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ANIKA THERAPEUTICS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following section of this Annual Report on Form 10-K titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" 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 and 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 Item 1 "Business" and Item 1A "Risk Factors." The following discussion should also be read in conjunction with the Consolidated Financial Statements of Anika Therapeutics, Inc. and the Notes thereto appearing elsewhere in this report. Management Overview Anika Therapeutics, Inc. ("Anika," and together, with its subsidiaries, the "Company") develops, manufactures and commercializes therapeutic products for tissue protection, healing, and repair. These products are based on hyaluronic acid ("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. Together with our wholly-owned subsidiary, Anika S.r.l., the Company offers therapeutic products in the following areas: Anika Anika S.r.l. Orthobiologics X X Dermal Advanced wound care X Aesthetic dermatology X Ophthalmic X Surgical Anti-adhesion X X Ear, nose and throat care ("ENT") X Veterinary X Orthobiologics Anika's orthobiologics business contributed 78% to our product revenue for the year ended December 31, 2013. Our orthobiologics products consist of joint health and orthopedic products. Joint health products include ORTHOVISC, ORTHOVISC mini, and MONOVISC. ORTHOVISC is available in the U.S., Canada, and some international markets for the treatment of osteoarthritis of the knee, and in Europe for the treatment of osteoarthritis in all joints. ORTHOVISC mini is available in Europe and is designed for the treatment of osteoarthritis in small joints. MONOVISC is our single injection osteoarthritis treatment indicated for all joints in Europe, and for the knee in the U.S., Turkey and Canada. ORTHOVISC mini, and MONOVISC are two viscosupplementation products which became available in certain international markets during the second quarter of 2008. Our most recent product approval was received in February 2014 for MONOVISC in the U.S. The related commercial introduction is planned for March 2014. Anika has marketed ORTHOVISC, our product for the treatment of osteoarthritis of the knee, internationally since 1996 through various distribution agreements. International sales of ORTHOVISC contributed 8% of product revenue for the year ended December 31, 2013. Our strategy is to continue to add new products, to expand the indications for usage of these products, and to add additional countries to our distribution network. The orthobiologics area has been the fastest growing area for the Company, growing from 57% of our product revenue in 2008 to 78% of our product revenue in 2013. We continue to seek new distribution partnerships around the world and we expect total orthobiologics product sales to increase in 2014 compared to 2013, based on sales from existing and new partners. - 31 - -------------------------------------------------------------------------------- We currently offer several orthopedic products used in connection with regenerative medicine. The products currently available in Europe include Hyalofast, a biodegradable support for human bone marrow mesenchymal stem cells; Hyalonect, a woven gauze used as a graft wrap; 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 in the shoulder for adhesive capsulitis. These products are commercialized through a network of distributors, primarily in Europe, the Middle East, and Korea. Anika believes that the U.S. market offers excellent expansion potential to increase revenue, and this will continue to be a major focus area for the Company. Dermal Our dermal products contributed 3% to our product revenue for the year ended December 31, 2013, and consist of advanced wound care products based on the HYAFF technology, and aesthetic dermal fillers. Anika S.r.l. offers 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 in connection with skin substitutes. Leading products include Hyalomatrix and Hyalofill, for treatment of complex wounds such as burns and ulcers, and Hyalograft 3D and Laserskin scaffolds, for use in connection with the regeneration of skin. Anika S.r.l.'s dermal products are commercialized through a network of distributors, primarily in Europe, Latin America and the Middle East. Several of the products are also approved for sale in the United States including Hyalomatrix, Hyalofill and Hyalogran. Currently, the Company is actively seeking a commercial partner in the United States. In 2012, the Company entered into a distribution agreement for sales of advanced wound care products in nine South American countries, including Argentina, Brazil, Mexico and Chile. Our initial aesthetic dermatology product is a dermal filler based on our proprietary chemically modified, cross-linked HA, and is approved in Europe, Canada, the U.S., South Korea and certain countries in South America. Internationally, this product is marketed under the ELEVESS trade name. In the U.S., the trade name is HYDRELLE, although the product is not currently marketed in the U.S. Surgical Our surgical group consists of products used to prevent surgical adhesions, and to treat ENT disorders. For the year ended December 31, 2013, sales of surgical products contributed 8% 