form 10-K, before deciding whether to purchase our common stock. If any of
the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be
materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or
all of your investment.
12
Risks Related to Our Business and Industry
Failure to obtain, or any delay in obtaining, FDA or other U.S. and foreign governmental approvals for our products may
have a material adverse effect on our business, financial condition and results of operations.
Several of our current products, and any future products we may develop, will require clinical trials to determine their
safety and efficacy for United States and international marketing approval by regulatory bodies, including the FDA. Product
development and approval within the FDA framework takes a number of years and involves the expenditure of substantial
resources. There can be no assurance that the FDA will accept submissions related to our new products or the expansion of the
indications of our current products, and, even if submissions are accepted, there can be no guarantee that the FDA will grant
approval for our new products, including CINGAL, HYALOFAST, or other line extensions of our current products, or for the
expansion of indications of our current products on a timely basis, if at all. In addition to regulations enforced by the FDA, we
are subject to other existing and future federal, state, local, and foreign regulations applicable to product approval, which may
vary significantly across jurisdictions. Additional approval of existing products may be required when changes to such products
may affect the safety and effectiveness, including for new indications for use, labeling changes, process or manufacturing
changes, the use of a different facility to manufacture, process or package the device, and changes in performance or design
specifications. Failure to obtain regulatory approvals of our products, including any changes to existing products, could have an
adverse material impact on our business, financial condition, and results of operations.
Even if ultimately granted, FDA and international regulatory approvals may be subject to significant, unanticipated
delays throughout the regulatory approval process. Internally, we make assumptions regarding product approval timelines, both
in the United States and internationally, in our business planning, and any delay in approval could materially affect our
competitive position in the relevant product market and our projections related to future business results.
We cannot be certain that product approvals, both in the United States and internationally, will not include significant
limitations on the product indications, and other claims sought for use, under which the products may be marketed. The relevant
approval or clearance may also include other significant conditions of approval such as post-market testing, tracking, or
surveillance requirements. Any of these factors could significantly impact our competitive position in relation to such products
and could have a negative impact on the sales of such products.
Once obtained, we cannot guarantee that FDA or international product approvals will not be withdrawn or that relevant
agencies will not require other corrective action, and any withdrawal or corrective action could materially affect our business
and financial results.
Once obtained, marketing approval can be withdrawn by the FDA or comparable foreign regulatory agencies for a
number of reasons, including the failure to comply with ongoing regulatory requirements or the occurrence of unforeseen
problems following initial approval. Regulatory authorities could also limit or prevent the manufacture or distribution of our
products. Any regulatory limitations on the use of our products or any withdrawal or suspension of approval or rescission of
approval by the FDA or a comparable foreign regulatory agency could have a material adverse effect on our business, financial
condition, and results of operations.
Our operations and products are subject to extensive regulation, compliance with which is costly and time consuming, and
our failure to comply may result in substantial penalties, including recalls of our products.
The FDA and foreign regulatory bodies impose extensive regulations applicable to our operations and products,
including regulations governing product standards, packing requirements, labeling requirements, quality system and
manufacturing requirements, import restrictions, tariff regulations, duties, and tax requirements. We cannot assure you that we
will be able to achieve and maintain compliance required for FDA, CE marking, or other foreign regulatory approvals for any or
all of our operations and products or that we will be able to produce our products in a timely and profitable manner while
complying with applicable requirements.
Failure to comply with applicable regulatory requirements could result in substantial penalties, including warning letters,
fines, injunctions, civil penalties, seizure of products, total or partial suspension of production, refusal to grant pre-market
clearance or pre-market approval for devices or drugs, withdrawal of approvals, and criminal prosecution. Additionally,
regulatory authorities have the power to require the recall of our products. It also might be necessary for us, in applicable
circumstances, to initiate a voluntary recall per regulatory requirements of one or several of our products. The imposition of any
of the foregoing penalties, whether voluntarily or involuntary, could have a material negative impact on our business, financial
condition, and results of operations.
13
Any changes in FDA or international regulations related to product approval, including those that apply retroactively, could
adversely affect our competitive position and materially affect our business and financial results.
FDA and foreign regulations depend heavily on administrative interpretation, and we cannot assure you that future
interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect us.
Additionally, any changes, whether in interpretation or substance, in existing regulations or policies, or any future adoption of
new regulations or policies by relevant regulatory bodies, could prevent or delay approval of our products. In the event our future,
or current, products, including HA generally, are classified, or re-classified, as human drugs, combination products, or biologics
by the FDA or an applicable international regulatory body, the applicable review process related to such products is typically
substantially longer and substantially more expensive than the review process to which they are currently subject as medical
devices, which could materially impact our competitive position, business, and financial results.
We are implementing a direct sales model to commercialize our CINGAL product, as well as certain other future products, in
the United States and we may face unforeseen difficulties and delays in implementing this new model, which could affect our
business and financial results.
For the first time, we are implementing a direct sales model to market and promote one of our products, CINGAL, in
the United States, initially through a contract sales organization, with the ultimate goal of transitioning the direct sales function
into our company as part of a broader buildout of our commercial capabilities. We may also use this direct model to
commercialize other of our products in the United States in the future. Our success in utilizing this sales model will initially
depend in part on our ability to successfully develop and implement the necessary internal and external resources to manage the
contract sales organization and the sales of the product. Our longer term success will depend on our ability to transition the direct
sales function into our company and to manage all resources associated with this function. We cannot assure you that there will
not be unforeseen roadblocks or delays in finalizing the contracts related to, and implementing, the relationship with the contract
sales organization, nor we can we assure you that we will not face setbacks in transitioning the direct sales function into our
organization. The initial implementation timeline of this direct sales model is also dependent on CINGAL obtaining FDA
approval in a timely manner, of which there is no guarantee. Failure to implement our direct sales model in a timely fashion or
to successfully manage the implementation or transition process could materially impact our competitive position, business, and
financial results.
Substantial competition could materially affect our financial performance.
We compete with many companies, including large pharmaceutical companies, specialized medical products
companies, and healthcare companies. Many of these companies have substantially greater financial resources, larger research
and development staffs, more extensive marketing and manufacturing organizations, and more experience in the regulatory
process than us. We also compete with academic institutions, government agencies, and other research organizations that may
be involved in research, development, and commercialization of products similar to our own. Because a number of companies
are developing or have developed HA products for similar applications and have received FDA approval, the successful
commercialization of a particular product will depend in part upon our ability to complete clinical studies and obtain FDA
marketing and foreign regulatory approvals prior to our competitors, or, if regulatory approval is not obtained prior to our
competitors, to identify markets for our products that may be sufficient to permit meaningful sales of our products. For example,
we are aware of several companies that are developing and/or marketing products utilizing HA for a variety of human
applications. In some cases, competitors have already obtained product approvals, submitted applications for approval, or have
commenced human clinical studies, either in the United States or in certain foreign countries. There exist major competing
products for the use of HA in ophthalmic surgery. In addition, certain HA products made by our competitors for the treatment of
osteoarthritis in the knee received FDA approval before ours and have been marketed in the United States since 1997, as well as
select markets in Canada, Europe, and other countries. There can be no assurance that we will be able to compete against current
or future competitors or that competition will not have a material adverse effect on our business, financial condition, and results
of operations.
14
We may rely on third parties to support certain aspects of our clinical trials. If these third parties do not successfully carry
out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval or commercialize
our products, and our business could be substantially harmed.
We have hired experienced clinical development and regulatory staff, and we have also retained the services of
knowledgeable external service providers, including consultants and clinical research organizations, to develop and supervise
our clinical trials and regulatory processes. Despite our internal investment in staffing, we will remain dependent upon these
third party contract research organizations to carry out portions of our clinical and preclinical research studies for the foreseeable
future. As a result, we have had and will have less control over the conduct of the clinical trials, the timing and completion of the
trials, the required reporting of adverse events, and the management of data developed through the trials than would be the case
if we were relying entirely on our own staff. Outside parties may have staffing difficulties, may undergo changes in priorities or
may become financially distressed, adversely affecting their willingness or ability to conduct our trials. Failure by these third
parties to comply with regulatory requirements or to meet timing expectations may require us to repeat clinical or preclinical
trials, which would delay the regulatory approval process, or require substantial unexpected expenditures.
We are dependent upon marketing and distribution partners and the failure to maintain strategic alliances on acceptable
terms will have a material adverse effect on our business, financial condition, and results of operations.
Our success will be dependent, in part, upon the efforts of our marketing and distribution partners and the terms and
conditions of our relationships with such partners. One partner, Mitek accounted for 73% of our product revenue in fiscal year
2017. We cannot assure you that our partners, including Mitek, will not seek to renegotiate their current agreements on terms
less favorable to us or terminate such agreements. A failure to renew these partnerships on terms satisfactory to us, or at all, could
result in a material adverse effect on our operating results.
We continue to seek to establish long-term distribution relationships in regions and countries not covered by existing
agreements, and we may need to obtain the assistance of additional marketing partners to bring new and existing products to
market and to replace certain marketing partners. There can be no assurance that we will be able to identify or engage appropriate
distribution or collaboration partners or effectively transition to any such partners. The failure to establish strategic partnerships
for the marketing and distribution of our products on acceptable terms and within our planned timeframes could have a material
adverse effect on our business, financial condition, and results of operations.
We must achieve market acceptance of our products in order to be successful in the future.
Our success will depend in part upon the acceptance of our existing and future products by the medical community,
hospitals, physicians, other health care providers, third-party payers, and end-users. Such acceptance may depend upon the extent
to which the medical community and end-users perceive our products as safer, more effective, or more cost-competitive than
other similar products. Ultimately, for our new products to gain general market acceptance, it may also be necessary for us to
develop marketing partners or viable commercial strategies for the distribution of our products. There can be no assurance that
our new products will achieve significant market acceptance on a timely basis, or at all. Failure of some or all of our future
products to achieve significant market acceptance could have a material adverse effect on our business, financial condition, and
results of operations.
Our manufacturing processes involve inherent risks, and disruption could materially adversely affect our business, financial
condition, and results of operations.
The operation of biomedical manufacturing plants involves many risks, including the risks of breakdown, failure, or
substandard performance of equipment, the occurrence of natural and other disasters, and the need to comply with the
requirements of directives of government agencies, including the FDA. In addition, we rely on a single supplier for certain key
raw materials and a small number of suppliers for a number of other materials required for the manufacturing and delivery of our
HA products. Although we believe that alternative sources for many of these and other components and raw materials that we
use in our manufacturing processes are available, we cannot be certain that the supply of key raw materials, specifically HA, will
continue be available at current levels or will be sufficient to meet our future needs. Any supply interruption could harm our
ability to manufacture our products until a new source of supply is identified and qualified. We may not be able to find sufficient
alternative suppliers in a reasonable time period, or on commercially reasonable terms, if at all, and our ability to produce and
supply our products could be impaired.
15
We use raw materials derived from animal sources to produce certain of our products, and there is no guarantee that we will
be able to continue to utilize this source of material in the future.
Our manufacturing processes and research and development efforts for some of our ophthalmic and veterinary products
involve products derived from animals. We procure our animal-derived raw materials from a qualified vendor, who controls for
contamination and has processes that effectively inactivate infectious agents; however, we cannot assure you that we can
completely eliminate the risk of transmission of infectious agents. Furthermore, regulatory authorities could in the future impose
restrictions on the use of animal-derived raw materials that could impact our business.
The utilization of animals in research and development and product commercialization is subject to increasing focus by
animal rights activists. The activities of animal rights groups and other organizations that have protested animal based research
and development programs or boycotted the products resulting from such programs could cause an interruption in our
manufacturing processes and research and development efforts. The occurrence of material operational problems, including but
not limited to the events described above, could have a material adverse effect on our business, financial condition, and results
of operations during the period of such operational difficulties and beyond.
We lease properties in the United States and Italy, and there is no guarantee that these leaseholds will be without issue or
sufficient to support future growth.
We lease approximately 134,000 square feet of administrative, research and development, and manufacturing space in
Bedford, MA and approximately 33,000 square feet of office, research and development, training, and warehousing space in
Padova, Italy. The current term of the Bedford lease extends to 2022, and the current term of the Padova lease extends to 2032,
each with several options for renewal. Please see Item 2 – Properties for additional information on our current leases. The nature
of these leaseholds presents certain risks. We must maintain a positive working relationship with the respective owners as a
dispute with either owner over payment, maintenance, or any other matter could be disruptive to our business. Additionally, there
is a possibility that changes to our business or the geographic location of the facilities could make either location less suitable to
our operations. Any renegotiation or termination of either lease could result in substantial cost or business interruption to our
operations. Additionally, there is no guarantee that our current space will be sufficient to support our future growth or that any
future relocation or expansion of our operations would be completed smoothly or in a timely manner due to, among other things,
unexpected construction delays or unexpected difficulties related to the achievement of necessary permitting. Any business
disruption as a result of any of these factors could have a material impact on our business, financial condition, and results of
operations.
Our financial performance depends on the continued sales growth and increasing demand for our products and we may not
be able to successfully manage the expansion of our operations.
Our future success depends on substantial growth in product sales. There can be no assurance that such growth can be
achieved or, if achieved, sustained. There can be no assurance that, even if substantial growth in product sales and the demand
for our products is achieved, we will be able to:
• Develop and maintain the necessary manufacturing capabilities;
• Obtain the assistance of additional marketing partners or develop appropriate alternative sales strategies;
• Attract, retain, and integrate required key personnel; and
•
Implement the financial, accounting, and management systems needed to manage growing demand for our products.
Our failure to successfully manage future growth could have a material adverse effect on our business, financial
condition, and results of operations.
16
We may face circumstances in the future that will result in impairment charges, including, but not limited to, goodwill
impairment and In-Process Research and Development (“IPR&D”) charges.
As of December 31, 2017, we had long-lived assets, including goodwill and IPR&D, of $76.3 million. If the fair value
of any of our long-lived assets decreases as a result of an economic slowdown, a downturn in the markets where we sell products
and services, or a downturn in our financial performance or future outlook, we may be required to record an impairment charge
on such assets.
We are required to test intangible assets with indefinite life periods for potential impairment annually and on an interim
basis if there are indicators of a potential impairment. We also are required to evaluate amortizable intangible assets and fixed
assets for impairment if there are indicators of a possible impairment. Impairment charges could have a negative impact on our
results of operations and financial position, as well as on the market price of our common stock.
Customer, vendor, and employee uncertainty about the effects of any acquisitions could harm us.
We and the customers of any companies we acquire may, in response to the consummation of any acquisitions, delay
or defer purchasing decisions. Any delay or deferral in purchasing decisions by customers could adversely affect our business.
Similarly, employees of acquired companies may experience uncertainty about their future role until or after we execute our
strategies with regard to employees of acquired companies. This may adversely affect our ability to attract and retain key
management, sales, marketing, and technical personnel following an acquisition.
We may engage in acquisitions as a part of our future growth strategy, which exposes us to a variety of risks that could
adversely affect our business operations.
Our business strategy includes the acquisition of businesses, technologies, services, or products that we believe are a
strategic fit with our business. We may fund these acquisitions by utilizing our cash, incurring debt, issuing additional shares of
our common stock, or by other means. Completed acquisitions may expose us to a number of risks and expenses, including
unanticipated liabilities, amortization expenses related to intangible assets with definite lives, or risks associated with entering
new markets with which we have limited experience or where commercial alliances with experienced partners or existing sales
channels are not available. Whether or not completed, acquisitions may result in diversion of management resources otherwise
available for ongoing development of our business and significant expenditures.
We may not be able to realize the expected benefits of any completed acquisitions, including growth synergies and cost
savings from the integration of acquired businesses or assets with our existing operations and technologies, as rapidly as expected,
or at all. In addition, the integration and reorganization processes for our acquisitions may be complex, costly, and time
consuming and include unanticipated issues, expenses, and liabilities. We may have difficulty in developing, manufacturing, and
marketing the products of a newly acquired company in a manner that enhances the performance of our combined businesses or
product lines and allows us to realize value from expected synergies. Moreover, we may lose key clients or employees of acquired
businesses as a result of the change in ownership to us. Following an acquisition, we may not achieve the revenue or net income
levels that justify the acquisition. Acquisitions may also result in one-time charges, such as write-offs or restructuring charges,
impairment of goodwill or acquired In-Process Research and Development, which could adversely affect our operating results.
The failure to achieve the expected benefits of any acquisition may harm our business, financial condition, and results of
operations.
17
The acquisitions we have made or may make in the future may make us the subject of lawsuits from either an acquired
company’s stockholders, an acquired company’s previous stockholders, or our current stockholders.
We may be the subject of lawsuits from either an acquired company’s stockholders, an acquired company’s previous
stockholders, or our current stockholders. These lawsuits could result from the actions of the acquisition target prior to the date
of the acquisition, from the acquisition transaction itself, or from actions after the acquisition. Defending potential lawsuits could
cost us significant expense and distract management’s attention from the operation of the business. Additionally, these lawsuits
could result in the cancellation of, or the inability to renew, certain insurance coverage that would be necessary to protect our
assets.
Attractive acquisition opportunities may not be available to us in the future.
We may consider the acquisition of other businesses. However, we may not locate suitable acquisition targets or have
the opportunity to make acquisitions of such targets on favorable terms in the future, which could negatively impact the growth
of our business. In order to pursue such opportunities, we may require significant additional financing, which may not be available
to us on favorable terms, if at all. The availability of such financing is limited by the continued tightening of the global credit
markets. We expect that our competitors, many of which have significantly greater resources than we do, will compete with us
to acquire compatible businesses. This competition could increase prices for acquisitions that we would likely pursue.
Sales of our products are largely dependent upon third party reimbursement and our performance may be harmed by health
care cost containment initiatives.
In the United States and other foreign markets, health care providers, such as hospitals and physicians, that purchase
health care products, such as our products, generally rely on third party payers, including Medicare, Medicaid, and other health
insurance and managed care plans, to reimburse all or part of the cost of the health care product. We generally depend upon the
distributors of our products to secure reimbursement and reimbursement approvals. Reimbursement by third party payers, both
in the United States and internationally, may depend on a number of factors, including the payer’s determination that the use of
our products is clinically useful and cost-effective, medically necessary, and not experimental or investigational. Since
reimbursement approval is required from each payer individually, seeking such approvals can be a time consuming and costly
process which, in the future, could require us or our marketing partners to provide supporting scientific, clinical, and cost-
effectiveness data for the use of our products to each payer separately. Significant uncertainty exists as to the reimbursement
status of newly approved health care products, and any failure or delay in obtaining reimbursement approvals can negatively
impact sales of our new products.
In addition, third party payers are increasingly attempting to contain the costs of health care products and services by
limiting both coverage and the level of reimbursement for new therapeutic products and by refusing, in some cases, to provide
coverage for uses of approved products for disease indications for which the FDA, or the applicable foreign regulatory agency,
has granted marketing approval. Also, the U.S. Congress, certain state legislatures, and certain foreign governments and
regulatory agencies have considered reforms, including, among other items, the potential repeal of the Affordable Care Act in
the United States, which may affect current reimbursement practices and create additional uncertainty about the pricing of our
products, including the potential implementation of controls on health care spending through limitations on the growth of
Medicare and Medicaid spending. There can be no assurance that third party reimbursement coverage will be available or
adequate for any products or services developed by us. Outside the United States, the success of our products is also dependent
in part upon the availability of reimbursement and health care payment systems. Domestic and international reimbursement laws
and regulations may change from time to time. Lack of adequate coverage and reimbursement provided by governments and
other third party payers for our products and services, including continuing coverage for MONOVISC and ORTHOVISC in the
United States, and any change of classification by the Centers for Medicare and Medicaid Services for ORTHOVISC and
MONOVISC, could have a material adverse effect on our business, financial condition, and results of operations.
18
We may seek additional financing in the future, which could be difficult to obtain and which could dilute your ownership
interest or the value of your shares.
We had cash, cash equivalents, and investments of $157.3 million at December 31, 2017. In addition, and subject to
certain constraints, we have $50.0 million of credit available to us under our Senior Revolving Credit Facility as of December
31, 2017. Our future capital requirements and the adequacy of available funds will depend, however, on numerous factors,
including:
• Market acceptance of our existing and future products;
• The success and sales of our products under various distributor agreements and other appropriate commercial
strategies, including the ability of our partners to achieve third party reimbursement for our products;
• The successful commercialization of products in development;
• Progress in our product development efforts;
• The magnitude and scope of such product development efforts;
• Any potential acquisitions of products, technologies, or businesses;
• Progress with preclinical studies, clinical trials, and product approvals and clearances by the FDA and other
agencies;
• The cost and timing of our efforts to manage our manufacturing capabilities and related costs;
• The cost of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights and the
cost of defending any other legal proceeding;
• Competing technological and market developments;
• The development of strategic alliances for the marketing of certain of our products;
• The terms of such strategic alliances, including provisions (and our ability to satisfy such provisions) that provide
upfront and/or milestone payments to us; and
• The cost of maintaining adequate inventory levels to meet current and future product demand.
To the extent funds generated from our operations, together with our existing capital resources, are insufficient to meet
future requirements, we will be required to obtain additional funds through equity or debt financings, through strategic alliances
with corporate partners and others, or through other sources. The terms of any future equity financings may be dilutive to our
investors and the terms of any debt financings may contain restrictive covenants, which limit our ability to pursue certain courses
of action. Our ability to obtain financing is dependent on the status of our future business prospects as well as conditions
prevailing in the relevant capital markets at the time we seek financing. No assurance can be given that any additional financing
will be made available to us or will be available on acceptable terms should such a need arise.
We could become subject to product liability claims, which, if successful, could materially adversely affect our business,
financial condition, and results of operations.