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 Asian countries through a distribution network, but is not approved in the U.S. INCERT, approved for sale in Europe, Turkey, 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 U.S. Anika co-owns issued U.S. patents covering the use of INCERT for adhesion prevention. See the section captioned "Patent and Proprietary Rights" for additional information. Anika S.r.l. also offers 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. Anika S.r.l. is partnered with Medtronic for distribution of these products. In 2011, Merogel Injectable was voluntarily withdrawn from the market due to a labeling error on the product's packaging. We settled the matter related to this dispute with Medtronic in August, 2012. This labeling error related to conduct that initially occurred prior to our acquisition of Anika S.r.l. from Fidia Farmaceutici S.p.A. ("Fidia") and, as a result, we made claims against Fidia for indemnification for Anika's losses related to this issue. Fidia maintained that it did not have liability for this matter, and asserted a counterclaim against Anika for failing to consent to the release of the remaining shares held in escrow upon the closing of the Anika S.r.l. acquisition. The Company reached agreement with Fidia in October 2013 to settle this matter without admission of liability by either party in return for a payment made by Fidia to the Company. As a result of the settlement, the arbitration with Fidia pending before the London Court of International Arbitration has been withdrawn, and shares previously held in escrow have been released. Ophthalmic Our ophthalmic business includes HA viscoelastic products used in ophthalmic surgery. For the year ended December 31, 2013, sales of ophthalmic products contributed 6% of our product revenue. Anika previously manufactured the AMVISC product line for Bausch & Lomb under the terms of a supply agreement that expired on December 31, 2010 (the "2004 B&L Agreement") for viscoelastic products used in ophthalmic surgery. Effective January 1, 2011, the parties entered into a non-exclusive, two year contract intended to transition the manufacture of AMVISC and AMVISC Plus to an alternative, low-cost supplier formerly affiliated with B&L, and we continued to supply B&L with these products during 2011. Effective January 1, 2012, the parties agreed to a three year contract for Anika to continue to supply these products to B&L as a second supplier with committed annual volumes for 2012, and with lower committed volumes in 2013 and 2014. - 32 - -------------------------------------------------------------------------------- B&L accounted for 5% of product revenue for the year ended 2013, and is expected to be lower in 2014 under the current contract. Operating margins under the 2004 B&L Agreement were low and will remain at a similar level under the current contract. See Item 1A. "Risk Factors." Veterinary U.S. sales of HYVISC, our product for the treatment of equine osteoarthritis, contributed 5% to product revenue for the year ended December 31, 2013. We continue to look at other veterinary applications and opportunities to expand geographic territories. Research and Development Anika's research and development efforts primarily consisted 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 related to our existing and new products. Our development focus includes products for tissue protection, healing and repair. Our investment in R&D has been important over the years, and varies considerably depending on the number and size of clinical trials and studies underway. We anticipate that we will continue to commit significant resources to research and development, including clinical trials, in the future. In February 2014 we received FDA approval for MONOVISC. MONOVISC is our first FDA approved single-injection treatment of osteoarthritis that uses a non-animal sourced HA. It is also our first osteoarthritis product based on our proprietary cross-linked HA-technology. We received Conformité Européenne ("CE") Mark approval for the MONOVISC product in October 2007, and began sales in Europe during the second quarter of 2008. Our second single-injection osteoarthritis product under development is CINGAL, which is based on our hyaluronic acid material with an added active therapeutic molecule designed to provide broad pain relief for a longer period of time. We have completed the formulation and biocompatibility studies of the product. During the second quarter of 2013, we commenced a phase III clinical trial to obtain the needed clinical data for a CE Mark submission and approval, and to support other product registrations including in the United States. With the acquisition of Anika S.r.l., we have enhanced our research and development capabilities, our technology base, and our pipeline of product candidates. Anika S.r.l. has research and development programs for new products including Hyalofast, an innovative product for cartilage tissue repair, Hyalospine, an adhesion prevention gel for use after spinal surgery, and Hyalobone, a bone tissue filler. Restructuring Plan On December 28, 2012 the Company announced the closure of its tissue engineering facility in Abano Terme, Italy due to the inability to meet strict regulatory standards, established by the EMA for Advanced Therapy Medicinal Products, which became effective January 1, 2013. The restructuring plan primarily involved a workforce reduction, the disposal of related supplies and equipment, and the termination of the Hyalograft C autograft in-process R&D project. We recorded restructuring and related impairment charges in the fourth quarter of 2012 of approximately $2.5 million. Of the total restructuring and related impairment charges, approximately $1.6 million was related to the noncash disposal of assets. The remaining $0.9 million related to cash payments anticipated to occur in 2013, primarily for employee termination costs. The restructuring plan was completed in 2013, with a $286,843 benefit to the statement of operations for the year ended December 31, 2013, based on actual expenses and payment settlements. - 33 - --------------------------------------------------------------------------------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, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 related disclosure of contingent assets and liabilities. We monitor our estimates on an on-going 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 is discussed throughout "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 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K for the year ended December 31, 2013. Foreign Currency Translation The functional currency of our wholly-owned 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 monthly average exchange rates prevailing throughout the year. The translation adjustments resulting from this process are included as a component of accumulated currency translation adjustment. The Company recognized gains from foreign currency transactions of $259,275 and $200,452 during the years ended December 31, 2013, and 2012, respectively and losses from foreign currency transactions of $623,093 in 2011. 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, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. 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. 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 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 our own estimates of assumptions market participants would use in pricing the asset or liability. Allowance for Doubtful Accounts We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. 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 our customer payment terms. - 34 - --------------------------------------------------------------------------------Inventories Inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out method. Work-in-process and finished goods inventories include materials, labor, and manufacturing overhead. The Company's policy is to write-down inventory when conditions exist that suggests 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. 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 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. 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 sales projections provided to us by our distributor customers. If necessary we adjust our estimates based upon final sales data received prior to issuing our quarterly unaudited or annual audited financial statements. 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 our product sales are subject to the provisions of the MDET. The Company has elected to recognize any amounts related to the MDET under the gross method as allowed under ASC 605-45. For the period ending December 31, 2013, amounts included in revenue and cost of goods sold for the MDET were immaterial. 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. 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 Accounting Standards Update ("ASU") 2009-13, Revenue Recognition, in January 2011, which amends Accounting Standards Codification 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 upfront 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. - 35 - --------------------------------------------------------------------------------Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Computer hardware and software are typically amortized over three to five years, and furniture and fixtures over five to seven years. Leasehold improvements are amortized over the shorter of their useful lives or the remaining terms of the related leases. Property and equipment under capital leases are amortized over the lesser of the lease terms or their estimated useful lives. Maintenance and repairs are charged to expense when incurred, while additions and improvements are capitalized. When an item is sold or retired, the cost and related accumulated depreciation is relieved, and the resulting gain or loss, if any, is recognized in income. 