The testing, marketing, and sale of human health care products entail an inherent risk of allegations of product liability,
and there can be no assurance that substantial product liability claims will not be asserted against us. Although we have not
received any material product liability claims to date and have an insurance policy of $5.0 million per occurrence and $5.0 million
in the aggregate to cover such product liability claims should they arise, there can be no assurance that material claims will not
arise in the future or that our insurance will be adequate to cover all situations. Moreover, there can be no assurance that such
insurance, or additional insurance, if required, will be available in the future or, if available, will be available on commercially
reasonable terms. Any product liability claim, if successful, could have a material adverse effect on our business, financial
condition, and results of operations.
19
Our business is dependent upon hiring and retaining qualified management and technical personnel.
We are highly dependent on the members of our management and technical staff, the loss of one or more of whom could
have a material adverse effect on us. We have experienced a number of management changes in recent years, and there can be
no assurances that any future management changes will not adversely affect our business. We believe that our future success will
depend in large part upon our ability to attract and retain technical and highly skilled executive, managerial, professional, and
technical personnel. We face significant competition for such personnel from competitive companies, research and academic
institutions, government entities, and other organizations. There can be no assurance that we will be successful in hiring or
retaining the personnel we require. The failure to hire and retain such personnel could have a material adverse effect on our
business, financial condition, and results of operations.
We are subject to environmental regulations and any failure to comply with applicable laws could subject us to significant
liabilities and harm our business.
We are subject to a variety of local, state, federal, and foreign government regulations relating to the storage, discharge,
handling, emission, generation, manufacture, and disposal of toxic or other hazardous substances used in the manufacture of our
products. Any failure by us to control the use, disposal, removal, or storage of hazardous chemicals or toxic substances could
subject us to significant liabilities, which could have a material adverse effect on our business, financial condition, and results of
operations.
As our international sales and operations grow, we could become increasingly subject to additional economic, political, and
other risks that could harm our business.
Since we manufacture and sell our products worldwide, our business is subject to risks associated with doing business
internationally. During the years ended December 31, 2017, 2016, and 2015, 20%, 19%, and 18%, respectively, of our product
sales were to international distributors. We continue to be subject to a variety of risks, which could cause fluctuations in the
results of our international and domestic operations. These risks include:
• The impact of recessions and other economic conditions in economies, including Europe in particular, outside the
United States;
•
Instability of foreign economic, political, and labor conditions;
• Unfavorable labor regulations applicable to our European operations, such as severance and the unenforceability
of non-competition agreements in the European Union;
• The impact of strikes, work stoppages, work slowdowns, grievances, complaints, claims of unfair labor practices,
or other collective bargaining disputes;
• Difficulties in complying with restrictions imposed by regulatory or market requirements, tariffs, or other trade
barriers or by U.S. export laws;
•
Imposition of government controls limiting the volume of international sales;
• Longer accounts receivable payment cycles;
• Potentially adverse tax consequences, including, if required or applicable, difficulties transferring funds generated
in non-U.S. jurisdictions to the United States in a tax efficient manner;
• Difficulties in protecting intellectual property, especially in international jurisdictions;
• Difficulties in managing international operations; and
• Burdens of complying with a wide variety of foreign laws.
Our success depends, in part, on our ability to anticipate and address these risks. We cannot guarantee that these or
other factors will not adversely affect our business or operating results.
20
Currency exchange rate fluctuations may have a negative impact on our reported earnings.
Approximately 5% of our business during 2017 was conducted in functional currencies other than the U.S. dollar, which
is our reporting currency. Thus, currency fluctuations among the U.S. dollar and the other currencies in which we do business
have caused and will continue to cause foreign currency transaction gains and losses. Currently, we attempt to manage foreign
currency risk through the matching of assets and liabilities. In the future, we may undertake to manage foreign currency risk
through additional hedging methods. We recognize foreign currency gains or losses arising from our operations in the period
incurred. We cannot guarantee that we will be successful in managing foreign currency risk or in predicting the effects of
exchange rate fluctuations upon our future operating results because of the variability of currency exposure and the potential
volatility of currency exchange rates.
A significant portion of our revenues are derived from a small number of customers, the loss of which could materially
adversely affect our business, financial condition and results of operations.
We have historically derived the majority of our revenues from a small number of customers who resell our products to
end-users, and most of these customers are significantly larger companies than us. For the year ended December 31, 2017, five
customers accounted for 83% of product revenue, with Mitek alone accounting for 73% of product revenue. We expect to
continue to be dependent on a small number of large customers, especially Mitek, for the majority of our revenues for the
foreseeable future. The failure of these customers to purchase our products in the amounts they historically have or in amounts
that we expect would seriously harm our business.
In addition, if present and future customers terminate their purchasing arrangements with us, significantly reduce or
delay their orders, or seek to renegotiate their agreements on terms less favorable to us, our business, financial condition, and
results of operations will be adversely affected. If we accept terms less favorable than the terms of the current agreements, such
renegotiations may have a material adverse effect on our business, financial condition, and/or results of operations. Furthermore,
in any future negotiations we may be subject to the perceived or actual leverage that these customers may have given their relative
size and importance to us. Any termination, change, reduction, or delay in orders could seriously harm our business, financial
condition, and results of operations. Accordingly, unless and until we diversify and expand our customer base, or develop
alternative commercial strategies, our future success will significantly depend upon the timing and size of future purchases by
our largest customers, and the financial and operational success of these customers. The loss of any one of our major customers
or the delay of significant orders from such customers, even if only temporary, could reduce or delay our recognition of revenues,
harm our reputation in the industry, and reduce our ability to accurately predict cash flow, and, as a consequence, it could
seriously harm our business, financial condition, and results of operations.
Information security breaches or business system disruptions, including our ongoing phased implementation of our enterprise
resource planning (ERP) system, may adversely affect our business.
We rely on our information technology infrastructure and management information systems to effectively run our
business. While we have not previously experienced a material information security breach caused by illegal hacking, computer
viruses, or acts of vandalism or terrorism, we may in the future be subject to such a breach. Our security measures or those of
our third-party service providers may not detect or prevent such breaches. Any such compromise to our information security
could result in an interruption in our operations, the unauthorized publication of our confidential business or proprietary
information, the unauthorized release of customer, vendor, or employee data, the violation of privacy, or other laws and exposure
to litigation, any of which could harm our business and operating results. In addition, there may be other challenges and risks as
we upgrade and standardize our business systems, including with respect to our newly implemented ERP system and the planned
system enhancements thereto, which could adversely affect our business, financial condition, or results of operations.
21
Our business may be adversely affected if consolidation in the healthcare industry leads to demand for price concessions or
if we are excluded from being a supplier by a group purchasing organization or similar entity.
Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms have been
launched by legislators, regulators, and third-party payers to curb these costs. As a result, there has been a consolidation trend in
the healthcare industry to create larger companies, including hospitals, with greater market power. As the healthcare industry
consolidates, competition to provide products and services to industry participants has become and may continue to become more
intense. This may result in greater pricing pressures and the exclusion of certain suppliers from important markets as group
purchasing organizations, independent delivery networks, and large single accounts continue to use their market power to
consolidate purchasing decisions. If a group purchasing organization excludes us from being one of their suppliers, our net sales
could be adversely impacted. We expect that market demand, government regulation, third-party reimbursement policies, and
societal pressures will continue to change the worldwide healthcare industry, which may exert further downward pressure on the
prices of our products.
We experience quarterly sales volume variation, which makes our future results difficult to predict and makes period-to-
period comparisons potentially not meaningful.
We experience quarterly fluctuations in our products sales as a result of multiple factors, many of which are outside of
our control. These quarterly fluctuations create uncertainty as to the volume of sales that we may achieve in a given period. As
a result, comparing our operating results on a period-to-period basis might not be meaningful. You should not rely on our past
results as an indication of our future performance. Our operating results could be disproportionately affected by a reduction in
revenue because a proportionately smaller amount of our expenses varies with our revenue. As a result, our quarterly operating
results are difficult to predict, even in the near term.
Risks Related to Our Intellectual Property
We may be unable to adequately protect our intellectual property rights, which could have a material impact on our business
and future financial results.
Our efforts to enforce our intellectual property rights may not be successful. We rely on a combination of copyright,
trademark, patent, and trade secret laws, confidentiality procedures, and contractual provisions to protect our proprietary rights.
Our success will depend, in part, on our ability to obtain and enforce patents and trademarks, to protect trade secrets, to obtain
licenses to technology owned by third parties when necessary, and to conduct our business without infringing on the proprietary
rights of others. The patent positions of pharmaceutical, medical product, and biotechnology firms, including ours, can be
uncertain and involve complex legal and factual questions. There can be no assurance that any patent applications will result in
the issuance of patents or, if any patents are issued, that they will provide significant proprietary protection or commercial
advantage or will not be circumvented by others. Filing and prosecution of patent applications, litigation to establish the validity
and scope of patents, assertion of patent infringement claims against others, and the defense of patent infringement claims by
others can be expensive and time consuming. There can be no assurance that, in the event that any claims with respect to any of
our patents, if issued, are challenged by one or more third parties, any court or patent authority ruling on such challenge will
determine that such patent claims are valid and enforceable. An adverse outcome in such litigation or patent review process could
cause us to lose exclusivity covered by the disputed rights. If a third party is found to have rights covering products or processes
used by us, we could be forced to cease using the technologies or marketing the products covered by such rights, we could be
subject to significant liabilities to such third party, and we could be required to license technologies from such third party in order
to continue production of the products. Furthermore, even if our patents are determined to be valid, enforceable, and broad in
scope, there can be no assurance that competitors will not be able to design around such patents and compete with us using the
resulting alternative technology. We have a policy of seeking patent protection for patentable aspects of our proprietary
technology. We intend to seek patent protection with respect to products and processes developed in the course of our activities
when we believe such protection is in our best interest and when the cost of seeking such protection is not inordinate. However,
no assurance can be given that any patent application will be filed, that any filed applications will result in issued patents, or that
any issued patents will provide us with a competitive advantage or will not be successfully challenged by third parties. The
protections afforded by patents will depend upon their scope and validity, and others may be able to design around our patents.
22
We also rely upon trade secrets and proprietary know-how for certain non-patented aspects of our technology. To protect
such information, we require all employees, consultants, and licensees to enter into confidentiality agreements limiting the
disclosure and use of such information. There can be no assurance that these agreements provide meaningful protection or that
they will not be breached, that we would have adequate remedies for any such breach, or that our trade secrets, proprietary know-
how, and our technological advances will not otherwise become known to others. In addition, there can be no assurance that,
despite precautions taken by us, others have not and will not obtain access to our proprietary technology. Further, there can be
no assurance that third parties will not independently develop substantially equivalent or better technology.
There can be no assurance that we will not infringe upon the intellectual property rights of others, which could have a
significant impact on our business and financial results.
Other entities have filed patent applications for, or have been issued patents concerning, various aspects of HA-related
products or processes. There can be no assurance that the products or processes developed by us will not infringe on the patent
rights of others in the future. The cost of defending infringement suits is typically large, and there is no guarantee that any future
defense would be successful. In addition, infringement could lead to substantial damages payouts or our inability to produce or
market certain of our current or future products. As a result, any such infringement may have a material adverse effect on our
business, financial condition, and results of operations.
Risks Related to Ownership of Our Common Stock
Our stock price may be highly volatile, and we cannot assure you that market making in our common stock will continue.
The market price of shares of our common stock may be highly volatile. Factors such as announcements of new
commercial products or technological innovations by us or our competitors, disclosure of results of clinical testing or regulatory
proceedings, government regulation and approvals, developments in patent or other proprietary rights, public concern as to the
safety of products developed by us, and general market conditions may have a significant effect on the market price of our
common stock. The trading price of our common stock could be subject to wide fluctuations in response to quarter-to-quarter
variations in our operating results, material announcements by us or our competitors, governmental regulatory action, conditions
in the health care industry generally or in the medical products industry specifically, or other events or factors, many of which
are beyond our control. In addition, the stock market has experienced extreme price and volume fluctuations, which have
particularly affected the market prices of many medical products companies and which often have been unrelated to the operating
performance of such companies. Our operating results in future quarters may be below the expectations of equity research
analysts and investors. In such an event, the price of our common stock would likely decline, perhaps substantially.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market,
or if they adversely change their recommendations regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that securities or industry analysts
may publish about us, our business, our market, or our competitors. No person is under any obligation to publish research or
reports on us, and any person publishing research or reports on us may discontinue doing so at any time without notice. If
adequate research coverage is not maintained on our company or if any of the analysts who cover us downgrade our stock or
publish inaccurate or unfavorable research about our business or provide relatively more favorable recommendations about our
competitors, our stock price would likely decline. If any analysts who cover us were to cease coverage of our company or fail to
regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or
trading volume to decline.
23
We do not intend to pay dividends on our common stock in the foreseeable future.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain earnings, if
any, for use in our business and do not anticipate paying cash dividends on our common stock in the foreseeable future.
Accordingly, investors are not likely to receive any dividends on their common stock in the foreseeable future, and their ability
to achieve a return on their investment will therefore depend on appreciation in the price of our common stock.
Our charter documents contain anti-takeover provisions that may prevent or delay an acquisition of our company.
Certain provisions of our Restated Articles of Organization and Amended and Restated By-laws could have the effect
of discouraging a third party from pursuing a non-negotiated takeover of us and preventing certain changes in control. These
provisions include a classified Board of Directors, advance notice to the Board of Directors of stockholder proposals, limitations
on the ability of stockholders to remove directors and to call stockholder meetings, and the provision that vacancies on the Board
of Directors be filled by vote of a majority of the remaining directors. In addition, the Board of Directors adopted a ten-year
Shareholders Rights Plan in April 2008. We are also subject to Chapter 110F of the Massachusetts General Laws which, subject
to certain exceptions, prohibits a Massachusetts corporation from engaging in any of a broad range of business combinations
with any “interested stockholder” for a period of three years following the date that such stockholder becomes an interested
stockholder. All of these provisions, policies, and plans are reviewed periodically by our Board of Directors. These provisions
could discourage a third party from pursuing a takeover of us at a price considered attractive by many stockholders, since such
provisions could have the effect of preventing or delaying a potential acquirer from acquiring control of us and our Board of
Directors.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Bedford, Massachusetts, where we lease approximately 134,000 square feet of
administrative, research and development, and manufacturing space. We entered into this lease in January 2007, and the lease
commenced in May 2007 for an initial term of ten and a half years. In October 2016, we exercised the first option under the lease
to extend its term for five years. There are three additional renewal periods, each of which is subject to the condition that we
notify the landlord of our exercise of such option at least one year prior to the expiration of the then current term. Two additional
renewal options each extend the term an additional five years, and the final renewal option extends the term an additional six
years.
In October 2015, Anika S.r.l. entered into a build-to-suit lease agreement for a new European headquarters facility
consisting of approximately 33,000 square feet of general office, research and development, training, and warehousing space
located in Padova, Italy. This lease, which has an initial term of fifteen years, commenced in February 2017 in accordance with
the lease agreement, as amended in February 2017. The lease will automatically renew for up to three additional six-year terms,
subject to certain terms and conditions. Anika S.r.l. may elect to early withdraw from this lease subject to certain financial
penalties after six years and with no penalties after the ninth year. The lease provides for an initial yearly rent of approximately
$0.3 million.
Prior to April 2017, Anika S.r.l. leased approximately 28,000 square feet of laboratory, warehouse, and office space in
Abano Terme, Italy from Fidia. The lease commenced in December 2009. In December 2016, following discussions between
Anika S.r.l. and Fidia, Anika S.r.l. notified Fidia of its intention to terminate this lease agreement as of March 2017, in accordance
with the terms of the lease.
In 2017, we had aggregate facility lease expenses of approximately $1.8 million. We believe that the capacity of our
Bedford, Massachusetts corporate headquarters is sufficient to satisfy our needs for the immediately foreseeable future. We also
believe that Anika S.r.l.’s leased facility in Padova, Italy will be sufficient to satisfy its needs for the foreseeable future.
24
ITEM 3. LEGAL PROCEEDINGS
We are 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, we do not expect the resolution of these proceedings to
have a material adverse effect on our financial position, results of operations, or cash flow.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock Information
Our common stock has traded on the NASDAQ Global Select Market since November 25, 1997, under the symbol
“ANIK.” The following table sets forth, for the periods indicated, the high and low sales prices of our common stock on the
NASDAQ Global Select Market. These prices represent prices between dealers and do not include retail mark-ups, markdowns,
or commissions, and they may not necessarily represent actual transactions.
Year Ended December 31, 2017
First Quarter ......................................................... $
Second Quarter ....................................................
Third Quarter .......................................................
Fourth Quarter .....................................................
High
Year Ended December 31, 2016
First Quarter ......................................................... $
Second Quarter ....................................................
Third Quarter .......................................................
Fourth Quarter .....................................................
High
52.23 $
49.68
58.21
59.94
47.24 $
53.68
54.96
50.19
Low
41.72
43.04
45.71
52.14
Low
35.07
42.36
45.52
41.38
At December 31, 2017, the closing price per share of our common stock was $53.91 as reported on the NASDAQ Global
Select Market, and there were 135 holders of record. We believe that the number of beneficial owners of our common stock at
that date was substantially greater, due to shares being held by intermediaries.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain earnings, if
any, for use in our business and do not anticipate paying cash dividends on our common stock in the foreseeable future. Payment
of future dividends, if any, on our common stock will be at the discretion of our Board of Directors after taking into account
various factors, including our financial condition, operating results, anticipated cash needs, and plans for expansion.
Accelerated Share Repurchase Program
On February 26, 2016, we entered into an accelerated stock repurchase agreement with Morgan Stanley & Co. LLC
(“Morgan Stanley”) pursuant to a Fixed Dollar Accelerated Share Repurchase Transaction (“ASR Agreement") to purchase $25.0
million of shares of its common stock. Pursuant to the terms of the ASR Agreement, we paid Morgan Stanley $25.0 million in
cash and received an initial delivery of 0.4 million shares of our common stock on February 29, 2016 based on a closing market
price of $46.40 per share and the applicable contractual discount.
25
On August 26, 2016, we settled the approximately $7.5 million remaining under the ASR Agreement, which was
recorded as an equity forward sale contract and was included in additional paid-in capital in stockholders' equity in the
consolidated balance sheet as it met the criteria for equity accounting. Pursuant to the terms of the ASR Agreement, the final
number of shares and the average purchase price was determined at the end of the applicable purchase period, which was August
26, 2016. Based on the volume-weighted average price since the effective date of the ASR Agreement less the applicable
contractual discount, Morgan Stanley delivered 0.1 million additional shares to us on August 31, 2016. In total, 0.5 million shares
were repurchased under the ASR Agreement at an average repurchase price of $47.08 per share. These shares are held by us as
authorized but unissued shares pursuant to Massachusetts law. The initial and final delivery of shares resulted in immediate
reductions of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted net
income per share.
Performance Graph
Set forth below is a graph comparing the total returns of our company, the NASDAQ Composite Index, and the
NASDAQ Biotechnology Index. The graph assumes $100 is invested on December 31, 2012 in our common stock and each of
the indices. Past performance is not indicative of future results.
Anika Therapeutics, Inc. ............................. $
NASDAQ Composite Index ........................ $
NASDAQ Biotechnology Index .................. $
100.00 $
100.00 $
100.00 $
383.90 $
138.32 $
165.61 $
409.86 $
156.85 $
222.08 $
383.90 $
165.84 $
247.44 $
492.56 $
178.28 $
193.79 $
542.35
228.63
234.60
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Securities Authorized for Issuance Under Equity Compensation Plans
For information regarding securities authorized for issuance under our employee stock-based compensation plans, see
Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, included
elsewhere in this Annual Report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto and the section captioned “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” included elsewhere in this Annual Report on Form 10-K. The Balance Sheet Data at December 31,
2017 and 2016 and the Statement of Operations Data for each of the three years ended December 31, 2017, 2016, and 2015
have been derived from the audited Consolidated Financial Statements for such years, included elsewhere in this Annual Report
26
2013
71,774
3,307
75,081
22,765
49,009
68 %
42,474
20,575
1.39
14,826
2013
on Form 10-K. The Balance Sheet Data at December 31, 2015, 2014, and 2013, and the Statement of Operations Data for each
of the two years in the period ended December 31, 2014 and 2013 have been derived from audited consolidated financial
statements for such years not included in this Annual Report on Form 10-K.
2017
Years ended December 31,
2015
(in thousands, except per share data)
2014
2016
Statements of Operations Data:
Product revenue ...................................................... $ 107,783 $ 102,932 $
Licensing, milestone and contract revenue ............
447
103,379
Total revenue ..........................................................
24,027
Cost of product revenue .........................................
78,905
Product gross profit ................................................
Product gross margin ..............................................
77 %
52,772
Total operating expenses ........................................
32,547
Net income .............................................................
2.15 $
Diluted net income per common share ................... $
15,116
Diluted common shares outstanding ......................
5,637
113,420
27,364
80,419
75 %
67,691
31,816
2.11 $
15,068
87,696 $
5,303
92,999
21,053
66,643
76 %
44,865
30,758
2.01 $
15,321
75,474 $
30,121
105,595
20,930
54,544
72 %
44,148
38,319
2.51 $
15,269
Balance Sheet Data:
Cash, cash equivalents and investments .................. $
Working capital .......................................................
Total assets ..............................................................
Long-term liabilities ................................................
Retained earnings ....................................................
Stockholders' equity ................................................
2017
2016
Years ended December 31,
2015
(in thousands)
2014
157,256 $
193,254
282,617
6,054
199,511
263,491
124,761 $
161,641
240,246
8,674
168,209
222,773
138,458 $
159,155
235,748
7,622
135,662
210,848
106,906 $
131,863
192,808
8,737
104,904
178,098
63,333
84,650
156,042
11,125
66,584
135,634
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following section contains statements that are not statements of historical fact and are forward-looking statements
within the meaning of the federal securities laws. These statements involve known and unknown risks, uncertainties, and other
factors that may cause our actual results, performance, or achievement to differ materially from anticipated results, performance,
or achievement, expressed or implied in such forward-looking statements. These statements reflect our current views with respect
to future events, are based on assumptions, and are subject to risks and uncertainties. We discuss many of these risks and
uncertainties at the beginning of this Annual Report on Form 10-K and under the sections captioned “Business” and “Risk
Factors.” The following discussion should also be read in conjunction with the consolidated financial statements and the Notes
thereto appearing elsewhere in this Annual Report on Form 10-K.
Management Overview
We are a global, integrated orthopedic medicines company committed to improving the lives of patients with
degenerative orthopedic diseases and traumatic conditions with clinically meaningful therapies along the continuum of care, from
palliative pain management to regenerative tissue repair. We have over two decades of global expertise developing,
manufacturing, and commercializing products based on our proprietary HA technology. Our orthopedic medicine portfolio
includes ORTHOVISC, MONOVISC, and CINGAL, which alleviate pain and restore joint function by replenishing depleted
HA, and HYALOFAST, a solid HA-based scaffold to aid cartilage repair and regeneration.
27
Our therapeutic offerings consist of products in the following areas: Orthobiologics, Dermal, Surgical, and Other, which
includes our ophthalmic and veterinary products. All of our products are based on HA, a naturally occurring, biocompatible
polymer found throughout the body. Due to its unique biophysical and biochemical properties, HA plays an important role in a
number of physiological functions such as the protection and lubrication of soft tissues and joints, the maintenance of the
structural integrity of tissues, and the transport of molecules to and within cells.
Our proprietary technologies for modifying the HA molecule allow product properties to be tailored specifically to
therapeutic use. Our patented technology chemically modifies HA to allow for longer residence time in the body. We also offer
products made from HA based on two other technologies: HYAFF, which is a solid form of HA, and ACP gel, an autocross-
linked polymer of HA. Our technologies are protected by an extensive portfolio of owned and licensed patents.
Since our inception in 1992, we have utilized a commercial partnership model for the distribution of our products to end
users. Our strong, worldwide network of distributors has historically provided, and continues to provide, a solid foundation for
our revenue growth and territorial expansion. In 2015, we made the strategic decision to commercialize our next generation
viscosupplementation product, CINGAL, in the United States by utilizing a direct sales model, initially through the engagement
of a contract sales organization. Ultimately, we intend to transition the direct sales function into our company as part of a broader
buildout of our commercial capabilities. We believe that the combination of the direct and distribution commercial models will
maximize the revenue and profitability potential from our current and future product portfolio.
In the fourth quarter of 2017, we completed all planned activities related to the strategic project we began in 2015 to
insource the manufacturing of our HYAFF-based products to our Bedford, Massachusetts facility at a total cost of $23.0 million.
These products were previously manufactured by a third-party contract manufacturer in Italy. Our main purposes behind this
strategic move are to enhance our research and development capabilities with the aim of accelerating future product development
and to improve the efficiency of our manufacturing processes.
The following sections provide more information about our products:
Orthobiologics
Our orthobiologics business contributed 87% of our product revenue for the year ended December 31, 2017. Our
orthobiologics products primarily consist of viscosupplementation and
regenerative orthopedic products. Our
viscosupplementation products include ORTHOVISC, ORTHOVISC mini, and MONOVISC, each of which is commercialized
in various territories worldwide, and CINGAL, which we launched internationally in Canada and the European Union in the
second quarter of 2016 after receiving Health Canada and CE Mark approval. ORTHOVISC is available in the United States,
Canada, and some international markets for the treatment of osteoarthritis of the knee, and in Europe and other international
markets for the treatment of osteoarthritis in all synovial joints. It has been marketed by us in the United States since 2004 and
internationally since 1996 through various distribution agreements. ORTHOVISC mini is available in Europe and is designed
for the treatment of osteoarthritis in small joints. MONOVISC is our first single injection osteoarthritis treatment indicated for
all synovial joints in Europe and certain international markets, and for the knee in the United States, Turkey, and Canada.
ORTHOVISC mini and MONOVISC both became available in certain international markets through our network of distributors
during the second quarter of 2008, and the commercial introduction of MONOVISC in the United States occurred in April 2014.
We are currently seeking regulatory approval for CINGAL, our second single-injection osteoarthritis product, in the United
States.
28
We currently offer several orthopedic products used in connection with regenerative medicine. The products currently
available in Europe and certain international markets include HYALOFAST, a biodegradable support for human bone marrow
mesenchymal stem cells used for cartilage regeneration and as an adjunct for microfracture surgery; HYALONECT, a resorbable
knitted fabric mesh for use in orthopedic and trauma reconstructive procedures to maintain the relative position of engrafted bone
tissue or bone fragments from comminuted fractures; and HYALOSS, HYAFF fibers used to mix blood/bone grafts to form a
paste for bone regeneration. We also offer HYALOGLIDE, an ACP gel used in tenolysis treatment that, with additional clinical
data, may demonstrate potential for flexor tendon adhesion prevention and for the treatment of adhesive capsulitis prevention in
the shoulder. This product is commercialized through a network of distributors, primarily in Europe and the Middle East. We
believe that the U.S. market offers excellent expansion potential to increase revenue for these products, and this will continue to
be a focus area for us moving forward.
In addition to the products discussed above, we received CE Mark approval in December 2016 for a product which
utilizes our proprietary HA technology to treat pain associated with lateral epicondylitis, better known as tennis elbow. Outside
of the United States, this product is marketed under the trade name ORTHOVISC-T. Additionally, in the second quarter of 2016,
we submitted an IDE to the FDA to conduct a Phase III clinical trial for this treatment, and the IDE was approved by the FDA
in June 2016. We also received 510(k) clearance for an injectable HA-based bone repair treatment in December 2017.
Our strategy is to continue to add new products, to expand the indications for use of both our current and any new
products, and to expand our commercial reach. The orthobiologics area has been our fastest growing area, generating 88% growth
from 2012 to 2017. We continue to seek new distribution partnerships around the world, in concert with entering new markets
with other appropriate sales strategies, and we expect total orthobiologics product sales to increase in 2018 compared to 2017
based mainly on increased sales to existing and new partners, as well as additional MONOVISC and CINGAL product launches
in certain international countries. Additionally, if we achieve FDA approval of CINGAL, we plan to utilize a direct sales model
to commercialize the product in the United States initially through the engagement of a contract sales organization with the
ultimate goal of transitioning the direct sales function to our company as part of a broader buildout of our commercial capabilities.
Dermal
Our dermal products contributed 3% to our product revenue for the year ended December 31, 2017 and consist of
advanced wound care products, which are based on the HYAFF technology, and an aesthetic dermal filler. We offer products for
the treatment of skin wounds ranging from burns to diabetic ulcers. The products cover a variety of wound treatment solutions
including debridement agents, advanced therapies, and scaffolds used as skin substitutes. Leading products include
HYALOMATRIX and HYALOFILL for the treatment of complex wounds, such as burns and ulcers, and for use in connection
with the regeneration of skin. Our dermal products are commercialized through a network of distributors, primarily in the United
States, Europe, Latin America, and the Middle East. Products cleared for sale in the United States include HYALOMATRIX,
HYALOFILL, HYALOGRAN, HYALOSAFE, and HYALOMATRIX 3D. We have a commercial partnership agreement with
Medline Industries, Inc. to commercialize HYALOMATRIX in the United States on an exclusive basis through 2022.
Our aesthetic dermatology product is a dermal filler based on our proprietary, chemically modified, cross-linked HA,
and it is primarily commercialized in certain countries in the Middle East. Internationally, this product is marketed under the
ELEVESS trade name. In the United States, the trade name is HYDRELLE, although the product is not currently marketed in
the United States.
Surgical
Our surgical group consists of products used to prevent surgical adhesions and to treat ENT disorders. For the year
ended December 31, 2017, sales of surgical products contributed 5% of our product revenue. HYALOBARRIER is a clinically
proven post-operative adhesion barrier for use in the abdomino-pelvic area. The product is currently commercialized in Europe,
the Middle East, and certain African and Asian countries through a distribution network, but it is not approved in the United
States. INCERT, approved for sale in Europe, Turkey, and Malaysia, is a chemically modified, cross-linked HA product used for
the prevention of post-surgical spinal adhesions. There are no plans at this time to distribute INCERT in the United States.
We also offer several products used in connection with the treatment of ENT disorders. The lead products are
MEROGEL, a woven fleece nasal packing, and MEROGEL INJECTABLE, a thick, viscous hydrogel composed of cross-linked
HA, a biocompatible agent that creates a moist wound-healing environment. We partner with Medtronic for the worldwide
distribution of these products.
29
Other
Our other products include our ophthalmic and veterinary products, which constituted 5% of our product revenue for
the year ended December 31, 2017. These legacy products are not a part of our core business. Our ophthalmic business includes
HA viscoelastic products used in ophthalmic surgery. Sales of ophthalmic products contributed 1% of our product revenue and
sales of HYVISC, our veterinary product used for the treatment of equine osteoarthritis, contributed 4% of our product revenue
for the year ended December 31, 2017.
Research and Development
Our research and development efforts primarily consist of the development of new medical applications for our HA-
based or other technologies, the management of clinical trials for certain product candidates, the preparation and processing of
applications for regulatory approvals or clearances at all relevant stages of product development, and process development and
scale-up manufacturing activities for our existing and new products. Our development focus includes products for tissue
protection, repair, and regeneration. For the years ended December 31, 2017, 2016, and 2015, these expenses were $18.8 million,
$10.7 million, and $9.0 million, respectively. We anticipate that we will continue to commit significant resources in the near
future to research and development activities, including in relation to preclinical activities and clinical trials. These activities are
aimed at the delivery of a steady cascade of new product development and launches over the next several years.
Our second single-injection osteoarthritis product under development in the United States is CINGAL, which is
composed of our proprietary cross-linked HA material combined with an approved steroid and is designed to provide both short-
and long-term pain relief to patients. We completed an initial CINGAL phase III clinical trial, including the associated statistical
analysis for 368 enrolled patients, during the fourth quarter of 2014 with data indicating that the product met all primary and
secondary endpoints set forth for the trial. During the first half of 2015, we completed a CINGAL retreatment study with 242
patients who had participated in the phase III clinical trial and reported safety data related to the retreatment study. This initial
phase III clinical trial and the associated retreatment study supported the Health Canada and CE Mark approval of the product,
and the commercial launch of the product in both Canada and the European Union occurred in the second quarter of 2016. In the
United States, after discussions with the FDA related to the regulatory pathway for CINGAL, we conducted a formal meeting
with OCP to present and discuss our data in September 2015, and we submitted a formal request for designation with OCP a
month later. In its response to our formal request for designation, OCP assigned the product to CDER as the lead agency center
for premarket review and regulation. We held a meeting with CDER at the end of September 2016 to align on an approval
framework and on submission requirements for an NDA for CINGAL, including the execution of an additional Phase III clinical
trial to supplement our strong, existing CINGAL pivotal study data. We submitted an IND in late 2016, and discussions with
CDER to this point indicate that they do not have objections to our clinical protocol design. As a result, we commenced work on
this second Phase III clinical trial in the first quarter of 2017, and the first patient was treated in the second quarter of 2017.
Enrollment of the 576 patients in this second Phase III clinical trial was completed during October 2017. We expect to complete
the six-month follow-up for this Phase III clinical trial during the second quarter of 2018 and to submit our NDA to FDA as
expeditiously as possible thereafter. We have also initiated an additional three-month extended follow-up study in conjunction
with the second Phase III clinical trial to investigate the efficacy of CINGAL over this longer period, and the first patients were
enrolled in this follow-up study in the fourth quarter of 2017. This extended follow-up study will not impact the timeline for
submission of the NDA for CINGAL following the completion of the second Phase III clinical trial.
We have several research and development programs underway for new products, including for HYALOFAST (in the
United States), an innovative product for cartilage tissue repair, and other early stage regenerative medicine development
programs. HYALOFAST received CE Mark approval in September 2009, and it is commercially available in Europe and certain
international countries. During the first quarter of 2015, we submitted an IDE for HYALOFAST to the FDA, which was approved
in July 2015. We commenced patient enrollment in a clinical trial in December 2015, and we are advancing site initiations and
patient enrollment activities. In the second quarter of 2016, a supplement to the HYALOFAST IDE was approved to expand the
inclusion criteria for the clinical study. The purpose of this supplement is to allow us to increase enrollment rates with the ultimate
goal of decreasing the time needed to complete the clinical trial. We are also currently proceeding with other research and
development programs, one of which utilizes our proprietary HA technology to treat pain associated with common repetitive
overuse injuries, such as lateral epicondylitis, also known as tennis elbow. We submitted a CE Mark application for this treatment
during the first quarter of 2016 and received a CE Mark for the treatment of pain associated with tennis elbow in December 2016.
We expect to begin enrolling patients in a post-market clinical study in relation to the CE Mark for this product before the end
of the second quarter of 2018. Outside of the United States, this product will be marketed under the trade name ORTHOVISC-
T. In the second quarter of 2016, we submitted an IDE to the FDA to conduct a phase III clinical trial for this treatment, which
was approved by the FDA in June 2016. We also have other research and development programs underway focused on expanding
the indications of our current products, including one program being conducted and funded by our U.S. MONOVISC distribution
partner, Mitek, seeking to expand MONOVISC’s indication to include the treatment of pain associated with osteoarthritis of the
hip. In third quarter of 2017, we also submitted an application to the FDA for 510(k) clearance of an injectable HA-based bone
30
repair treatment. The 510(k) clearance was received from the FDA in December 2017. In addition to other early stage research
and developments initiatives we are currently undertaking, we are working to expand our regenerative medicine pipeline with a
new product candidate in the form of an implant for rotator cuff repair utilizing our proprietary solid HA.
In June 2015, we entered into an agreement with the Institute for Applied Life Sciences at the University of
Massachusetts Amherst to collaborate on research to develop a therapy for rheumatoid arthritis. The purpose of this research is
to develop a novel modality for the treatment of rheumatoid arthritis. The agreement with the University of Massachusetts
Amherst was extended in January 2018, and the next phase of the research will focus on optimizing the drug delivery system
with the goal of advancing a novel therapeutic candidate into clinical trials to support regulatory submission. We also recently
entered into an agreement with the University of Liverpool to develop an injectable mesenchymal stem cell therapy for the
treatment of age-related osteoarthritis with the goal of bringing a therapeutics candidate through clinical trials to market to meet
an unmet therapeutic need.
Summary of Critical Accounting Policies; Significant Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial
statements included elsewhere in this Annual Report on Form 10-K, which consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and the related disclosure of contingent assets and liabilities. We monitor our estimates on an ongoing basis for changes
in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded
in the period in which they become known. We base our estimates on historical experience and other assumptions that we believe
to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions
do not turn out to be substantially accurate.
We have identified the policies below as critical to our business operations and the understanding of our results of
operations. The impact and any associated risks related to these policies on our business operations are discussed throughout this
section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such
policies affect our reported and expected financial results. For a detailed discussion on the application of these and other
accounting policies, see Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form
10-K.
Revenue Recognition - General
We recognize revenue from product sales when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the seller's price to the buyer is fixed or determinable;
and collection from the customer is reasonably assured.
Product Revenue
Revenue from product sales is recognized when title and risk of loss have passed to the customer, which is typically
upon shipment to the customer. Amounts billed or collected prior to recognition of revenue are classified as deferred revenue.
When determining whether risk of loss has transferred to customers on product sales, or if the sales price is fixed or determinable,
we evaluate both the contractual terms and conditions of our distribution and supply agreements as well, as our business practices.
31
Product revenue also includes royalties. Royalty revenue is based on our distributors’ sales and is recognized in the
same period our distributors record their sale of products manufactured by us. On a quarterly basis we record royalty revenue
based upon estimated or reported sales results provided to us by our distributor customers.
Licensing, Milestone and Contract Revenue
Licensing, milestone and contract revenue consists of revenue recognized on initial and milestone payments, as well as
contractual amounts received from partners. Our business strategy includes entering into collaborative license, development,
and/or supply agreements with partners for the development and commercialization of our products.
The terms of the agreements typically include non-refundable license fees, funding of research and development, and
payments based upon achievement of certain milestones. Under ASC 605-25, Multiple Element Arrangements, in order to
account for an element as a separate unit of accounting, the element must have objective and reliable evidence of selling price of
the undelivered elements. In general, non-refundable upfront fees and milestone payments that do not relate to other elements
are recognized as revenue over the term of the arrangement as we complete our performance obligations.
Inventories
Inventories are stated at the lower of standard cost and net realizable value, with approximate cost determined using the
first-in, first-out method. Work-in-process and finished goods inventories include materials, labor, and manufacturing overhead.
Inventory costs associated with product candidates that have not yet received regulatory approval are capitalized if we believe
there is probable future commercial use and future economic benefit.
Our policy is to write-down inventory when conditions exist that suggest inventory may be in excess of anticipated
demand or is obsolete based upon assumptions about future demand for our products and market conditions. We regularly
evaluate our ability to realize the value of inventory based on a combination of factors including, but not limited to, historical
usage rates, forecasted sales or usage, product end of life dates, and estimated current or future market values. Purchasing
requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure.
Goodwill and Acquired In-Process Research and Development
Goodwill is the amount by which the purchase price of acquired net assets in a business combination exceeded the fair
values of net identifiable assets on the date of acquisition. Acquired IPR&D represents the fair value assigned to research and
development assets that we acquire that have not been completed at the date of acquisition or are pending regulatory approval in
certain jurisdictions. The value assigned to the acquired IPR&D is determined by estimating the costs to develop the acquired
technology into commercially viable products, estimating the resulting revenue from the projects, and discounting the net cash
flows to present value.
Goodwill and IPR&D are evaluated for impairment annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. Factors we consider important, on an overall company basis, that could trigger an
impairment review include significant underperformance relative to historical or projected future operating results, significant
changes in our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends,
a significant decline in our stock price for a sustained period, or a reduction of our market capitalization relative to net book
value.
To conduct impairment tests of goodwill, the fair value of the reporting unit is compared to its carrying value. If the
reporting unit’s carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of
goodwill exceeds its implied fair value. Our annual assessment for impairment of goodwill as of November 30, 2017 indicated
that the fair value of our reporting unit exceeded the carrying value of the reporting unit.
32
To conduct impairment tests of IPR&D, the fair value of the IPR&D project is compared to its carrying value. If the
carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of the IPR&D project
exceeds its fair value. We estimate the fair value for IPR&D projects using discounted cash flow valuation models, which require
the use of significant estimates and assumptions, including, but not limited to, estimating the timing of and expected costs to
complete the in-process projects, projecting regulatory approvals, estimating future cash flows from product sales resulting from
completed projects and in-process projects, and developing appropriate discount rates. During the fourth quarter of 2015, we
performed an impairment review of our IPR&D projects as we reassessed our research and development strategy. We recorded
an impairment charge of $0.7 million due to the decision to discontinue further development efforts needed to commercialize
our Hemostatic Patch in-process development project. Our annual assessment for impairment of IPR&D indicated that the fair
value of our other IPR&D assets as of November 30, 2017 exceeded their respective carrying values.
Through December 31, 2017, there have not been any events or changes in circumstances that indicate that the carrying
value of goodwill or acquired intangible assets may not be recoverable. We continue to monitor and evaluate the financial
performance of our business, including the impact of general economic conditions, to assess the potential for the fair value of the
reporting unit to decline below its book value. There can be no assurance that, at the time future impairment tests are completed,
a material impairment charge will not be recorded.
Long-Lived Assets
Long-lived assets primarily include property and equipment and intangible assets with finite lives. Our intangible assets
are comprised of purchased developed technologies, distributor relationships, patents, and a trade name. The distributor
relationships and trade name were fully amortized as of December 31, 2017. These intangible assets are carried at cost, net of
accumulated amortization. Amortization is recorded on a straight-line basis over the intangible assets' useful lives, which range
from 5 to 16 years. We review long-lived assets for impairment when events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate.
Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If impairment
is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis.
Stock-Based Compensation
We measure the compensation cost of award recipients’ services received in exchange for an award of equity instruments
based on the grant-date fair value of the underlying award. That cost is recognized over the period during which an employee is
required to provide service in exchange for the award. For performance based awards with financial achievement targets, we
recognize expense using the graded vesting methodology based on the number of shares expected to vest. Compensation cost
associated with performance grants is estimated using the Black-Scholes valuation method multiplied by the expected number
of shares to be issued, which is adjusted based on the estimated probabilities of achieving the performance goals. Changes to the
probability assessment and the estimated shares expected to vest will result in adjustments to the related share-based
compensation expense that will be recorded in the period of the change. If the performance targets are not achieved, no
compensation cost is recognized and any previously recognized compensation cost is reversed. See Note 12, Equity Incentive
Plan, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of the
types of stock-based awards granted, the compensation expense related to such awards, and detail of equity-based awards
outstanding. See Note 16, Income Taxes, to the consolidated financial statements included elsewhere in this Annual Report on
Form 10-K for details related to the tax benefit recognized in the consolidated statement of operations for stock-based
compensation.
Income Taxes
Our income tax expense includes U.S. and international income taxes. Certain items of income and expense are not
reported in tax returns and financial statements in the same year. The tax effects of these differences are reported as deferred tax
assets and liabilities. Deferred tax assets are recognized for the estimated future tax effects of deductible temporary differences
and tax operating loss and credit carry-forwards. Changes in deferred tax assets and liabilities are recorded in the provision for
income taxes. We assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the
extent we believe that it is more likely than not that all or a portion of deferred tax assets will not be realized, we establish a
valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include an
expense within the tax provision in the consolidated statement of operations.