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 acquired 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. We estimate the fair value for reporting units using discounted cash flow valuation models which require the use of significant estimates and assumptions including but not limited to: risk free rate of return on an investment, weighted average cost of capital, future revenue, operating margin, working capital and capital expenditure needs. Our annual assessment for impairment of goodwill as of November 30, 2013 indicated that the fair value of our reporting unit exceeded the carrying value of the reporting unit. Anika S.r.l. is our only acquired reporting unit and currently holds 100% of the goodwill associated with the 2009 acquisition of that company. To conduct impairment tests of IPR&D, the fair value of the IPR&D projects is compared to the 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 values 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. Our annual assessment for impairment of IPR&D indicated that the fair value of our IPR&D as of November 30, 2013 exceeded their respective carrying values. Through December 31, 2013 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. The excess of the fair value of the equity of the Anika S.r.l. reporting unit over its carrying value at November 30, 2013 increased from the prior year. The Company continues to monitor and evaluate the financial performance of the Anika S.r.l. 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 (including purchased software and trade names). Purchased software is amortized over 2 to 10 years and trade names are amortized over 10 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. - 36 ---------------------------------------------------------------------------------Restructuring and Impairment Charges Restructuring charges are primarily comprised of severance costs, activity termination costs and costs of facility closure. Restructuring charges are recorded upon approval of a formal management plan and are included in the operating results of the period in which such plan is approved and the expense becomes estimable. To estimate restructuring charges, management utilizes assumptions such as the number of employees that would be involuntarily terminated and the future costs to operate and eventually terminate the subject activity. Research and Development Research and development costs consist primarily of 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 We measure the compensation cost of employee 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. See Note 10 of the accompanying Consolidated Financial Statements 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 14 of the accompanying Consolidated Financial Statements for details relative 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. 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, we do not record tax provisions or benefits for the net changes in the foreign currency translation adjustment, as we intend to indefinitely reinvest undistributed earnings of our foreign subsidiary. Accumulated other comprehensive income (loss) is reported as a component of stockholders' equity and, as of December 31, 2013 and 2012, was comprised solely of cumulative translation adjustments. Segment Information Operating segments, as defined under U.S. GAAP, 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 reportable operating segment, the results of which are disclosed in Note 13 of the accompanying Consolidated Financial Statements. - 37 - --------------------------------------------------------------------------------Results of Operations Year ended December 31, 2013 compared to year ended December 31, 2012 Statement of Operations Detail Year Ended December 31, 2013 2012 Inc/(Dec) Inc/(Dec) Product revenue $ 71,773,730 $ 68,010,169 $ 3,763,561 6 % Licensing, milestone and contract revenue 3,307,424 3,348,336 (40,912 ) (1 %) Total revenue 75,081,154 71,358,505 3,722,649 5 % Operating expenses: Cost of product revenue 22,765,404 28,988,621 (6,223,217 ) (21 %) Research & development 7,059,875 5,388,036 1,671,839 31 % Selling, general & administrative 12,936,001 14,728,662 (1,792,661 ) (12 %) Restructuring charges (286,843 ) 2,537,988 (2,824,831 ) - Total operating expenses 42,474,437 51,643,307 (9,168,870 ) (18 %) Income from operations 32,606,717 19,715,198 12,891,519 65 % Interest income (expense), net (127,186 ) (187,777 ) 60,591 (32 %) Income before income taxes 32,479,531 19,527,421 12,952,110 66 % Provision for income taxes 11,905,010 7,769,961 4,135,049 53 % Net income $ 20,574,521 $ 11,757,460 $ 8,817,061 75 % Product gross profit $ 49,008,326 $ 39,021,548 $ 9,986,778 26 % Product gross margin 68 % 57 % Total Revenue. Total revenue for the year ended December 31, 2013 increased by $3,722,649 to $75,081,154. The increase in total revenue was primarily due to increased orthobiologics product revenue in 2013 as compared to 2012. Product revenue by product line. Product revenue for the year ended December 31, 2013 was $71,773,730, an increase of $3,763,561, or 6%, compared to the prior year. Year Ended December 31, 2013 2012 Inc/(Dec) Inc/(Dec) Orthobiologics $ 55,956,068 $ 49,954,112 $ 6,001,956 12 % Dermal 1,816,602 1,384,403 432,199 31 % Surgical 5,445,715 5,022,456 423,259 8 % Ophthalmic 4,656,560 8,784,011 (4,127,451 ) (47 %) Veterinary 3,898,785 2,865,187 1,033,598 36 % $ 71,773,730 $ 68,010,169 $ 3,763,561 6 % Revenue from orthobiologics increased $6,001,956, or 12%, in 2013 compared to 2012. The improvement in orthobiologics product revenue was due primarily to increases in domestic and international ORTHOVISC sales. Our U.S. ORTHOVISC product revenue for 2013 increased 9% compared to 2012. This increase reflects Mitek's continued market penetration. International viscosupplementation product revenue in 2013 increased 34% compared to 2012. The increase in international revenue was driven primarily by growth from existing partners, as well as geographic expansion. We expect orthobiologics revenue will continue to