33
Results of Operations
Year ended December 31, 2017 compared to year ended December 31, 2016
Statement of Operations Detail
Years Ended December 31,
2017
2016
$ Inc/(Dec) % Inc/(Dec)
(in thousands, except percentages)
Product revenue ................................................................... $
Licensing, milestone and contract revenue .........................
Total revenue ...................................................................
107,783 $
5,637
113,420
102,932 $
447
103,379
4,851
5,190
10,041
5 %
1,161 %
10 %
Operating expenses:
Cost of product revenue ..................................................
Research & development ................................................
Selling, general & administrative ....................................
Total operating expenses .....................................................
Income from operations ......................................................
Interest income, net .........................................................
Income before income taxes ................................................
Provision for income taxes ..............................................
Net income .......................................................................... $
Product gross profit ................................................................. $
Product gross margin ...............................................................
27,364
18,787
21,540
67,691
45,729
473
46,202
14,386
31,816 $
80,419 $
75 %
24,027
10,732
18,013
52,772
50,607
263
50,870
18,323
32,547 $
78,905 $
77 %
3,337
8,055
3,527
14,919
(4,878 )
210
(4,668 )
(3,937 )
(731 )
1,514
14 %
75 %
20 %
28 %
(10 %)
80 %
(9 %)
(21 %)
(2 %)
2 %
Total revenue
Total revenue for the year ended December 31, 2017 increased by $10.0 million, as compared to the prior year, to $113.4
million. This increase was primarily due to the growth of our orthobiologics franchise, specifically an increase in global
MONOVISC revenue and our achievement of $5.0 million of milestone revenue in 2017 for reaching a target MONOVISC U.S.
end-user sales threshold set forth in the Mitek MONOVISC Agreement.
Product revenue
Product revenue for the year ended December 31, 2017 was $107.8 million, an increase of $4.9 million, or 5.0%,
compared to the prior year. Product revenue increases in our Orthobiologics and Other franchises were partially offset by a
moderate decrease in our Surgical product revenue. The following table presents comparative product revenue analysis by
product franchise:
Years Ended December 31,
2017
2016
$ Inc/(Dec) % Inc/(Dec)
Orthobiologics ............................................................... $
Dermal ..........................................................................
Surgical .........................................................................
Other .............................................................................
$
93,816 $
2,755
5,262
5,950
107,783 $
89,695 $
2,759
5,427
5,051
102,932 $
4,121
(4 )
(165 )
899
4,851
5 %
(0 %)
(3 %)
18 %
5 %
34
Orthobiologics
Our orthobiologics franchise consists of our joint health and orthopedic products. Overall, revenue from our
orthobiologics franchises increased $4.1 million, or 5%, in 2017 as compared to 2016. The growth in 2017 reflected growing
end-user demand, continued market penetration, and increased revenue from worldwide MONOVISC and CINGAL sales. The
increase in viscosupplementation revenue in 2017 was driven primarily by increased sales of MONOVISC resulting from a robust
and growing end-user demand. We expect orthobiologics revenue to continue to grow in 2018, led by MONOVISC revenue in
domestic and international markets, including revenue from sales in India, Australia, New Zealand, and Taiwan, as well as
increased revenue from CINGAL internationally.
Dermal
Our dermal franchise consists of advanced wound care products, which are based on our HYAFF technology, and
aesthetic dermal fillers. Our advanced wound care products treat complex skin wounds ranging from burns to diabetic ulcers,
with HYALOMATRIX and HYALOFILL as the lead products. Dermal revenue had no significant change in 2017 as compared
to 2016. The revenue, in part, is derived from the agreement we entered into with Medline Industries, Inc. to commercialize
HYALOMATRIX in the United States on an exclusive basis through 2022. We expect dermal revenue to increase modestly in
2018 as compared to 2017.
Surgical
Our surgical franchise consists of products used to prevent surgical adhesions and to treat ear, nose, and throat (“ENT”)
disorders. Sales of our surgical products decreased $0.2 million, or 3%, in 2017 as compared to 2016. The decrease of surgical
product revenue was primarily due to a decrease in sales generated by our ENT products. Our surgical franchise consists primarily
of our anti-adhesion products, including INCERT and HYALOBARRIER, and our ENT offerings, of which MEROGEL is the
leading product. We are partnered with Medtronic for the worldwide distribution of our ENT products. We expect surgical
product revenue to increase modestly in 2018 as compared to 2017 primarily due to increased worldwide sales of our surgical
anti-adhesions products.
Other
Other product revenue includes revenues from ophthalmic and veterinary products. The other product revenue increased
in 2017 from 2016 due to a recovery from weak 2016 sales volume for these franchises. We expect other revenue to increase in
2018 as compared to 2017, primarily driven by continued increases in ophthalmic revenue.
Licensing, milestone and contract revenue
Licensing, milestone and contract revenue for the year ended December 31, 2017 was $5.6 million, compared to $0.4
million for 2016. The year-over-year increase was primarily the result of the recognition of milestone revenue during the year
ended December 31, 2017. During the second quarter of 2017, we fully recognized revenue for a milestone payment of $5.0
million under Mitek MONOVISC Agreement as a result of U.S. MONOVISC 12-month end-user sales exceeding $100 million.
We expect that our licensing, milestone and contract revenue in 2018 will be approximately equal to such revenue received in
2017.
Product gross profit and margin
Product gross profit for the year ended December 31, 2017 was $80.4 million, or 75% of product revenue, as compared
with $78.9 million, or 77% of product revenue, for the year ended December 31, 2016. The increase in product gross profit was
primarily due to the increased volume compared to the prior year, while the decrease in product gross margin was due to inventory
write-offs in 2017, as well as initial start-up costs associated with our insourcing of the manufacturing of HYAFF-based products
to the Company’s Bedford facility. We expect gross margin to remain at similar levels in 2018 with potential opportunities for
improvement due to increased sales volume and manufacturing process improvements.
35
Research and development
Research and development expenses for the year ended December 31, 2017 increased by $8.1 million, or 75%, as
compared to the prior year, mainly due to an increase in expenses for our HYALOFAST and CINGAL phase III clinical trials.
We also increased our pre-clinical product development activities, including with respect to achieving a 510(k) clearance of an
HA-based, injectable, calcium phosphate bone graft substitute material. Research and development expense as a percentage of
total revenue was 17% in 2017 and 10% in 2016. Research and development spending is expected to increase in 2018 compared
to 2017 as we further develop new products and line extensions and initiate new clinical trials based on our existing technology
assets, including CINGAL and HYALOFAST, as well as increase early-stage activities for other products and line extensions in
the pipeline, such as our research collaborations with the University of Massachusetts Amherst and the University of Liverpool.
Selling, general and administrative
Selling, general and administrative expenses for the year ended December 31, 2017 increased by $3.5 million, or 20%,
as compared to 2016. The increase was primarily as a result of increased personnel related costs, external professional fees, and
additions to our allowance for doubtful accounts. We expect selling, general and administrative expenses for 2018 will increase
to reflect the support, including CINGAL pre-launch expenses and the implementation of improved operational and financial
technology platforms, required to grow our business both domestically and internationally.
Income taxes
Provisions for income taxes were $14.4 million and $18.3 million for the years ended December 31, 2017 and 2016,
respectively. The decrease in the effective tax rate in 2017 of 4.9%, as compared to 2016, is primarily due to the revaluation of
the deferred tax liability as a result of the Tax Cuts and Jobs Act tax reform legislation and an increased benefit from research
and development activities. In accordance with Staff Accounting Bulletin No. 118, which provides guidance on accounting for
the tax effects of the 2017 Tax Act, the Company has recorded a reasonable estimate of the impact on the consolidated financial
statements. The provisional amounts incorporate assumptions made based upon the Company’s current interpretation and
implementation guidance of the 2017 Tax Act.
A reconciliation of the U.S. federal statutory tax rate to the effective tax rate for the periods ending December 31 is as
follows:
Statutory federal income tax rate ................................................................
State tax expense, net of federal benefit ......................................................
Impact of rate change on deferred taxes ......................................................
Permanent items, including nondeductible expenses ..................................
State investment tax credit ..........................................................................
Federal, state and foreign research and development credits ......................
Foreign rate differential ..............................................................................
Domestic production deduction ..................................................................
Effective income tax rate ............................................................................
Years ended December 31,
2017
35.0 %
4.8 %
(4.9 )%
0.6 %
(0.7 )%
(1.4 )%
0.5 %
(2.8 )%
31.1 %
2016
35.0 %
4.5 %
0.0 %
0.5 %
(0.1 )%
(0.9 )%
(0.1 )%
(2.9 )%
36.0 %
As of December 31, 2017, we had gross net operating losses (“NOL”) for income tax purposes in Italy of $4.0 million
with no expiration date. In connection with the preparation of the financial statements, we performed an analysis to ascertain if
it was more likely than not that we would be able to utilize, in future periods, the net deferred tax assets associated with our NOL
carry-forward. We have concluded that the positive evidence outweighs the negative evidence and, thus, that the deferred tax
assets not otherwise subject to a valuation allowance are realizable on a “more likely than not” basis. As such, we have not
recorded a valuation allowance at December 31, 2017 or 2016.
36
In the normal course of business, Anika and its subsidiaries may be periodically examined by various taxing authorities.
We file income tax returns in the U.S. federal jurisdiction, in certain U.S. states, and in Italy. The associated tax filings remain
subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings
relate. The 2014 through 2016 tax years remain subject to examination by the IRS and other taxing authorities for U.S. federal
and state tax purposes. The 2011 through 2016 tax years remain subject to examination by the appropriate governmental
authorities for Italy.
Net income
For the year ended December 31, 2017, net income was $31.8 million, or $2.11 per diluted share, compared to $32.5
million, or $2.15 per diluted share, for the same period in the prior year. The decrease in net income and diluted earnings per
share was primarily a result of increased expenses for our HYALOFAST and CINGAL phase III clinical trials and increases in
personnel related costs, external professional fees, and additions to our allowance for doubtful accounts. These increased
expenses are offset by increased total revenue and a decreased effective federal income tax rate as a result of the 2017 Income
Tax Reform Legislation.
Year ended December 31, 2016 compared to year ended December 31, 2015
Statement of Operations Detail
Years Ended December 31,
2016
2015
$ Inc/(Dec) %Inc/(Dec)
(in thousands, except percentages)
Product revenue ................................................................... $
Licensing, milestone and contract revenue .........................
Total revenue ...................................................................
102,932 $
447
103,379
87,696 $
5,303
92,999
15,236
(4,856 )
10,380
Operating expenses:
Cost of product revenue ..................................................
Research & development ................................................
Selling, general & administrative ....................................
Total operating expenses .....................................................
Income from operations ......................................................
Interest income (expense), net .........................................
Income before income taxes ................................................
Provision for income taxes ..............................................
Net income .......................................................................... $
Product gross profit ................................................................. $
Product gross margin ...............................................................
24,027
10,732
18,013
52,772
50,607
263
50,870
18,323
32,547 $
78,905 $
77 %
21,053
8,987
14,825
44,865
48,134
120
48,254
17,496
30,758 $
66,643 $
76 %
2,974
1,745
3,188
7,907
2,473
143
2,616
827
1,789
12,262
17 %
(92 %)
11 %
14 %
19 %
22 %
18 %
5 %
119 %
5 %
5 %
6 %
18 %
Total revenue
Total revenue for the year ended December 31, 2016 increased by $10.4 million to $103.4 million compared to the prior
year. This increase was primarily due to the growth of our orthobiologics franchise, specifically an increase in global
MONOVISC revenue, which was partially offset by our receipt of $5 million of milestone revenue in 2015 for the achievement
of a target MONOVISC U.S. end user sales threshold.
37
Product revenue
Product revenue for the year ended December 31, 2016 was $102.9 million, an increase of $15.2 million, or 17%,
compared to the prior year. Product revenue increases in our Orthobiologics and Dermal franchises were partially offset by
moderate decreases in product revenue in our Surgical and Other franchises. Included in product revenue for the year ended
December 31, 2015 was approximately $1.8 million and $0.5 millions of non-recurring revenue recorded in the second and third
quarter of 2015, respectively, related to a high end-user average selling price for MONOVISC products sold to our U.S. partner,
Mitek, prior to the fourth quarter of 2014. Products sold to Mitek after the third quarter of 2014 are not impacted by this
arrangement, which will not result in additional related revenue.
Years Ended December 31,
2016
2015
$ Inc/(Dec) % Inc/(Dec)
(in thousands, except percentages)
Orthobiologics ....................................................... $
Dermal ...................................................................
Surgical ..................................................................
Other ......................................................................
89,695 $
2,759
5,427
5,051
$ 102,932 $
73,247 $
2,266
5,812
6,371
87,696 $
16,448
493
(385 )
(1,320 )
15,236
22 %
22 %
(7 %)
(21 %)
17 %
Orthobiologics
Revenue from our orthobiologics franchises increased $16.4 million, or 22%, in 2016 as compared to 2015. The growth
in 2016 reflected a growing end-user demand, continued market penetration, increased revenue from worldwide MONOVISC
sales, and CINGAL revenue associated with the product’s commercial launch in Canada and Europe. ORTHOVISC and
MONOVISC revenue in the U.S. also increased 22% in 2016 as compared to 2015, while international viscosupplementation
product revenue in 2016 increased 23% year-over-year. The increase in international viscosupplementation revenue in 2016 was
driven primarily by increased sales of MONOVISC resulting from a robust and growing end-user demand.
Dermal
Dermal revenue increased $0.5 million, or 22%, in 2016 as compared to 2015. The increase primarily reflects revenue
from the agreement we entered into with Medline Industries, Inc. to commercialize HYALOMATRIX in the United States on an
exclusive basis through 2022.
Surgical
Sales of our surgical products decreased slightly in 2016 as compared to 2015. The decrease of surgical product revenue
was primarily due to a decrease in sales generated by our ENT products and unfavorable impact from foreign currency exchange
rate fluctuations compared with the same periods in the prior year. Our surgical franchise consists primarily of our anti-adhesion
products, including INCERT and HYALOBARRIER, and our ENT offerings, of which MEROGEL is the leading product. We
are partnered with Medtronic for the worldwide distribution of our ENT products.
Other
Other product revenue includes revenues from ophthalmic and veterinary products. The other product revenue decreased
in 2016 from 2015 due to a decrease in sales generated by our veterinary and ophthalmic franchises.
Licensing, milestone and contract revenue
Licensing, milestone and contract revenue for the year ended December 31, 2016 was $0.4 million, compared to $5.3
million for 2015. The year over year decrease was primarily the result of the recognition of licensing and milestone revenue for
the year ended December 31, 2015 of $5.0 million for the achievement of a milestone payment under the Mitek MONOVISC
Agreement. During the fourth quarter of 2015, we collected and fully recognized revenue for a milestone payment of $5.0 million
as a result of U.S. MONOVISC 12-month end-user sales exceeding $50 million.
38
Product gross profit and margin
Product gross profit for the year ended December 31, 2016 was $78.9 million, or 77% of product revenue, as compared
with $66.6 million, or 76% of product revenue, for the year ended December 31, 2015. The increase in product gross profit was
primarily due to improvements in the overall revenue mix compared to the prior year, with increased sales of our higher-margin
products as a percentage of our total product sales.
Research and development
Research and development expenses for the year ended December 31, 2016 increased by $1.7 million, or 19%, as
compared to the prior year, mainly due to an increase in expenses for our HYALOFAST phase III clinical trial. Included in our
2015 results was a $0.7 million expense resulting from an impairment charge related to IPR&D that was recorded in connection
with our acquisition of Anika S.r.l. The charge resulted from a decision to discontinue development of the acquired Hemostatic
Patch in-process development project. Research and development expense as a percentage of total revenue was 10% for the
years ended 2016 and 2015.
Selling, general and administrative
Selling, general and administrative expenses for the year ended December 31, 2016 increased by $3.2 million, or 22%,
as compared to 2015. The increase was primarily a result of increased headcount and external professional fees.
Income taxes
Provisions for income taxes were $18.3 million and $17.5 million for the years ended December 31, 2016 and 2015,
respectively. The decrease in the effective tax rate in 2016 of 0.3%, as compared to 2015, is primarily due to an increased benefit
from research and development credits.
A reconciliation of the U.S. federal statutory tax rate to the effective tax rate for the periods ending December 31 is as
follows:
Statutory federal income tax rate ................................................................
State tax expense, net of federal benefit ......................................................
Impact of rate change on deferred taxes ......................................................
Permanent items, including nondeductible expenses ..................................
State investment tax credit ..........................................................................
Federal, state and foreign research and development credits ......................
Foreign rate differential ..............................................................................
Domestic production deduction ..................................................................
Effective income tax rate ............................................................................
Years ended December 31,
2016
35.0 %
4.5 %
0.0 %
0.5 %
(0.1 %)
(0.9 %)
(0.1 %)
(2.9 %)
36.0 %
2015
35.0 %
4.8 %
0.0 %
(0.3 %)
0.0 %
(0.4 %)
0.1 %
(2.9 %)
36.3 %
The decrease in permanent items, including nondeductible expenses, was mainly due to the impact on Anika
S.r.l.’s long-term deferred tax assets for the decrease in Italy’s tax rate, effective January 1, 2017. The increase in the federal,
state, and foreign research and development credit was mainly due to increased qualified research and development expenses.
As of December 31, 2016, we had gross net operating losses (“NOL”) for income tax purposes in Italy of $5.2 million
with no expiration date. In connection with the preparation of the financial statements, we performed an analysis to ascertain if
it was more likely than not that we would be able to utilize, in future periods, the net deferred tax assets associated with our NOL
carry-forward. We have concluded that the positive evidence outweighs the negative evidence and, thus, that the deferred tax
assets not otherwise subject to a valuation allowance are realizable on a “more likely than not” basis. As such, we have not
recorded a valuation allowance at December 31, 2016 or 2015.
39
Net income
For the year ended December 31, 2016, net income was $32.5 million, or $2.15 per diluted share, compared to $30.8
million, or $2.01 per diluted share, for the same period in the prior year. The increase in net income and diluted earnings per
share was primarily a result of increased worldwide product revenue and improved operating profit.
Concentration of Risk
We have historically derived the majority of our revenues from a small number of customers, most of whom resell our
products to end-users and most of whom are significantly larger companies than us. For the year ended December 31, 2017, five
customers accounted for 83% of product revenue, with Mitek alone accounting for 73% of product revenue. We expect to
continue to be dependent on a small number of large customers, especially Mitek, for the majority of our revenues for the
foreseeable future, even with our implementation of a direct sales model for CINGAL in the United States. The failure of these
customers to purchase our products in the amounts they historically have or in amounts that we expect would seriously harm our
business.
In addition, if present and future customers terminate their purchasing arrangements with us, significantly reduce or
delay their orders, or seek to renegotiate their agreements on terms less favorable to us, our business, financial condition, and
results of operations will be adversely affected. If we accept terms less favorable than the terms of the current agreements, such
renegotiations may have a material adverse effect on our business, financial condition, and/or results of operations. Furthermore,
in any future negotiations we may be subject to the perceived or actual leverage that these customers may have given their relative
size and importance to us. Any termination, change, reduction, or delay in orders could seriously harm our business, financial
condition, and results of operations. Accordingly, unless and until we diversify and expand our customer base, our future success
will significantly depend upon the timing and size of future purchases by our largest customers and the financial and operational
success of these customers. The loss of any one of our major customers or the delay of significant orders from such customers,
even if only temporary, could reduce or delay our recognition of revenues, harm our reputation in the industry, and reduce our
ability to accurately predict cash flow, and, as a consequence, it could seriously harm our business, financial condition, and
results of operations.
See Note 15, Revenue by Product Group, by Significant Customer and by Geographic Location; Geographic
Information, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information
regarding significant customers.
Liquidity and Capital Resources
We require cash to fund our operating expenses and to make capital expenditures. We expect that our requirements for
cash to fund these uses will increase as our operations expand. Historically we have generated positive cash flow from operations,
which, together with our available cash, investments, and debt, have met our cash requirements. Cash, cash equivalents, and
investments totaled $157.3 million and $124.8 million, and working capital totaled $193.3 million and $161.6 million, at
December 31, 2017 and December 31, 2016, respectively. In addition, we have $50.0 million of available credit under our Senior
Revolving Credit Facility as of December 31, 2017. We believe that we have adequate financial resources to support our business
for at least the twelve months from the issuance date of our financial statements.
Cash provided by operating activities was $40.8 million, $24.4 million, and $39.9 million for 2017, 2016, and 2015,
respectively. The increase in cash provided by operations was due primarily to increases in accounts payable and decreases in
accounts receivable offset in part by increases in inventory.
Cash used in investing activities was $12.5 million, $6.8 million, and $30.2 million for 2017, 2016, and 2015,
respectively. The increase in cash used in investing activities in 2017 as compared to 2016 was mainly the result of increased
purchase of investments in 2017. In the fourth quarter of 2017, we completed all planned activities related to the strategic project
at a cost of $23.0 million that we began in 2015 to insource the manufacturing of our HYAFF-based products to our Bedford,
Massachusetts facility. Cash used in property and equipment investing activities decreased year-over-year in 2017 as the largest
portion of the investment in this strategic project was made in 2016.
40
Cash provided (used) by financing activities was $0.3 million, ($24.0) million, and $1.1 million for 2017, 2016, and
2015, respectively. Cash provided by financing activities in 2017 was attributable to proceeds from the exercise of stock options.
The increase in cash used in financing activities in 2016 as compared to 2015 was primarily attributable to the $25.0 million
accelerated share repurchase program initiated in February 2016 and concluded in August 2016. For a description of the
accelerated share repurchase program, see “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities Accelerated Share Repurchase Program.”
Contractual Obligations and Other Commercial Commitments
The table below summarizes our non-cancelable operating leases, purchase commitments, and contractual obligations
related to future periods which are not reflected in our consolidated balance sheet at December 31, 2017. Purchase commitments
relate primarily to non-cancellable inventory commitments and capital expenditures entered in the normal course of business:
Payments due by period (in thousands)
Less than
More than
Total
1 year
1 - 3 years
3 - 5 years
5 years
Operating Leases (1) ....................................... $
Purchase Commitments (2) .............................
Year Ended December 31, 2017.................... $
10,583 $
22,053
32,636 $
1,879 $
19,286
21,165 $
3,797 $
2,767
6,564 $
3,596 $
-
3,596 $
1,311
-
1,311
(1)
(2)
Includes a lease we entered into in January 2007, pursuant to which we lease our corporate headquarters facility, which consists of approximately
134,000 square feet of general office, research and development, and manufacturing space located in Bedford, Massachusetts. The lease has an initial term
of ten and one-half years, and commenced in May 2007. In February 2017, we finalized the exercise of its first option under the lease to extend the terms
from November 1, 2017 through October 31, 2022, including the determination of a new annual base rent of $1.5 million which is included in the disclosure
above. No other terms of this lease were altered. We have an option under this lease to extend its lease-term for up to three additional periods subject to the
condition that the Company notify the landlord that we are exercising each option at least one year prior to the expiration of the original or then-current
term. The next two renewal options each extend the term an additional five years, while the final renewal option extends the term by six years. This schedule
does not include the amounts that would be due if the company exercised the renewal options.
Also includes a lease entered into pursuant to which Anika S.r.l. leases its Italian facility. In October 2015, Anika S.r.l, entered into a build-to-suit
lease agreement for a new European headquarters facility consisting of approximately 33,000 square feet of general office, research and development,
training, and warehousing space located in Padova, Italy. This lease has an initial term of fifteen years which commenced in February 2017. The lease will
automatically renew for up to three additional six-year terms, subject to certain terms and conditions. We have the ability to withdraw from this lease
subject to certain financial penalties after six years and with no penalties after the ninth year. As such, lease commitments through the ninth year are
included in the table above. The lease provides for an initial yearly rent of approximately $0.3 million. See the section captioned “Item 2—Properties” in
this Annual Report on Form 10-K for additional discussion regarding these leases.
Includes purchase commitments for materials, clinical trials, and other day to day business requirements.
Accounting for Off-Balance Sheet Arrangements
We do not use special purpose entities or other off-balance sheet financing techniques, except for operating leases as
disclosed in the contractual obligations table above, that we believe have or are reasonably likely to have a current or future
material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
or capital resources.
41
Recent Accounting Pronouncements
A discussion of recent accounting pronouncements is included in Note 2 to the consolidated financial statements in this
Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Primary Market Risk Exposures
We manage our investment portfolio in accordance with our investment policy. The primary objectives of our
investment policy are to preserve principal, maintain a high degree of liquidity to meet operating and other needs, and obtain
competitive returns subject to prevailing market conditions without significantly increasing risk. To achieve this objective, we
maintain our portfolio of cash equivalents and investments in a variety of high quality securities, including money market funds
and bank certificates of deposits. The investments are classified as available-for-sale and consequently are recorded at fair value
with unrealized gains or losses reported as a separate component of accumulated other comprehensive income. Our portfolio of
cash equivalents and investments is subject to interest rate fluctuations, changes in credit quality of the issuer, and other factors.
Foreign Exchange Risk
Our primary market risk exposures are in the area of currency exchange rate risk. A significant portion of Anika S.r.l.’s
revenue and operating expenses are denominated in Euros. We are utilizing clinical vendors which are located in various countries
outside of the United States and invoice us in their local currency. We do not engage in foreign currency hedging arrangements
for our accounts payable, and, consequently, foreign currency fluctuations may adversely affect our earnings. In addition, we
have one major supplier contract denominated in a foreign currency. Gains and losses arising from transactions denominated in
foreign currencies are primarily related to intercompany accounts that have been determined to be temporary in nature and cash,
accounts payable, and accounts receivable denominated in non-functional currencies. Unfavorable fluctuations in exchange rates
would have a negative impact on our financial statements. The impact of currency exchange rate fluctuations for the contract on
our financial statements was immaterial in 2017. In the future, we may undertake to manage foreign currency risk through
additional hedging methods. We recognize foreign currency gains or losses arising from our operations in the period incurred.
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ANIKA THERAPEUTICS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms ...............................................................................................
Consolidated Balance Sheets as of December 31, 2017 and 2016 .........................................................................................
Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2017, 2016
and 2015 .............................................................................................................................................................................
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015 .......................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015 ......................................
Notes to Consolidated Financial Statements ..........................................................................................................................
44
46
47
48
49
50
43
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Anika Therapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Anika Therapeutics, Inc. and subsidiaries (the "Company")
as of December 31, 2017, the related consolidated statements of operations, cash flows, and stockholders’ equity for the year
ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and
the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with the accounting principles
generally accepted in the United States of America (GAAP).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 26, 2018, expressed an unqualified opinion on the Company's internal control over
financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 26, 2018
We have served as the Company’s auditor since 2017.
44
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Anika Therapeutics, Inc.
In our opinion, the consolidated balance sheet as of December 31, 2016 and the related consolidated statements of operations
and comprehensive income, of stockholders' equity, and of cash flows for each of the two years in the period ended December
31, 2016 present fairly, in all material respects, the financial position of Anika Therapeutics, Inc. and its subsidiaries as of
December 31, 2016, and the results of their operations and their cash flows for each of the two years in the period ended December
31, 2016, in conformity with accounting principles generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 24, 2017
45
Anika Therapeutics, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except per share data)
Current assets:
ASSETS
Cash and cash equivalents ........................................................................................... $
Investments .................................................................................................................
Accounts receivable, net of reserves of $1,914 and $194 at December 31, 2017 and
December 31, 2016, respectively .............................................................................
Inventories, net ............................................................................................................
Prepaid expenses and other current assets ...................................................................
Total current assets ..................................................................................................
Property and equipment, net ............................................................................................
Other long-term assets .....................................................................................................
Intangible assets, net .......................................................................................................
Goodwill..........................................................................................................................
Total assets ...................................................................................................................... $
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable ........................................................................................................ $
Accrued expenses and other current liabilities ............................................................
Total current liabilities ............................................................................................
Other long-term liabilities ...............................................................................................
Deferred tax liability .......................................................................................................
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.01 par value; 1,250 shares authorized, no shares issued and
December 31,
2017
2016
133,256 $
24,000
23,825
22,035
3,211
206,327
56,183
1,254
10,635
8,218
282,617 $
6,747 $
6,326
13,073
660
5,393
104,261
20,500
27,598
15,983
2,098
170,440
52,296
69
10,227
7,214
240,246
2,303
6,496
8,799
2,126
6,548
outstanding at December 31, 2017 and December 31, 2016, respectively ...............
-
-
Common stock, $0.01 par value; 60,000 shares authorized, 14,688 and 14,627
shares issued and outstanding at December 31, 2017 and December 31, 2016,
respectively ..............................................................................................................
Additional paid-in-capital ...........................................................................................
Accumulated other comprehensive loss ......................................................................
Retained earnings ........................................................................................................
Total stockholders’ equity .......................................................................................
Total liabilities and stockholders’ equity ........................................................................ $
147
68,617
(4,784 )
199,511
263,491
282,617 $
146
61,735
(7,317 )
168,209
222,773
240,246
The accompanying notes are an integral part of these consolidated financial statements.
46
Anika Therapeutics, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share data)
Product Revenue ..................................................................................... $
Licensing, milestone and contract revenue .............................................
Total revenue .......................................................................................
For the Years Ended December 31,
2016
102,932 $
447
103,379
2017
107,783 $
5,637
113,420
2015
87,696
5,303
92,999
Operating expenses:
Cost of product revenue ......................................................................
Research & development ....................................................................
Selling, general & administrative ........................................................
Total operating expenses .........................................................................
Income from operations ..........................................................................
Interest income, net .............................................................................
Income before income taxes ....................................................................
Provision for income taxes ..................................................................
Net income .............................................................................................. $
27,364
18,787
21,540
67,691
45,729
473
46,202
14,386
31,816 $
24,027
10,732
18,013
52,772
50,607
263
50,870
18,323
32,547 $
Basic net income per share:
Net income .......................................................................................... $
Basic weighted average common shares outstanding ..........................
2.18 $
14,575
2.22 $
14,682
Diluted net income per share:
Net income .......................................................................................... $
Diluted weighted average common shares outstanding ......................
2.11 $
15,068
2.15 $
15,116
Net income .................................................................................................. $
Foreign currency translation adjustment .............................................
Comprehensive income ............................................................................... $
31,816 $
2,533
34,349 $
32,547 $
(668 )
31,879 $
The accompanying notes are an integral part of these consolidated financial statements.
21,053
8,987
14,825
44,865
48,134
120
48,254
17,496
30,758
2.06
14,934
2.01
15,321
30,758
(2,154 )
28,604
47
Anika Therapeutics, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
Common Stock
Accumulated
Other
Total
Number of $.01 Par Additional Paid Retained Comprehensive Stockholders'
Shares
Earnings
Equity
in Capital
Value
Loss
Balance, December 31, 2014 ..................... 14,852 $
149 $
77,540 $ 104,904 $
(4,495 ) $
178,098
Issuance of common stock for equity
awards ................................................
Tax benefit related to equity awards .....
Stock-based compensation expense ......
Net income ............................................
Other comprehensive loss .....................
185
-
-
-
-
Balance, December 31, 2015 ..................... 15,037 $
Issuance of common stock for equity
awards ................................................
Tax benefit related to equity awards .....
Stock-based compensation expense ......
Repurchase of common stock................
Net income ............................................
Other comprehensive loss .....................
121
-
-
(531 )
-
-
Balance, December 31, 2016 ..................... 14,627 $
Issuance of common stock for equity
1
-
-
-
-
150 $
1
-
-
(5 )
-
-
146 $
1,073
847
2,225
-
-
-
- 30,758
-
-
81,685 $ 135,662 $
1,006
647
3,392
(24,995 )
-
-
-
-
- 32,547
-
-
61,735 $ 168,209 $
-
-
-
-
(2,154 )
(6,649 ) $
-
-
-
-
-
(668 )
(7,317 ) $
1,074
847
2,225
30,758
(2,154 )
210,848
1,007
647
3,392
(25,000 )
32,547
(668 )
222,773
61
-
1
-
313
5,807
-
-
-
-
314
5,807
awards ................................................
Stock-based compensation expense ......
Cumulative effect of change in
accounting for stock-based
compensation .....................................
Net income ............................................
Other comprehensive income ................
-
-
-
Balance, December 31, 2017 ..................... 14,688 $
-
-
-
147 $
762
(514 )
- 31,816
-
-
68,617 $ 199,511 $
-
-
2,533
(4,784 ) $
248
31,816
2,533
263,491
The accompanying notes are an integral part of these consolidated financial statements.
48
Anika Therapeutics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income .................................................................................................... $
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................................................
Loss on disposal of fixed assets ................................................................
Stock-based compensation expense ..........................................................
Deferred income taxes ...............................................................................
Provision for doubtful accounts ................................................................
Provision for inventory..............................................................................
Non-cash impairment charges for IPR&D ................................................
Changes in operating assets and liabilities:
Accounts receivable ..............................................................................
Inventories .............................................................................................
Prepaid expenses, other current and long-term assets ...........................
Accounts payable ..................................................................................
Accrued expenses and other current liabilities ......................................
Income taxes payable ............................................................................
Other long-term liabilities .....................................................................
Net cash provided by operating activities .....................................................
For the years ended December 31,
2015
2016
2017
31,816 $
32,547 $
30,758
4,290
150
5,807
(1,198 )
1,609
695
-
2,674
(6,521 )
(1,454 )
3,890
(605 )
367
(708 )
40,812
3,734
-
3,392
(65 )
52
654
-
(6,201 )
(1,738 )
(898 )
(5,059 )
1,566
(3,552 )
16
24,448
3,775
-
2,225
(747 )
38
210
697
(4,996 )
(2,939 )
89
5,625
(199 )
5,484
(109 )
39,911
Cash flows from investing activities:
Proceeds from maturity of investments .....................................................
Purchase of investments ............................................................................
Purchase of property and equipment, net ..................................................
Net cash used in investing activities ..............................................................
41,500
(45,000 )
(8,980 )
(12,480 )
46,500
(39,249 )
(14,014 )
(6,763 )
24,250
(45,251 )
(9,225 )
(30,226 )
Cash flows from financing activities:
Repurchase of common stock....................................................................
Proceeds from exercise of equity awards ..................................................
Net cash (used in) provided by financing activities ......................................
-
314
314
(25,000 )
1,007
(23,993 )
-
1,074
1,074
Exchange rate impact on cash .......................................................................
349
(138 )
(208 )
Increase (Decrease) in cash and cash equivalents .........................................
Cash and cash equivalents at beginning of period .........................................
Cash and cash equivalents at end of period ................................................... $
Supplemental disclosure of cash flow information:
28,995
104,261
133,256 $
(6,446 )
110,707
104,261 $
10,551
100,156
110,707
Cash paid for income taxes ....................................................................... $
15,088 $
22,826 $
12,724
Non-cash Investing Activities:
Purchases of property and equipment included in accounts payable and
accrued expenses .................................................................................... $
Build-to-suit lease agreement .................................................................... $
1,891 $
- $
1,257 $
1,723 $
1,949
30
The accompanying notes are an integral part of these consolidated financial statements.
49
Anika Therapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(amounts in thousands, except share and per share amounts or as otherwise noted)
1. Nature of Business
Anika Therapeutics, Inc. (the “Company”) is a global, integrated orthopedic medicines company committed to
improving the lives of patients with degenerative orthopedic diseases and traumatic conditions with clinically meaningful
therapies along the continuum of care, from palliative pain management to regenerative tissue repair. The Company has over two
decades of global expertise developing, manufacturing, and commercializing products based on the Company’s proprietary
Hyaluronic Acid (“HA”) technology. The Company’s orthopedic medicine portfolio includes ORTHOVISC, MONOVISC, and
CINGAL, which alleviate pain and restore joint function by replenishing depleted HA, and HYALOFAST, a solid HA-based
scaffold to aid cartilage repair and regeneration.
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. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Anika Therapeutics, Inc. and its wholly
owned subsidiaries, Anika Securities, Inc. (a Massachusetts Securities Corporation), and Anika Therapeutics S.r.l. All
intercompany balances and transactions have been eliminated in consolidation.
Foreign Currency Translation
The functional currency of the Company’s foreign subsidiary is the Euro. Assets and liabilities of the foreign subsidiary
are translated using the exchange rate existing on each respective balance sheet date. Revenues and expenses are translated using
the average exchange rates for the period. The translation adjustments resulting from this process are included in stockholders’
equity as a component of accumulated other comprehensive loss which resulted in a gain (loss) from foreign currency translation
of $2.5 million, ($0.7) million, and ($2.2) million for the years ended December 31, 2017, 2016, and 2015, respectively.
The Company recognized a gain (loss) from foreign currency transactions of $0.7 million, ($0.3) million, and ($0.4)
million during the years ended December 31, 2017, 2016, and 2015, respectively.
Fair Value Measurements
Fair value is defined as the price that would be received from selling an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date. When determining the fair value measurements for assets and
liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it
would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent
risk, transfer restrictions, and risk of non-performance. The accounting standard establishes a fair value hierarchy that requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
50
A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is
significant to the fair value measurement. Three levels of inputs that may be used to measure fair value are:
• Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 instruments
include securities traded on active exchange markets, such as the New York Stock Exchange.
• Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active and model-based valuation techniques for which all significant
assumptions are directly observable in the market.
• Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the
market. These unobservable assumptions reflect the Company’s own estimates of assumptions market participants
would use in pricing the instrument.
The Company’s financial assets have been classified as Levels 1 and 2. The Company’s financial assets (which include
cash equivalents and investments) have been initially valued at the transaction price and subsequently valued, at the end of each
reporting period, utilizing third party pricing services or other market observable data.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments, which is included in selling, general and administrative expenses in the accompanying
consolidated statements of operations. In determining the adequacy of the allowance for doubtful accounts, management
specifically analyzes individual accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness,
current economic conditions, accounts receivable aging trends, and changes in the Company’s customer payment terms. A
summary of activity in the allowance for doubtful accounts is as follows:
2017
December 31,
2016
2015
Balance, beginning of the year ........................................ $
Amounts provided .......................................................
Amounts written off ....................................................
Translation adjustments ..............................................
Balance, end of the year .................................................. $
194 $
1,609
(6 )
117
1,914 $
167 $
52
(16 )
(9 )
194 $
147
38
(3 )
(15 )
167
Revenue Recognition - General
The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement
exists, risk of loss has passed or services have been rendered, the seller's price to the buyer is fixed or determinable, and collection
from the customer is reasonably assured.
Product Revenue
Revenues from product sales are recognized when title and risk of loss have passed to the customer, which is typically
upon shipment to the customer. Amounts billed or collected prior to recognition of revenue are classified as deferred revenue.
When determining whether risk of loss has transferred to customers on product sales, or if the sales price is fixed or determinable,
the Company evaluates both the contractual terms and conditions of its distribution and supply agreements as well as its business
practices.
51
Product revenue also includes royalties. Royalty revenue is based on distributors’ sales and is recognized in the same
period distributors record their sale of products manufactured by the Company. On a quarterly basis the Company records royalty
revenue based upon sales provided to it by its distributor customers.
Pursuant to the Health Care and Education Reconciliation Act of 2010, in conjunction with the Patient Protection and
Affordable Care Act, a medical device excise tax (“MDET”) became effective on January 1, 2013 for sales of certain medical
devices. Some of the Company’s product sales are subject to the provisions of the MDET. The Company elected to recognize
any amounts related to the MDET under the gross method as allowed under ASC 605-45. Amounts included in revenues and
costs of goods sold for the MDET in 2015 were immaterial. There were no amounts reported for 2016 and 2017 as the 2.3%
MDET has been suspended by Congress from January 1, 2016 through 2020.
Licensing, Milestone and Contract Revenue
Licensing, milestone and contract revenue consists of revenue recognized on initial and milestone payments, as well as
contractual amounts received from partners. The Company’s business strategy includes entering into collaborative license,
development, and/or supply agreements with partners for the development and commercialization of the Company’s products.
Under the milestone method, the Company recognizes a consideration that is contingent upon the achievement of a milestone in
its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A
milestone is considered substantive when it meets all of the following criteria:
1. The consideration is commensurate with either the entity’s performance to achieve the milestone or the enhancement of
the value of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve
the milestone;
2. The consideration relates solely to past performance; and
3. The consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.
A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity’s
performance or on the occurrence of a specific outcome resulting from the entity’s performance, (ii) for which there is substantive
uncertainty at the date the arrangement is entered into that the event will be achieved, and (iii) that would result in additional
payments being due to the Company. Non substantive milestones are recognized when there are no further obligations by the
Company.
The terms of the agreements typically include non-refundable license fees, funding of research and development, and
payments based upon achievement of certain milestones. The Company adopted ASU 2009-13, Revenue Recognition in January
2011, which amended ASC Subtopic 605-25, Multiple Element Arrangements (“ASC 605-25”) to require the establishment of a
selling price hierarchy for determining the allocable selling price of an item. Under ASC 605-25, as amended by ASU 2009-13,
in order to account for an element as a separate unit of accounting, the element must have objective and reliable evidence of
selling price of the undelivered elements. In general, non-refundable up-front fees and milestone payments that do not relate to
other elements are recognized as revenue over the term of the arrangement as the Company completes its performance
obligations.
Cash and Cash Equivalents
The Company considers only those investments which are highly liquid, readily convertible to cash, and that mature
within three months from date of purchase to be cash equivalents. The Company’s cash equivalents consist of money market
funds, mutual funds, and bank certificates of deposit with an original maturity of less than 90 days.
52
Investments
The Company’s investments consist of bank certificates of deposit with an original maturity of more than 90 days. The
Company has designated all investments as available-for-sale, and therefore such investments are reported at fair value, with
unrealized gains and losses recorded in accumulated other comprehensive income (loss). For securities sold prior to maturity, the
cost of securities sold is based on the specific identification method. Realized gains and losses on the sale of investments are
recorded in interest income, net. Interest is recorded when earned. Investments with original maturities greater than
approximately three months and remaining maturities less than one year are classified as short-term investments. Investments
with remaining maturities greater than one year are classified as long-term investments. The Company considers securities with
maturities of three months or less from the purchase date to be cash equivalents.
All of the Company’s investments are subject to a periodic impairment review. The Company recognizes an impairment
charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. Factors
considered in determining whether a loss is temporary include the extent and length of time the investment's fair value has been
lower than its cost basis, the financial condition and near-term prospects of the investee, extent of the loss related to credit of the
issuer, the expected cash flows from the security, the Company’s intent to sell the security, and whether or not the Company will
be required to sell the security prior the expected recovery of the investment's amortized cost basis. During the years
ended December 31, 2017 and 2016, the Company did not record any other-than-temporary impairment charges on its available-
for-sale securities because the Company does not intend to sell the securities and it is not more likely than not that the Company
will be required to sell these securities before the recovery of their cost basis.
Concentration of Credit Risk and Significant Customers
The Company has no significant off-balance sheet risks related to foreign exchange contracts, option contracts, or other
foreign hedging arrangements. The Company’s cash equivalents and investments are held with two major international financial
institutions.
The Company, by policy, routinely assesses the financial strength of its customers. As a result, the Company believes
that its accounts receivable credit risk exposure is limited.
As of December 31, 2017 and 2016, DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopaedics, Inc.
(“Mitek”), represented 68% and 66%, respectively, of the Company’s accounts receivable balance, no other single customer
accounted for more than 10% of accounts receivable in either period.
Inventories
Inventories are stated at the lower of standard cost and net realizable value, with approximate cost determined using the
first-in, first-out method. Work-in-process and finished goods inventories include materials, labor, and manufacturing overhead.
Inventory costs associated with product candidates that have not yet received regulatory approval are capitalized if the Company
believes there is probable future commercial use and future economic benefit.
The Company’s policy is to write-down inventory when conditions exist that suggest inventory may be in excess of
anticipated demand or is obsolete based upon assumptions about future demand for the Company’s products and market
conditions. The Company regularly evaluates the ability to realize the value of inventory based on a combination of factors
including, but not limited to, historical usage rates, forecasted sales or usage, product end of life dates, and estimated current or
future market values. Purchasing requirements and alternative usage avenues are explored within these processes to mitigate
inventory exposure.
When recorded, inventory write-downs are intended to reduce the carrying value of inventory to its net realizable value.
Inventory of $22.0 million and $16.0 million as of December 31, 2017 and 2016, respectively, is stated net of inventory reserves
of approximately $1.7 million and $0.9 million, respectively. If actual demand for the Company’s products deteriorates, or if
market conditions are less favorable than those projected, additional inventory write-downs may be required.
53
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful
lives, which are typically:
Asset
Computer equipment and software .......................................................................
Furniture and fixtures ............................................................................................
Equipment .............................................................................................................
Leasehold improvements ......................................................................................
Estimated useful life
(in years)
3 - 5 years
5 - 7 years
5 - 15 years
Shorter of useful life or
term of lease
Maintenance and repairs are charged to expense when incurred; additions and improvements are capitalized. Fully
depreciated assets are retained in the accounts until they are no longer used and no further charge for depreciation is made in
respect of these assets. When an item is sold, retired or removed from service, the cost and related accumulated depreciation is
relieved, and the resulting gain or loss, if any, is recognized in income.
Construction-in-process is stated at cost, which includes the cost of construction and other direct costs attributable to
the construction. Construction-in-process is not depreciated until such time as the relevant assets are completed and put into use.
Goodwill and Acquired Intangible Assets
Goodwill is the amount by which the purchase price of acquired net assets in a business combination exceeded the fair
values of net identifiable assets on the date of acquisition. Acquired IPR&D represents the fair value assigned to research and
development assets that the Company acquires that have not been completed at the date of acquisition or are pending regulatory
approval in certain jurisdictions. The value assigned to the acquired IPR&D is determined by estimating the costs to develop the
acquired technology into commercially viable products, estimating the resulting revenue from the projects, and discounting the
net cash flows to present value.
Goodwill and IPR&D are evaluated for impairment annually or more frequently if events or changes in circumstances
indicate that the asset might be impaired. Factors the Company considers important, on an overall company basis, that could
trigger an impairment review include significant underperformance relative to historical or projected future operating results,
significant changes in the Company’s use of the acquired assets or the strategy for its overall business, significant negative
industry or economic trends, a significant decline in the Company’s stock price for a sustained period, or a reduction of its market
capitalization relative to net book value.
To conduct impairment tests of goodwill, the fair value of the reporting unit is compared to its carrying value. If the
reporting unit’s carrying value exceeds its fair value, the Company records an impairment loss to the extent that the carrying
value of goodwill exceeds its implied fair value. The Company’s annual assessment for impairment of goodwill as of November
30, 2017 indicated that the fair value of its reporting unit exceeded the carrying value of the reporting unit.
To conduct impairment tests of IPR&D, the fair value of the IPR&D project is compared to its carrying value. If the
carrying value exceeds its fair value, the Company records an impairment loss to the extent that the carrying value of the IPR&D
project exceeds its fair value. The Company estimates the fair value for IPR&D projects using discounted cash flow valuation
models, which require the use of significant estimates and assumptions, including but not limited to, estimating the timing of and
expected costs to complete the in-process projects, projecting regulatory approvals, estimating future cash flows from product
sales resulting from completed projects and in-process projects, and developing appropriate discount rates. During the fourth
quarter of 2015, the Company performed an impairment review of its IPR&D projects as it reassessed its research and
development strategy. In 2015, the Company recorded an impairment charge of $0.7 million due to the decision to discontinue
further development efforts needed to commercialize the Hemostatic Patch in-process development project. The Company’s
annual assessment for impairment of IPR&D indicated that the fair value of its other IPR&D assets as of November 30, 2017
and 2016 exceeded their respective carrying values.
54
Long-Lived Assets
Long-lived assets primarily include property and equipment and intangible assets with finite lives. The Company’s
intangible assets are comprised of purchased developed technologies, patents, and trade names. These intangible assets are carried
at cost, net of accumulated amortization. Amortization is recorded on a straight-line basis over the intangible assets' useful lives,
which range from approximately five to sixteen years. The Company reviews long-lived assets for impairment when events or
changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful
lives of those assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to
the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value based on a
discounted cash flow analysis.
Research and Development
Research and development costs consist primarily of clinical trials, salaries and related expenses for personnel, and fees
paid to outside consultants and outside service providers, including costs associated with licensing, milestone and contract
revenue. Research and development costs are expensed as incurred.
Stock-Based Compensation
The Company has stock-based compensation plans under which it grants various types of equity-based awards,
including restricted stock units (“RSUs”), restricted stock awards (“RSAs”), performance options, and stock options. The
Company measures the compensation cost of award recipients’ services received in exchange for an award of equity instruments
based on the grant date fair value of the underlying award. That cost is recognized over the period during which an employee is
required to provide service in exchange for the award.
For performance-based options with financial and business milestone achievement targets, the Company recognizes
expense using the graded vesting methodology over the service period. Compensation cost associated with performance-based
options is based on the probable outcome of the performance conditions. Changes to the probability assessment and the estimated
shares expected to vest will result in adjustments to the related stock-based compensation expense that will be recorded in the
period of the change. If the performance targets are not achieved, no compensation cost is recognized, and any previously
recognized compensation cost is reversed. The Company recorded $0.8 million, $0.3 million, and $0.4 million related to
performance-based options in 2017, 2016, and 2015, respectively.
See Note 12, Equity Incentive Plan, to the consolidated financial statements included elsewhere in this Annual Report
on Form 10-K for a description of the types of stock-based awards granted, the compensation expense related to such awards,
and detail of equity-based awards outstanding.
Income Taxes
The Company’s income tax expense includes U.S. and international income taxes. Certain items of income and expense
are not reported in tax returns and financial statements in the same year. The tax effects of these timing differences are reported
as deferred tax assets and liabilities. Deferred tax assets are recognized for the estimated future tax effects of deductible temporary
differences, tax operating losses, and tax credit carry-forwards (including investment tax credits). Changes in deferred tax assets
and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets
will be recovered from future taxable income and, to the extent it believes that it is more likely than not that all or a portion of
deferred tax assets will not be realized, the Company establishes a valuation allowance to reduce the deferred tax assets to the
appropriate valuation. To the extent the Company establishes a valuation allowance or increases or decreases this allowance in a
given period, it includes the related tax expense or tax benefit within the tax provision in the consolidated statement of operations
in that period.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss), which includes foreign currency
translation adjustments. For the purposes of comprehensive income disclosures, the Company does not record tax provisions or
benefits for the net changes in the foreign currency translation adjustment, as it intends to indefinitely reinvest undistributed
earnings of its foreign subsidiary. Accumulated other comprehensive loss is reported as a component of stockholders' equity.
55
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 Chief Executive Officer. Based on the criteria
established by ASC 280, Segment Reporting, the Company has one operating and reportable segment.
Contingencies
In the normal course of business, the Company is involved from time-to-time in various legal proceedings and other
matters such as contractual disputes, which are complex in nature and have outcomes that are difficult to predict. The Company
records accruals for loss contingencies to the extent that it concludes that it is probable that a liability has been incurred and the
amount of the related loss can be reasonably estimated. The Company considers all relevant factors when making assessments
regarding these contingencies. Although the outcomes of any potential legal proceedings are inherently difficult to predict, the
Company does not expect the resolution of any potential legal proceedings to have a material adverse effect on its financial
position, results of operations, or cash flow.
Subsequent Events
Events occurring subsequent to December 31, 2017 have been evaluated for potential recognition or disclosure in the
consolidated financial statements. As a result of the evaluation, no subsequent events were required to be recognized or disclosed.
Recent Accounting Pronouncements
Recently Issued
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in “Topic
605, Revenue Recognition” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services. In July 2015, the FASB issued a one-year deferral making it effective for annual reporting periods by public
business entities beginning on or after December 15, 2017 while also providing for early adoption not to occur before the original
effective date. The Company adopted the new standard on a modified retrospective basis on January 1, 2018.
The Company developed an implementation plan to assess the impact of the new guidance on its operations, financial
results, and related disclosures. To date, the Company has substantially completed its assessment of the potential areas of the
balance sheet and financial statement components impacted. The Company has prepared its accounting policy memorandum and
assessment of the quantitative impact of adoption, including the impact of the new guidance on its results of operations and
internal controls. Based on procedures performed to date, the Company has concluded that the adoption of the new standard will
not have a material impact on its annual revenues. The Company does not anticipate a material adjustment to beginning retained
earnings as of the adoption on January 1, 2018.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 amends existing leasing
accounting requirements. The most significant change will result in the recognition of lease assets and lease liabilities by lessees
for virtually all leases. The new guidance will also require significant additional disclosures about the amount, timing, and
uncertainty of cash flows from leases. ASU 2016-02 is effective for fiscal years and interim periods beginning after December
15, 2018. Upon adoption, entities are required to recognize and measure leases at the beginning of the earliest period presented
using a modified retrospective approach. Early adoption is permitted, and a number of optional practical expedients may be
elected to simplify the impact of adoption. The Company is assessing ASU 2016-02 and the impact that adopting this new
accounting standard will have on its consolidated financial statements and footnote disclosures.
56
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments (Topic 326) Credit Losses. ASU 2016-13
changes the impairment model for most financial assets and certain other instruments. Under the new standard, entities holding
financial assets and net investment in leases that are not accounted for at fair value through net income are to be presented at the
net amount expected to be collected. An allowance for credit losses will be a valuation account that will be deducted from the
amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial
asset. ASU 2016-13 is effective as of January 1, 2020. Early adoption is permitted. The adoption of this standard is not expected
to have a material impact on the Company’s consolidated financial statements or footnote disclosures.
Recently Adopted
In March 2016, the FASB issued ASU No. 2016-09, Compensation (Topic 718) Stock Compensation. The ASU
identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the
income tax consequences, classification of awards as equity or liabilities, an option to recognize gross stock compensation
expense with actual forfeitures recognized as they occur, and certain classifications on the statement of cash flows. ASU 2016-
09 is effective as of January 1, 2017. Since January 1, 2017, the Company has recognized excess tax benefits and tax deficiencies
related to share-based payments in the Consolidated Statements of Operations and Comprehensive Income as a component of
the provision for income taxes on a prospective basis. Such excess tax benefits and tax deficiencies were previously recorded in
equity. The Company also began presenting tax-related cash flows resulting from share-based payments as operating activities
in the Consolidated Statements of Cash Flows and retrospectively revised prior periods to reflect this provision. Accordingly, the
Consolidated Statement of Cash Flows for the years ended December 31, 2016 and 2015, was revised by increasing net cash
provided by operating activities by $0.6 million and $0.8 million and by decreasing net cash used in financing activities by $0.6
million and $0.8 million, respectively. Lastly, as of January 1, 2017, the Company elected to recognize forfeitures as they occur
rather than estimate forfeitures each period on a modified retrospective basis. Accordingly, the Company recognized a cumulative
$0.5 million reduction to retained earnings at the beginning of 2017. Previously, the Company used historical data on the exercise
of stock options and other factors to evaluate and estimate the expected term of share-based awards to evaluate actual forfeiture
rates periodically and adjusted the expected forfeiture rate assumption within the model. See Note 16, Income Taxes, to the
consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding
the impacts on the consolidated financial statements.
3. Investments
All of the Company’s investments are classified as available-for-sale and are carried at fair value with unrealized gains
and losses recorded as a component of accumulated other comprehensive income, net of related income taxes. The Company
held bank certificates of deposits of $24.0 million and $20.5 million at December 31, 2017 and 2016, respectively. There were
no unrealized gains or losses on the Company’s available-for-sale securities at December 31, 2017 or 2016.
4. Fair Value Measurements
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 quoted prices in active markets. Level 2 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 and cash equivalents, current receivables, accounts payable, interest accrual and short-term debts,
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.
57
The fair value hierarchy of the Company’s cash equivalents and investments at fair value is as follows:
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
December 31, 2017
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Cash equivalents:
Money market fund .......................... $
Bank certificates of deposit ..............
Total cash equivalents ...................... $
Investments:
Bank certificates of deposit .............. $
5,893 $
500
6,393 $
5,893 $
-
5,893 $
- $
500
500 $
24,000 $
- $
24,000 $
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
December 31, 2016
Significant Other
Observable Inputs
(Level 2)
(Level 3)
Cash equivalents:
Money market funds ........................ $
Bank certificates of deposit ..............
Total cash equivalents ...................... $
Investments:
Bank certificates of deposit ..............
Total investments ............................. $
68,352 $
750
69,102 $
20,500
20,500 $
- $
-
- $
-
- $
68,352 $
750
69,102 $
20,500
20,500 $
-
-
-
-
-
-
-
-
-
The Company did not have transfers in or out of Level 3 of the fair value hierarchy during the years ended December
31, 2017 and 2016. As of December 31, 2017, the Company’s exchange traded money market fund is reported as a Level 1 cash
equivalent, previously it was reported as Level 2 cash equivalent.
5. Earnings per Share (“EPS”)
Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period.
Unvested RSA’s, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic
earnings per share. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus
the dilutive effect, if any, of outstanding stock options, stock appreciation rights (“SAR’s”), RSA’s, and RSU’s using the treasury
stock method.
The following table provides share information used in the calculation of the Company's basic and diluted earnings per
share:
Years Ended December 31,
2016
2017
2015
Shares used in the calculation of basic earnings per share ................................
Effect of dilutive securities:
Stock options, SAR's, RSA's and RSU's .......................................................
Diluted shares used in the calculation of earnings per share .............................
14,575
14,682
14,934
493
15,068
434
15,116
387
15,321
Stock options to purchase 0.5 million shares, 0.4 million shares, and 0.2 million shares for the years ended December
31, 2017, 2016, and 2015, respectively, were excluded from the computation of diluted EPS as their effect would have been anti-
dilutive. The anti-dilutive restricted shares for the years 2017, 2016 and 2015 were not significant.
58
At December 31, 2017, 2016, and 2015, 0.1 million shares of issued and outstanding unvested RSA’s were excluded
from the basic earnings per share.
On February 26, 2016, the Company entered into an accelerated stock repurchase agreement with Morgan Stanley &
Co. LLC (“Morgan Stanley”) pursuant to a Fixed Dollar Accelerated Share Repurchase Transaction (“ASR Agreement") to
purchase $25.0 million of shares of its common stock. Pursuant to the terms of the ASR Agreement, the Company paid Morgan
Stanley $25.0 million in cash and received an initial delivery of 0.4 million shares of the Company’s common stock on February
29, 2016 based on a closing market price of $46.40 per share and the applicable contractual discount.
On August 26, 2016, the Company settled the approximately $7.5 million remaining under the ASR Agreement, which
was recorded as an equity forward sale contract and was included in additional paid-in capital in stockholders' equity in the
consolidated balance sheet as it met the criteria for equity accounting. Pursuant to the terms of the ASR Agreement, the final
number of shares and the average purchase price was determined at the end of the applicable purchase period, which was August
26, 2016. Based on the volume-weighted average price since the effective date of the ASR Agreement less the applicable
contractual discount, Morgan Stanley delivered 0.1 million additional shares to the Company on August 31, 2016. In total, 0.5
million shares were repurchased under the ASR Agreement at an average repurchase price of $47.08 per share. These shares are
held by the Company as authorized but unissued shares pursuant to Massachusetts law. The initial and final delivery of shares
resulted in immediate reductions of the outstanding shares used to calculate the weighted-average common shares outstanding
for basic and diluted net income per share.
6. Inventories
Inventories consist of the following:
Raw materials ...............................................................................
Work-in-process ............................................................................
Finished goods ..............................................................................
Total ..........................................................................................
$
$
11,296
6,062
4,677
22,035
$
$
5,884
5,559
4,540
15,983
December 31,
2017
2016
7. Property and Equipment
Property and equipment is stated at cost and consists of the following:
Equipment and software ...............................................................
Furniture and fixtures ....................................................................
Leasehold improvements ..............................................................
Construction in progress ...............................................................
Subtotal .....................................................................................
Less accumulated depreciation .....................................................
Total ..........................................................................................
$
$
December 31,
2017
2016
37,137
1,947
31,459
5,830
76,373
(20,190 )
56,183
$
$
27,456
1,126
27,796
22,695
79,073
(26,777 )
52,296
Construction-in-progress at December 31, 2017, primarily represents the costs incurred for the implementation of a new
ERP that was placed in service in January 2018. Construction-in-progress at December 31, 2016 primarily represented the costs
being incurred in our strategic project that we began in 2015 to insource the manufacturing of our HYAFF-based products to our
Bedford, Massachusetts facility, which was placed in service in December 2017. In 2017 we retired $9.8 million of fully
depreciated assets that were no longer in use.
59
Depreciation expense was $3.3 million, $2.7 million, and $2.7 million for the years ended December 31, 2017, 2016,
and 2015, respectively.
8. Acquired Intangible Assets, Net
Intangible assets consist of the following:
December 31, 2017
December 31, 2016
Accumulated
Currency
Translation
Adjustment
Gross Value
Accumulated
Amortization
Net Book
Value
Developed technology ..................... $
In-process research & development
Distributor relationships ..................
Patents .............................................
Elevess trade name ..........................
Total ............................................ $
17,100 $
4,406
4,700
1,000
1,000
28,206 $
(2,550 ) $
(1,015 )
(415 )
(152 )
-
(4,132 ) $
(7,723 ) $ 6,827 $
- 3,391
-
(4,285 )
417
(431 )
-
(1,000 )
(13,439 ) $ 10,635 $
Accumulated
Currency
Translation
Adjustment
(3,442 ) $
(1,433 )
(415 )
(207 )
-
(5,497 ) $
Accumulated
Amortization
Net Book
Value
(6,816 ) $ 6,842
Useful
Life
15
- 2,973 Indefinite
-
(4,285 )
412
(381 )
-
(1,000 )
(12,482 ) $ 10,227
5
16
9
On December 30, 2009, in connection with the acquisition of Anika S.r.l., the Company purchased various intangible
assets.
In 2015, the Company recorded an impairment charge totaling $0.7 million to write-off in-process research and
development that was recorded in connection with its acquisition of Anika S.r.l. Subsequent to an evaluation in the fourth quarter
of the ongoing research and development efforts surrounding the Hemostatic Patch IPR&D project, the Company determined it
would discontinue further development efforts needed to commercialize this technology. As a result of this decision, an
impairment charge was recorded. These amounts are included in research and development expenses on the Company’s
consolidated statements of operations.
The Company performed an annual assessment of IPR&D intangible assets as of November 30, 2017. Based upon that
assessment, for the fiscal year 2017 there were no events or changes in circumstances that would result in a change in the carrying
value of IPR&D.
Total amortization expense was $1.0 million, $1.1 million, and $1.1 million for the years ended December 31, 2017,
2016, and 2015, respectively. Amortization expense on intangible assets is expected to be approximately $1.0 million in 2018,
$1.0 million annually through 2021, and approximately $3.1 million in aggregate thereafter.
9. Goodwill
The Company completed its annual impairment review as of November 30, 2017 and concluded that no impairment in
the carrying value exists as of that date with respect to goodwill. Through December 31, 2017, there have not been any events or
changes in circumstances that indicate that the carrying value of goodwill may not be recoverable. Changes in the carrying value
of goodwill were as follows:
Balance, beginning ............................................................................... $
Effect of foreign currency adjustments ................................................
Balance, ending .................................................................................... $
7,214 $
1,004
8,218 $
7,482
(268 )
7,214
December 31,
2017
2016
60
10. Accrued Expenses
Accrued expenses consist of the following:
Compensation and related expenses..................................................... $
Facility construction costs ....................................................................
Research grants ....................................................................................
Clinical trial costs ................................................................................
Professional fees ..................................................................................
Deferred rent ........................................................................................
Other ....................................................................................................
Total ................................................................................................. $
December 31,
2017
2016
2,893 $
-
419
2,318
448
-
248
6,326 $
3,089
804
463
227
802
231
880
6,496
11. Commitments and Contingencies
Leasing Arrangements
On October 9, 2015, our Italian subsidiary, Anika Therapeutics S.r.l. (“Anika S.r.l.”) entered into a build-to-suit lease
agreement with Consorzio Zona Industriale E Porto Fluviale di Padova (“ZIP”) as landlord, pursuant to which Anika S.r.l. leases
a new European headquarters facility, consisting of approximately 33,000 square feet of general office, research and
development, training, and warehousing space located in Padova, Italy. The lease has an initial term of fifteen years, which
commenced on March 1, 2017. The lease will automatically renew for up to three additional six-year terms, subject to certain
terms and conditions. The Company has the ability to withdraw from this lease subject to certain financial penalties after six
years and with no penalties after the ninth year. Beginning on the commencement date, the lease provides for an initial yearly
rent of approximately $0.3 million.
Construction of the new facility commenced during the first quarter of 2016. During the period of construction, the
Company was the deemed owner of the facility. Accordingly, the landlord's costs of constructing the facility were capitalized, as
a non-cash transaction, offset by a corresponding facility lease obligation in the Company’s consolidated balance sheet. When
the construction concluded on March 1, 2017, the Company removed the construction-in-process asset of $3.1 million and related
liability from its consolidated balance sheet. The Company commissioned ZIP for additional tenant improvements of $0.8
million, which are recorded within Other long-term assets. The lease is accounted for as an operating lease based on the
Company’s assessment of the applicable accounting principles.
Prior to April 2017, Anika S.r.l. leased approximately 28,000 square feet of laboratory, warehouse, and office space in
Abano Terme, Italy that served as headquarters for Anika S.r.l. On December 29, 2016 Anika S.r.l. notified the landlord of its
intention to terminate the lease agreement as of March 31, 2017.
Rental expense in connection with the various facility leases totaled $1.8 million, $1.3 million, and $1.3 million for the
years ended December 31, 2017, 2016, and 2015, respectively. The increased expense in 2017 is primarily a result of finalizing
the exercise of our first option under the lease to extend the terms from November 1, 2017 through October 31, 2022, including
the determination of a new annual base rent for the Company’s headquarters facility in Bedford, Massachusetts.
61
The Company’s future lease commitments as of December 31, 2017 are as follows:
2018 .................................................................................................................... $
2019 ....................................................................................................................
2020 ....................................................................................................................
2021 ....................................................................................................................
2022 ....................................................................................................................
2023 and thereafter .............................................................................................
Total ................................................................................................................ $
1,879
1,880
1,916
1,924
1,673
1,311
10,583
Warranty and Guarantor Arrangements
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. patent or intellectual property rights, 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 negligence or 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 has
no accrued warranties at December 31, 2017 or 2016, respectively, and has no history of claims paid.
Legal Proceedings
The Company is involved from time-to-time in various legal proceedings arising in the normal course of business.
Although the outcomes of potential legal proceedings are inherently difficult to predict, the Company does not expect the
resolution of potential legal proceedings to have a material adverse effect on its financial position, results of operations, or cash
flow.
12. Equity Incentive Plan
Equity Incentive Plan
The Anika Therapeutics, Inc. Stock Option and Incentive Plan, as amended, (the “2003 Plan”) provides for grants of
nonqualified and incentive stock options, common stock, RSA’s, RSU’s, and SAR’s to employees, directors, officers, and
consultants. The 2003 Plan was originally approved by the Board of Directors on April 4, 2003, approved by the Company’s
shareholders on June 4, 2003, and reserved 1,500,000 shares of common stock for grant pursuant to its terms.
On May 29, 2009, the Board of Directors approved changes to the 2003 Plan and adopted the Amended and Restated
2003 Stock Option and Incentive Plan (the “Amended 2003 Plan”) to increase the number of shares available to grant by
850,000. The Amended 2003 Plan was approved by the Company’s shareholders on June 5, 2009, and it resulted in a total of
2,350,000 shares of common stock being reserved for issuance under the Amended 2003 Plan.
At the 2011 Annual Meeting of Stockholders on June 7, 2011, the shareholders of the Company approved the Anika
Therapeutics, Inc. Second Amended and Restated Stock Option and Incentive Plan (the “2003 Plan”), which, among other things,
increased the number of shares reserved for issuance under the Company’s predecessor stock option and incentive plan by
800,000 to 3,150,000 shares. Pursuant to this amendment and restatement to the 2003 Plan approved by the Company’s
shareholders, each share award issued after June 7, 2011 other than stock options or SAR’s will reduce the number of total shares
available for grant by 1.9 shares.
At the 2013 Annual Meeting of Stockholders on June 18, 2013, the shareholders of the Company approved an additional
amendment to the Amended 2003 Plan, which, among other things, increased the number of shares reserved for issuance under
the Company’s stock option and incentive plan by 650,000 to 3,800,000 shares. Pursuant to this amendment and restatement to
the 2003 Plan approved by the Company’s shareholders, each share award issued after June 18, 2013 other than stock options or
SAR’s will reduce the number of total shares available for grant by 1.5 shares.
62
On June 13, 2017, the Company’s shareholders approved the Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan
(the “2017 Plan”). The 2017 Plan replaced the 2003 Plan, as the plan under which future grants to employees, directors, officers,
and consultants will be made. The 2017 Plan was originally approved by the Company’s Board of Directors on March 31, 2017.
The terms of the 2017 Plan provide for the grant of incentive stock options, nonqualified stock options, SAR’s, RSA’s, RSU’s,
and performance options that may be settled in cash, stock, or other property. In accordance with the 2017 Plan approved by the
Company’s shareholders, each share award other than stock options or SAR’s will reduce the number of total shares available
for grant by 2.0 shares. Subject to adjustment for specified types of changes in our capitalization, no more than 1.2 million shares
of common stock may be issued under the 2017 Plan. There are 1.1 million shares available for future grant at December 31,
2017.
The Company may satisfy the awards upon exercise, or upon fulfillment of the vesting requirements for other equity-
based awards, with either newly-issued shares or shares reacquired by the Company. Stock-based awards are granted with an
exercise price equal to the market price of the Company’s stock on the date of grant. Awards contain service conditions or service
and performance conditions, and they generally become exercisable ratably over one to four years.
The Company estimates the fair value of stock options and SAR’s using the Black-Scholes valuation model. Fair value
of restricted stock is measured by the grant-date price of the Company’s shares. Key input assumptions used to estimate the fair
value of stock options and SAR’s include the exercise price of the award, the expected award term, the expected volatility of the
Company’s stock over the option’s expected term, the risk-free interest rate over the award’s expected term, and the Company’s
expected annual dividend yield.
The expected volatility assumption is evaluated against the historical volatility of the Company’s common stock over a
four-year average, and it is adjusted if there are material changes in historical volatility. The risk-free interest rate assumption is
based on U.S. Treasury interest rates at the time of grant.
The fair value of each stock option during 2017, 2016, and 2015 was estimated on the grant date using the Black-Scholes
option-pricing model with the following assumptions:
Risk free interest rate ........................................
Expected volatility ............................................ 38.74% - 44.31%
Expected life (years) .........................................
Expected dividend yield ....................................
4.0
0.00%
2017
1.60% - 1.86%
2016
0.94% - 1.55%
47.33% - 51.61%
2015
1.15% - 1.46%
53.15% - 54.65%
4.5
0.00%
4.5
0.00%
Stock Options and Restricted Stock
During the year ended December 31, 2017, a total of 85,109 stock options and 26,306 RSA’s were granted under the
2017 Plan, and a total of 407,635 stock options were granted under the 2003 Plan. The stock options granted to employees
become exercisable or vest ratably over a three-year period. In January 2017, the Company executed its annual grant under the
2003 Plan of 9,970 RSU’s to non-employee directors; these RSU’s vest over a one-year period.
63
The Company recorded $5.8 million, $3.4 million, and $2.2 million of stock-based compensation expense for the years
ended December 31, 2017, 2016, and 2015, respectively, for stock options, SAR’s, RSA’s and RSU’s. The Company presents
the expenses related to stock-based compensation awards in the same expense line items as cash compensation paid to each of
its employees as follows:
Cost of product revenue .................................................. $
Research & development ................................................
Selling, general & administrative ....................................
Total stock-based compensation expense ....................... $
439 $
564
4,804
5,807 $
148 $
467
2,777
3,392 $
42
269
1,914
2,225
2017
2016
2015
Combined stock options and SAR’s activity under the Company’s plans is summarized as follows for the years ended
December 31, 2017 and 2016, respectively:
2017
2016
Weighted
Average
Exercise
Weighted
Average
Exercise
Number of Price Per Number of Price Per
Shares
Shares
Share
Share
Options and SAR's outstanding at beginning of
year ........................................................................
Granted ................................................................
Cancelled ............................................................
Expired ................................................................
Exercised .............................................................
979,569 $
440,688 $
(74,527 ) $
(589 ) $
(17,941 ) $
Options and SAR's outstanding at end of year ........ 1,327,200 $
26.15
50.22
45.56
32.86
20.56
33.70
762,260 $
354,275 $
(58,841 ) $
(3,310 ) $
(74,815 ) $
979,569 $
18.75
40.77
30.05
11.37
15.46
26.15
All the 1,327,200 stock options and SAR’s outstanding at December 31, 2017 are vested or are expected to vest, with a
weighted-average exercise price of $33.70 as well as an aggregate intrinsic value of $27.6 million related to these awards. The
weighted average remaining contractual term of the vested and expected to vest stock options and SAR’s was 7.0 years as of
December 31, 2017.
As of December 31, 2017, total unrecognized compensation costs related to non-vested stock options and SAR’s was
approximately $7.6 million and is expected to be recognized over a weighted average period of 2.1 years.
The exercisable options and SAR’s at December 31, 2017 are as follows:
Outstanding
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Term
(in years)
Incentive stock options ...................................................
Nonqualified stock options .............................................
Performance options .......................................................
SAR's ..............................................................................
182,472 $
374,211 $
32,598 $
35,250 $
14.12
20.18
38.79
6.36
4.3
5.3
7.7
2.1
The aggregate intrinsic value of stock options and SAR’s fully vested at December 31, 2017 and 2016 was $22.0 million
and $16.7 million, respectively. The aggregate intrinsic value of stock options and SAR’s outstanding at December 31, 2017 and
2016 was $27.6 million and $22.3 million, respectively.
64
The total intrinsic value of stock options and SAR’s exercised was $0.5 million and $2.1 million for the years ended
December 31, 2017 and 2016, respectively.
The total fair value of stock options and SAR’s vested during the years ended December 31, 2017 and 2016 was
approximately $2.1 and $1.3 million, respectively.
The Company received $0.3 million and $1.0 million for exercises of stock options during the years ended December 31,
2017 and 2016, respectively.
The RSA and RSU activity for the years ended December 31, 2017 and 2016 is as follows:
2017
Weighted
Average
2016
Weighted
Average
Unvested at Beginning of year ................................
Granted....................................................................
Cancelled ................................................................
Expired ....................................................................
Vested/Released ......................................................
Unvested at end of year ...........................................
Fair Value
Number of Grant Date Number of Grant Date
Fair Value
Shares
34.29
38.11
36.20
-
33.35
36.44
Shares
150,384 $
87,158 $
(4,950 ) $
- $
(25,515 ) $
207,077 $
207,077 $
67,567 $
- $
- $
(45,418 ) $
229,226 $
36.44
52.03
-
-
35.32
42.47
The total fair value of RSA’s and RSU’s vested during the years ended December 31, 2017 and 2016 was $2.3 million
and $1.0 million.
13. Employee Benefit Plan
The Company’s U.S. employees are eligible to participate in the Company’s 401(k) savings plan. Employees may elect
to contribute a percentage of their compensation to the plan, and the Company will make 140% matching contributions up to a
limit of 5% of an employee’s eligible compensation. In addition, the Company may make annual discretionary contributions.
The Company made matching contributions of $0.6 million, $0.6 million, and $0.4 million for the years ended December 31,
2017, 2016, and 2015, respectively.
14. Shareholder Rights Plan
On April 4, 2008, the Board of Directors of the Company adopted a Shareholder Rights Plan (the “2008 Plan”) that
replaced the Company’s former Shareholder Rights Plan. Under the 2008 Plan, the Rights generally become exercisable if:
(1) A person becomes an “Acquiring Person” by acquiring 15% or more of the Company’s common stock, or
(2) A person commences a tender offer that would result in that person owning 15% or more of the Company’s common
stock.
In the event that a person becomes an “Acquiring Person,” each holder of a Right (other than the Acquiring Person)
would be entitled to acquire a number of shares of preferred stock equivalent to shares of the Company’s common stock having
a value of twice the exercise price of the Right. If, after any such event, the Company enters into a merger or other business
combination transaction with another entity, each holder of a Right would then be entitled to purchase, at the then-current exercise
price, shares of the acquiring company’s common stock having a value of twice the exercise price of the Right.
The current exercise price per Right is $75.00. The Rights may be redeemed in whole, but not in part, at a price of $0.01
per Right (payable in cash, shares of the Company’s common stock, or other consideration deemed appropriate by the Board of
Directors) by the Board of Directors only until the earlier of:
65
(1) The time at which any person becomes an “Acquiring Person,” or
(2) The Expiration Date.
At any time after any person becomes an “Acquiring Person,” the Board of Directors may, at its option, exchange all or
any part of the then outstanding and exercisable Rights for shares of the Company’s common stock at an exchange ratio specified
in the 2008 Plan. Notwithstanding the foregoing, the Board of Directors generally will not be empowered to affect such exchange
at any time after any person becomes the beneficial owner of 50% or more of the Company’s common stock.
In connection with the establishment of the 2008 Plan, the Board of Directors approved the creation of Preferred Stock
of the Company designated as Series B Junior Participating Cumulative Preferred Stock with a par value of $0.01 per share. The
Board also reserved 175,000 shares of preferred stock for issuance upon exercise of the Rights. Until a Right is exercised, the
holder will have no rights as a stockholder of the Company, beyond those as an existing stockholder, including the right to vote
or to receive dividends.
15. Revenue by Product Group, by Significant Customer and by Geographic Location; Geographic Information
Product revenue by product group is as follows:
2017
Years Ended December 31,
2016
2015
Revenue
Orthobiologics ......................................... $ 93,816
2,755
Dermal .....................................................
5,262
Surgical ...................................................
5,950
Other .......................................................
$ 107,783
Percentage
of Product
Revenue Revenue
87 % $ 89,695
2,759
3 %
5,427
5 %
5,051
5 %
100 % $ 102,932
Percentage
of Product
Revenue Revenue
87 % $ 73,247
2,266
3 %
5,812
5 %
6,371
5 %
100 % $ 87,696
Percentage
of Product
Revenue
84 %
2 %
7 %
7 %
100 %
Product revenue from our sole significant customer, Mitek, as a percentage of our total product revenue was 73%, 75%,
and 72% for the years ended December 31, 2017, 2016, and 2015, respectively.
ORTHOVISC became available for sale in the United States on March 1, 2004, and it is marketed exclusively by Mitek
under the terms of an initial ten-year licensing, distribution, supply, and marketing agreement entered into in December 2003.
The agreement was extended by Mitek for additional five-year terms in 2012 and in 2017, with the current agreement to expire
on December 20, 2023.
In December 2011, the Company entered into a fifteen-year licensing agreement with Mitek to exclusively market
MONOVISC in the United States. The agreement provides certain milestone payments to the Company when rolling end-user
sales of U.S. MONOVISC exceed certain target sales goals. For the years ended December 31, 2017, 2016, and 2015, the
Company recognized milestone revenue of $5.0 million, $0.0 million, and $5.0 million, respectively, as a result of MONOVISC
achieving end-user sales in 2015 of $50 million within a consecutive 12-month period, and end-user sales in 2017 of $100 million
within a consecutive 12-month period. Under the terms of the agreement, there are additional milestone revenue that may be
achieved in future years.
66
Total revenue by geographic location based on the location of the customer in total and as a percentage of total revenue
are as follows:
2017
Years Ended December 31,
2016
2015
Percentage
of
Percentage
of
Total
Revenue Revenue Revenue Revenue Revenue Revenue
Total
Total
Percentage
of
Geographic Location:
United States ....................................... $ 92,905
12,435
Europe .................................................
8,080
Other ...................................................
Total ................................................ $ 113,420
82 % $ 83,972
10,953
11 %
8,454
7 %
100 % $ 103,379
81 % $ 76,621
8,756
11 %
7,622
8 %
100 % $ 92,999
82 %
9 %
9 %
100 %
The Company recorded licensing, milestone, and contract revenue of $5.6 million, $0.4 million, and $5.3 million for
the years ended December 31, 2017, 2016, and 2015, respectively; substantially all was derived in the United States with the
exception of 2016 which was derived in the Middle East and Latin America.
Net long-lived assets, consisting of net property and equipment, are subject to geographic risks because they are
generally difficult to move and to effectively utilize in another geographic area in a reasonable time period and because they are
relatively illiquid. Net tangible long-lived assets by principal geographic areas are as follows:
Years Ended December 31,
2017
2016
United States .............................................. $
Italy ............................................................
Total ....................................................... $
52,828 $
3,355
56,183 $
49,140
3,156
52,296
16. Income Taxes
New Tax Legislation
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “2017 Tax
Act”) tax reform legislation. This legislation makes significant changes to the U.S. tax law, including a reduction in the corporate
tax rate from the current rate of 35% to 21% starting in 2018. As a result of the enacted law, the Company was required to revalue
deferred tax assets and liabilities at the future rate. This revaluation resulted in a $2.3 million income tax benefit in continuing
operations and a corresponding reduction in the deferred tax liability. The other provisions of the 2017 Tax Act did not have a
material impact on the 2017 consolidated financial statements.
In accordance with Staff Accounting Bulletin No. 118, which provides guidance on accounting for the tax effects of the
2017 Tax Act, the Company has recorded a reasonable estimate of the impact on the consolidated financial statements. The
provisional amounts incorporate assumptions made based upon the Company’s current interpretation and implementation
guidance of the 2017 Tax Act. The Company does not expect a significant adjustment to the recorded amounts.
67
Income Tax Expense
The components of the Company’s income before income taxes and its provision for (benefit from) income taxes consist
of the following:
Income before income taxes
Domestic ..................................................................... $
Foreign ........................................................................
$
48,446 $
(2,244 )
46,202 $
50,181 $
689
50,870 $
48,608
(354 )
48,254
Years ended December 31,
2016
2015
2017
Provision for (benefit from) income taxes:
Current provision:
Federal ........................................................................ $
State ............................................................................
Foreign ........................................................................
Deferred provision:
Federal ........................................................................
State ............................................................................
Foreign ........................................................................
Total provision ............................................................ $
Years ended December 31,
2016
2015
2017
12,608 $
2,737
31
15,376
(426 )
(68 )
(496 )
(990 )
14,386 $
14,982 $
3,265
302
18,549
(70 )
(84 )
(72 )
(226 )
18,323 $
14,572
3,635
249
18,456
(370 )
(33 )
(557 )
(960 )
17,496
Deferred Tax Assets and Liabilities
Significant components of the Company’s deferred tax assets and liabilities consist of the following:
December 31,
2017
2016
Deferred tax assets:
Net operating loss carry forward, foreign ................................. $
Stock-based compensation expense ..........................................
Foreign currency exchange .......................................................
Accrued expenses and other ......................................................
Inventory reserve ......................................................................
Deferred tax assets .................................................................... $
959 $
2,309
265
496
740
4,769 $
1,253
1,882
677
308
640
4,760
December 31,
2017
2016
Deferred tax liabilities:
Acquisition-related Intangibles .................................................. $
Depreciation ...............................................................................
Deferred tax liabilities ................................................................ $
(2,743 ) $
(7,419 )
(10,162 ) $
(2,932 )
(8,376 )
(11,308 )
Net deferred tax liabilities ............................................................. $
(5,393 ) $
(6,548 )
68
Tax Rate
The reconciliation between the U.S. federal statutory rate and the Company’s effective rate is summarized as follows:
Statutory federal income tax rate ...........................................
State tax expense, net of federal benefit .................................
Impact of rate change on deferred taxes .................................
Permanent items, including nondeductible expenses .............
State investment tax credit .....................................................
Federal, state and foreign research and development credits .
Foreign rate differential .........................................................
Domestic production deduction .............................................
Effective income tax rate .......................................................
Years ended December 31,
2016
35.0 %
4.5 %
0.0 %
0.5 %
(0.1 %)
(0.9 %)
(0.1 %)
(2.9 %)
36.0 %
2017
35.0 %
4.8 %
(4.9 %)
0.6 %
(0.7 %)
(1.4 %)
0.5 %
(2.8 %)
31.1 %
2015
35.0 %
4.8 %
0.0 %
(0.3 %)
0.0 %
(0.4 %)
0.1 %
(2.9 %)
36.3 %
As of December 31, 2017, the Company had NOL’s for income tax purposes in Italy of $4.0 million that do not expire.
Accounting for Uncertainty in Income Taxes
The Company had no unrecognized tax benefits for the years ended December 31, 2017 and 2016, respectively. The
Company does not anticipate experiencing any significant increases or decreases in its unrecognized tax benefits within the
twelve months following December 31, 2017.
In the normal course of business, Anika and its subsidiaries may be periodically examined by various taxing authorities.
We file income tax returns in the U.S. federal jurisdiction, in certain U.S. states, and in Italy. The associated tax filings remain
subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings
relate. The 2014 through 2016 tax years remain subject to examination by the IRS and other taxing authorities for U.S. federal
and state tax purposes. The 2011 through 2016 tax years remain subject to examination by the appropriate governmental
authorities for Italy.
Upon the settlement of certain stock-based awards (i.e., exercise, vesting, forfeiture, or cancellation), the actual tax
deduction is compared with cumulative financial reporting compensation cost, and any excess tax deduction related to these
awards is considered a windfall tax benefit. With the adoption of ASU 2016-09 in 2017, the Company records windfall tax
benefits to income tax expense. Prior to the adoption of ASU 2016-09, such benefits were tracked in a “windfall tax benefit pool”
as part of additional paid-in capital. The Company follows the with-and-without approach for the direct effects of
windfall/shortfall items and to determine the timing of the recognition of any related benefits. The Company recorded a windfall
tax benefit in income tax expense of $0.4 million in 2017. The amount of excess tax benefits previously recognized through
additional paid-in capital was $0.6 million and $0.9 million in 2016 and 2015, respectively.
17. Revolving Credit Agreement
On October 24, 2017, the Company, as borrower, entered into a new five-year agreement with Bank of America, N.A.,
as administrative agent, swingline lender and issuer of letters of credit, for a $50.0 million senior revolving line of credit (the
“Credit Agreement”). Subject to certain conditions, the Company may request up to an additional $50.0 million in commitments
for a maximum aggregate commitment of $100.0 million, which requests must be approved by the Revolving Lenders (as defined
in the Credit Agreement). Loans under the Credit Agreement generally bear interest equal to, at the Company’s option, either:
(i) LIBOR plus the Applicable Margin, as defined below, or the (ii) Base Rate, defined as the highest of: (a) the Federal Funds
Rate plus 0.50%, (b) Bank of America, N.A.’s prime rate and (c) the one month LIBOR adjusted daily plus 1.0%, plus the
Applicable Margin. The Applicable Margin ranges from 0.25% to 1.75% based on the Company’s consolidated leverage ratios
at the time of the borrowings under the Credit Agreement. The Company has agreed to pay a commitment fee in an amount that
is equal to 0.25% per annum on the actual daily unused amount of the credit facility and that is due and payable quarterly in
arrears. Loan origination costs are included in Other long-term assets and are being amortized over the five-year term of the
Credit Agreement. As of December 31, 2017, there are no outstanding borrowings under the Credit Agreement and the Company
is in compliance with the terms of the Credit Agreement.
69
The Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including
financial covenants, events of default and indemnification provisions in favor of the Lenders (as defined in the Credit Agreement).
The covenants include restrictions governing the Company’s leverage ratio and interest coverage ratio, its incurrence of liens and
indebtedness, and its entry into certain merger and acquisition transactions or dispositions and other matters, all subject to certain
exceptions. The financial covenants require the Company not to exceed certain maximum leverage and interest coverage ratios.
The Lenders have been granted a first priority lien and security interest in substantially all of the Company’s assets, except for
certain intangible assets.
18. Quarterly Financial Data (Unaudited)
Year 2017
Product revenue .................................................................. $
Total revenue ......................................................................
Cost of product revenue .....................................................
Gross profit on product revenue .........................................
Net income ......................................................................... $
Per common share information:
Basic net income per share ............................................. $
Basic common shares outstanding .................................
Diluted net income per share .......................................... $
Diluted common shares outstanding ..............................
Quarter ended Quarter ended Quarter ended Quarter ended
December 31 September 30
March 31
June 30
28,884 $
29,388
8,716
20,168
8,067 $
0.55 $
14,596
0.53 $
15,141
27,178 $
27,184
6,250
20,928
6,887 $
0.47 $
14,579
0.46 $
15,115
28,340 $
33,462
6,315
22,025
11,369 $
0.78 $
14,588
0.76 $
15,044
23,381
23,386
6,083
17,298
5,493
0.38
14,576
0.37
15,043
Quarter ended Quarter ended Quarter ended Quarter ended
December 31 September 30
March 31
June 30
28,296 $
28,726
7,539
20,757
8,085 $
0.56 $
14,538
0.54 $
14,979
25,783 $
25,789
4,998
20,785
8,952 $
0.61 $
14,625
0.59 $
15,077
26,575 $
26,581
6,065
20,510
8,615 $
0.59 $
14,679
0.57 $
15,111
22,278
22,283
5,425
16,853
6,895
0.46
14,875
0.45
15,307
Year 2016
Product revenue .................................................................. $
Total revenue ......................................................................
Cost of product revenue .....................................................
Gross profit on product revenue .........................................
Net income ......................................................................... $
Per common share information:
Basic net income per share ............................................. $
Basic common shares outstanding .................................
Diluted net income per share .......................................... $
Diluted common shares outstanding ..............................
70
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a)
Evaluation of disclosure controls and procedures.
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (“Exchange Act”), we carried out an evaluation
under the supervision and with the participation of our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period
covered by this report. Based upon that evaluation, the chief executive officer and chief financial officer have concluded that our
disclosure controls and procedures are effective as of December 31, 2017 to ensure that information required to be disclosed by
us in reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by our company in the reports we file or submit under the Exchange
Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, or
persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. On an on-going
basis, we review and document our disclosure controls and procedures, and our internal control over financial reporting, and we
may from time to time make changes aimed at enhancing their effectiveness and ensuring that our systems evolve with our
business.
(b)
Changes in internal controls over financial reporting.
There were no changes in our internal control over financial reporting during the fourth quarter of fiscal year 2017 that
have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles in the United States.
Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance, and
it may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies
or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in its 2013 Internal Control—Integrated Framework.
Based on its assessment and those criteria, our management believes that our company maintained effective internal
control over financial reporting as of December 31, 2017.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Deloitte
& Touche LLP an independent registered public accounting firm, as stated in their report which is included below in this Item 9A
of this annual report on Form 10-K.
71
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Anika Therapeutics, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Anika Therapeutics, Inc. and subsidiaries (the “Company”) as of
December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report
dated February 26, 2018, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 26, 2018
72
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required under this item is incorporated herein by reference to our definitive proxy statement pursuant
to Regulation 14A, which proxy statement will be filed with the SEC not later than 120 days after the close of our fiscal year
ended December 31, 2017.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by reference to our definitive proxy statement pursuant
to Regulation 14A, which proxy statement will be filed with the SEC not later than 120 days after the close of our fiscal year
ended December 31, 2017.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required under this item and Item 5 of this Annual Report on Form 10-K under the heading “Equity
Compensation Plan Information” is incorporated herein by reference to our definitive proxy statement pursuant to
Regulation 14A, which proxy statement will be filed with the SEC not later than 120 days after the close of our fiscal year ended
December 31, 2017.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required under this item is incorporated herein by reference to our definitive proxy statement pursuant
to Regulation 14A, which proxy statement will be filed with the SEC not later than 120 days after the close of our fiscal year
ended December 31, 2017.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required under this item is incorporated herein by reference to our definitive proxy statement pursuant
to Regulation 14A, which proxy statement will be filed with the SEC not later than 120 days after the close of our fiscal year
ended December 31, 2017.
73
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
Documents filed as part of Form 10-K.
(1)
Financial Statements
45
Reports of Independent Registered Public Accounting Firms .................................................................................
47
Consolidated Balance Sheets ...................................................................................................................................
48
Consolidated Statements of Operations and Comprehensive Income ......................................................................
49
Consolidated Statements of Stockholder’s Equity ...................................................................................................
Consolidated Statements of Cash Flows ..................................................................................................................
50
Notes to Consolidated Financial Statements ............................................................................................................ 51 - 71
(2)
Schedules
Schedules have been omitted as all required information has been disclosed in the financial statements and related
footnotes.
(3)
Exhibits
The list of Exhibits filed as a part of this Annual Report on Form 10-K is set forth in the Exhibit Index (b) below.
Exhibit
Number
Description
3.1a
3.1b
3.1c
3.1d
3.1e
3.1f
3.1g
3.1h
3.2
4.1
10.1
10.1a
10.2
10.2a
10.2b
10.2c
10.2c
Restated Articles of Organization, as amended, of Anika Therapeutics, Inc. (with date of
filing with Secretary of State of the Commonwealth of Massachusetts):
(a) Restated Articles of Organization (April 29, 1993)
(b) Certificate of Correction (November 10, 1993)
(c) Certificate of Vote of Directors Establishing a Series of a Class of Stock (May 18,
1995)
(d) Articles of Amendment (January 9, 1997)
(e) Certificate of Vote of Directors Establishing a Series of a Class of Stock (April 7,
1998)
(f) Articles of Amendment (June 3, 1998)
(g) Articles of Amendment (April 4, 2008)
(h) Articles of Amendment (June 8, 2016)
Amended and Restated Bylaws of Anika Therapeutics, Inc.
Shareholder Rights Agreement, dated as of April 7, 2008, between Anika Therapeutics,
Inc. and American Stock Transfer & Trust Company
Lease, dated January 3, 2007, between Anika Therapeutics, Inc. and Farley White
Wiggins, LLC, relating to 32 Wiggins Avenue, Bedford, Massachusetts
Amendment No. 1 to Lease, dated February 1, 2007, between Anika Therapeutics, Inc.
and Farley White Wiggins, LLC, relating to 32 Wiggins Avenue, Bedford, Massachusetts
Lease Agreement, dated December 30, 2009, between Fidia Farmaceutici S.p.A. and Fidia
Advanced Biopolymers S.r.l., relating to Via Ponte della Fabbrica 3/A and 3/B Abano
Terme, Padua, Italy
Amendment No. 1 to Lease Agreement, dated June 18, 2010, between Fidia Farmaceutici
S.p.A. and Anika Therapeutics S.r.l. (formerly Fidia Advanced Biopolymers S.r.l.) relating
to Via Ponte Della Fabbrica 3/A and 3/B Abano Terme, Padua, Italy
Amendment No. 2 to Lease Agreement, dated September 20, 2010, between Fidia
Farmaceutici S.p.A. and Anika Therapeutics S.r.l. (formerly Fidia Advanced Biopolymers
S.r.l.) relating to Via Ponte Della Fabbrica 3/A and 3/B Abano Terme, Padua, Italy
Translation of Amendment No. 3 to Lease Agreement, dated April 16, 2012, between
Fidia Farmaceutici S.p.A. and Anika Therapeutics S.r.l. (formerly Fidia Advanced
Biopolymers S.r.l.) relating to Via Ponte Della Fabbrica 3/A and 3/B Abano Terme,
Padua, Italy
Translation of Amendment No. 3 to Lease Agreement, dated April 16, 2012, between
Fidia Farmaceutici S.p.A. and Anika Therapeutics S.r.l. (formerly Fidia Advanced
Biopolymers S.r.l.) relating to Via Ponte Della Fabbrica 3/A and 3/B Abano Terme,
Padua, Italy
74
Filed
with
this
Form
10-K Form
Incorporated by Reference
Filing Date
with SEC
Exhibit
Number
March 13, 2015
10-K
March 13, 2015
10-K
10-K March 13, 2015
10-QSB January 14, 1997
10-K March 13, 2015
10-QSB August 14, 1998
10-K
10-Q
10-Q
8-A12B April 7, 2008
March 9, 2009
August 1, 2016
August 14, 2002
3.1a
3.1b
3.1c
3.1
3.1e
3.1
3.7
3.1h
3.6
4.1
8-K
January 10, 2007
10.1
10-K
February 24, 2017
10.a
8-K
January 6, 2010
10.2
10-Q May 3, 2016
10.2
10-Q May 3, 2016
10.3
10-Q May 3, 2016
10.4
10-Q May 3, 2016
10.4
Exhibit
Number
Description
Filed
with
this
Form
10-K Form
Incorporated by Reference
Filing Date
with SEC
Exhibit
Number
10.2d
10.3
10.3a
10.4a
10.4b
10.5
10.6
10.6a
10.7
*10.8
*10.9
Translation of Amendment No. 4 to Lease Agreement, dated February 22, 2016, between
Fidia Farmaceutici S.p.A. and Anika Therapeutics S.r.l. (formerly Fidia Advanced
Biopolymers S.r.l.) relating to Via Ponte Della Fabbrica 3/A and 3/B Abano Terme,
Padua, Italy
Translation of Lease Agreement, dated October 9, 2015, between Anika Therapeutics S.r.l.
and Consorzio Zona Industriale E Porto Fluviale di Padova relating to Land Registry of
the Municipality of Padova, Page 148, cadastral map 516 and 517
Translation of Amendment No. 1 to Lease Agreement, dated February 2, 2017, between
Anika Therapeutics S.r.l. and Consorzio Zona Industriale E Porto Fluviale di Padova
relating to Land Registry of the Municipality of Padova, Page 148, cadastral map 516 and
517
Credit Agreement with Bank of America, N.A.:
(a) Credit Agreement, dated as of October 24, 2017, among Anika Therapeutics, Inc.,
certain subsidiaries of Anika Therapeutics, Inc. as are or may from time to time become
parties to the Credit Agreement, Bank of America, N.A., as administrative agent,
swingline lender and issuer of letters of credit, and the lenders party thereto.
(b) Security and Pledge Agreement, dated as of October 24, 2017, among Anika
Therapeutics, Inc., certain subsidiaries of Anika Therapeutics, Inc. listed on the signature
pages thereto, and Bank of America, N.A., as administrative agent.
Sale and Purchase Agreement, dated December 30, 2009, by and between Fidia
Farmaceutici S.p.A. and Anika Therapeutics, Inc.
Tolling Agreement, dated December 30, 2009, between Fidia Farmaceutici S.p.A. and
Fidia Advanced Biopolymers S.r.l.
Amendment No. 1 to Tolling Agreement, dated January 1, 2012, between Fidia
Farmaceutici S.p.A. and Anika Therapeutics S.r.l. (formerly Fidia Advanced Biopolymers
S.r.l.)
Registration Rights Agreement, dated December 30, 2009, between Anika Therapeutics,
Inc. and Fidia Farmaceutici S.p.A.
License Agreement, dated as of December 20, 2003, by and between Anika Therapeutics,
Inc. and Ortho Biotech Products, L.P.
License Agreement, dated as of December 21, 2011, by and between Anika Therapeutics,
Inc. and DePuy Mitek, Inc.
2003 Stock Option and Incentive Plan:
†10.10a
†10.10b
(a) Second Amended and Restated 2003 Stock Option and Incentive Plan (adopted April
5, 2011)
(b) Amendment to Second Amended and Restated 2003 Stock Option and Incentive Plan
(adopted April 11, 2013)
10-Q
May 3, 2016
10.5
8-K
October 14, 2015
10.1
10-K
February 24, 2017
10.3a
10-Q
October 27, 2017
10.1
10-Q
October 27, 2017
10.2
8-K
January 6, 2010
2.1
8-K
January 6, 2010
10.3
10-K
February 24, 2017
10.6a
8-K
January 6, 2010
10.1
10-K
March 30, 2004
10.38
8-K
December 22, 2011
10.1
8-K
June 10, 2011
8-K
June 21, 2013
10.1
10.1
75
Exhibit
Number
Description
Filed
with
this
Form
10-K Form
Incorporated by Reference
Filing Date
with SEC
Exhibit
Number
†10.10c
†10.10d
†10.10e
†10.10f
(c) Form of Incentive Stock Option Agreement
(d) Form of Non-Qualified Stock Option Agreement for Non-Employee Directors
(e) Form of Performance Share Award Agreement
(f) Form of Restricted Deferred Stock Unit Award Agreement for Non-Employee
Directors
†10.10g
†10.10h
†10.10i
†10.11
†10.12
†10.13a
†10.13b
†10.14a
†10.14b
†10.15a
†10.15b
†10.16
†10.17a
†10.17b
†10.18
†10.19
†10.20
10.21
10.22
10.23
†10.24a
†10.24b
(g) Form of Restricted Stock Award Agreement for Employees
(h) Form of Stock Appreciation Right Agreement for Employees
(i) Form of Stock Appreciation Right Agreement for Non-Employee Directors
Anika Therapeutics, Inc. Senior Executive Incentive Compensation Plan
Anika Therapeutics, Inc. Non-Employee Director Compensation Policy
Employment Agreement, dated March 22, 2010, between Anika Therapeutics, Inc. and
Sylvia Cheung
Amendment No. 1 to the Employment Agreement, dated December 8, 2010, by and
between Anika Therapeutics, Inc. and Sylvia Cheung
Employment Agreement, dated September 10, 2009, between Anika Therapeutics, Inc.
and Frank J. Luppino
Amendment No. 1 to Employment Agreement, dated December 1, 2010, by and between
Anika Therapeutics, Inc. and Frank J. Luppino
Employment Agreement, dated September 10, 2009, between Anika Therapeutics, Inc.
and William J. Mrachek
Amendment No. 1 to Employment Agreement, dated December 1, 2010, by and between
Anika Therapeutics, Inc. and William J. Mrachek
Employment Agreement, dated October 17, 2008, between Anika Therapeutics, Inc. and
Kevin Quinlan
Employment Agreement, dated October 17, 2008, between Anika Therapeutics, Inc. and
Charles H. Sherwood, Ph.D.
Amendment No. 1 to Employment Agreement, dated December 8, 2010, by and between
Anika Therapeutics, Inc. and Charles H. Sherwood, Ph.D.
Separation Agreement, effective November 26, 2014, by and between Anika Therapeutics,
Inc. and Carol Barnett
Separation Agreement, effective November 7, 2014, by and between Anika Therapeutics,
Inc. and John W. Sheets
Consulting Agreement, effective December 8, 2015, by and between Anika Therapeutics,
Inc. and John C. Moran
Fixed Dollar Accelerated Share Repurchase Transaction Confirmation entered into as of
February 26, 2016 by and between Morgan Stanley & Co. LLC and Anika Therapeutics,
Inc.
Negotiated Settlement Agreement and General Release, dated July 13, 2017, by and
between Stephen Masciolo, M.D., MPH and Anika Therapeutic, Inc.
Employment Agreement, dated July 27, 2017, by and between Anika Therapeutics, Inc.
and Joseph Darling
2017 Stock Option and Incentive Plan:
(a) Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan
(b) Form of Notice of Grant of Incentive Stock Option, including Terms and Conditions of
Stock Option, granted under Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan.
8-K
8-K
8-K
10-K
10-K
10-Q
10-Q
8-K
10-K
10-K
October 5, 2004
October 5, 2004
February 6, 2008
March 9, 2009
March 12, 2008
May 9, 2006
May 9, 2006
February 6, 2008
March 12, 2008
May 5, 2014
10.3
10.4
10.3
10.25
10.27
10.1
10.2
10.2
10.28
10.42
10-K
May 5, 2014
10.43
8-K
September 14, 2009
10.1
10-K
March 16, 2011
10.35
8-K
September 14, 2009
10.2
10-K
March 16, 2011
10.36
8-K
October 22, 2008
10.2
8-K
October 22, 2008
10.1
10-K
March 16, 2011
10.33
10-K
March 13, 2015
10.16
10-K
March 13, 2015
10.17
8-K
December 9, 2015
10.1
10-Q
May 3, 2016
10.1
8-K
July 14, 2017
8-K
July 27, 2017
10.1
10.1
8-K
8-K
June 19, 2017
June 19, 2017
99.1
99.2
†10.24c
(c) Form of Notice of Grant of Nonqualified Stock Option, including Terms and
8-K
June 19, 2017
99.3
Conditions of Stock Option, granted under Anika Therapeutics, Inc. 2017 Omnibus
Incentive Plan
†10.24d
(d) Form of Notice of Grant of Restricted Stock Award, including Terms and Conditions
8-K
June 19, 2017
99.4
of Restricted Stock Award, granted under Anika Therapeutics, Inc. 2017 Omnibus
Incentive Plan.
†10.24e
(e) Form of Notice of Grant of Restricted Stock Units, including Terms and Conditions
8-K
June 19, 2017
99.5
of Restricted Stock Units, granted under Anika Therapeutics, Inc. 2017 Omnibus
Incentive Plan.
76
Exhibit
Number
Description
Filed
with
this
Form
10-K Form
Incorporated by Reference
Filing Date
with SEC
Exhibit
Number
21.1
23.1
23.2
31.1
31.2
**32.1
***101
List of Subsidiaries of Anika Therapeutics, Inc.
Consent of Deloitte & Touche LLP
Consent of PricewaterhouseCoopers LLP
Certification of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
The following materials from the Annual Report on Form 10-K of Anika
Therapeutics, Inc. for the fiscal year ended December 31, 2017, formatted in
xBRL: (i) Consolidated Balance Sheets as of December 31, 2017 and December
31, 2016; (ii) Consolidated Statements of Operations for the Years Ended
December 31, 2017, December 31, 2016, and December 31, 2015; (iii)
Consolidated Statements of Stockholders’ Equity for the Years Ended
December 31, 2017, December 31, 2016, and December 31, 2015; (iv)
Consolidated Statements of Cash Flows for the Years Ended December 31,
2017, December 31, 2016, and December 31, 2015; and (v) Notes to
Consolidated Financial Statements
X
X
X
X
X
X
X
†
*
**
Management contract or compensatory plan or arrangement.
Certain portions of this document have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange
Commission. The omitted portions have been filed separately with the Commission.
The certification attached as Exhibit 32.1 that accompanies this Form 10-K is not deemed filed with the SEC and is not to be incorporated
by reference into any filing of Anika Therapeutics, Inc. under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether
made before or after the date of this Form 10-K, irrespective of any general incorporation language contained in such filing.
*** Pursuant to Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language) information is deemed not filed or a part
of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes
of section 18 of the Securities Exchange Act of 1934 and otherwise is not subject to liability under these sections.
ITEM 16. 10-K SUMMARY
None.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 26, 2018
By: /s/ CHARLES H. SHERWOOD, PH.D.
Charles H. Sherwood, Ph.D.
Chief Executive Officer
ANIKA THERAPEUTICS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ CHARLES H. SHERWOOD, PH.D. Chief Executive Officer, Director
Charles H. Sherwood, Ph.D.
(Principal Executive Officer)
February 26, 2018
/s/ SYLVIA CHEUNG
Sylvia Cheung
/s/ JOSEPH L. BOWER
Joseph L. Bower
/s/ RAYMOND J. LAND
Raymond J. Land
/s/ GLENN R. LARSEN, PH.D.
Glenn R. Larsen, Ph.D.
/s/ JEFFERY S. THOMPSON
Jeffery S. Thompson
/s/ STEVEN E. WHEELER
Steven E. Wheeler
Chief Financial Officer
(Principal Accounting Officer and Principal Financial Officer) February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
Director
Director
Director
Director
Director
78
Anika Therapeutics, Inc.
32 Wiggins Avenue
Bedford, MA 01730
(781) 457-9000
www.anikatherapeutics.com