increase in 2014, both domestically and internationally. Dermal revenue increased $432,199, or 31%, in 2013 compared to 2012. The increase was primarily due to Anika S.r.l.'s advanced wound care products revenue which totaled $1,647,396 in 2013, as compared to $976,388 in 2012. This increase was driven by expansion of advanced wound care revenue from existing distributors as well as product launches in South America. We expect advanced wound care revenue to increase in 2014 compared to 2013 primarily due to geographic expansion. Sales of our surgical products increased $423,259, or 8%, as compared to 2012. This product group consists primarily of Anika S.r.l.'s Hyalobarrier anti-adhesion and ENT products. Our anti-adhesion products include INCERT and Hyalobarrier. Our leading ear, nose and throat care product is Merogel. Anika S.r.l. is partnered with Medtronic for distribution of its ENT products. We expect surgical product revenue to increase in 2014 compared to 2013. - 38 - -------------------------------------------------------------------------------- Revenue from ophthalmic products in 2013 decreased $4,127,451, or 47%, compared to revenue for these products in 2012. The decrease was primarily attributable to B&L's plan to shift manufacturing to an alternative supplier. B&L accounted for 5% of product revenue for the year ended 2013, and is expected to be lower in 2014 due to the lower minimum purchase requirements under the current three year contract. Operating margins under the expired 2004 B&L Agreement were low, and remain at a similar level under the current contract. Veterinary revenue increased $1,033,598, or 36%, in 2013 as compared to 2012. Sales of HYVISC are made to a single customer under an exclusive agreement which expires December 31, 2014. We expect HYVISC revenue to be at a similar level in 2014 as compared to 2013. Licensing, milestone and contract revenue. Licensing, milestone and contract revenue for the year ended December 31, 2013 was $3,307,424, compared to $3,348,336 for 2012. Licensing and milestone revenue includes the ratable recognition of the $27,000,000 in up-front and milestone payments related to the JNJ Agreement. These amounts are being recognized in income ratably over the ten-year initial term of the agreement, or $2,700,000 per year. The year 2013 was the last year for the recognition of these milestone payments related to ORTHOVISC under the initial term of the agreement. In November 2012, Mitek exercised its option and extended the JNJ Agreement for an additional five years through December 2018. In December 2011, the Company entered into a fifteen-year licensing and supply agreement with Mitek, Inc. to market MONOVISC in the U.S. The Company received an initial payment of $2,500,000 in December 2011, which is also being recognized ratably over the life of the underlying agreement of fifteen years. The Company received FDA PMA approval for MONOVISC in February 2014, and is entitled to receive additional payments from Mitek, following FDA approval and commercial launch of the product, as well as payments related to future regulatory, clinical and sales milestones. Product gross profit and margin. Product gross profit for the year ended December 31, 2013 was $49,008,326, or 68% of product revenue, compared with $39,021,548, or 57% of product revenue, for the year ended December 31, 2012. The increase in product gross profit was primarily due to the elimination of duplicate manufacturing facility costs for a full year in 2013, improved manufacturing efficiencies, as well as improvements in overall product sales mix, compared to the prior year, with increasing sales of our higher-margin orthobiologics products as a percent of our total product sales being the primary driver. Research and development. Research and development ("R&D") expenses for the year ended December 31, 2013 increased by $1,671,839, or 31%, as compared to the prior year, due to the timing of the start of certain clinical trials. R&D as a percentage of revenue was 9% and 8% for the years ended 2013 and 2012, respectively. We expect research and development expenses will increase in 2014 and thereafter compared to 2013 with our continued efforts for CINGAL, the development efforts for tissue regenerative products, line extension products, new products, and early-stage development projects. Selling, general and administrative. Selling, general and administrative expenses for the year ended December 31, 2013 decreased by $1,792,661, or 12%, as compared to 2012. This decrease was primarily due to a legal dispute settlement payment received in 2013, as well as on-going cost saving initiatives. We expect general and administrative expenses for 2014 will increase reflective of the support required to grow our business both domestically and internationally. Restructuring charges. On December 28, 2012 the Company announced a strategic shift involving the closure of its tissue engineering facility in Abano Terme, Italy due to the inability to meet strict regulatory standards, established by the EMA, which became effective January 1, 2013. As a result of the plan, the Company recorded restructuring and associated impairment charges in the fourth quarter 2012 of approximately $2.5 million. Of the total restructuring and associated impairment charges, approximately $1.6 million related to the abandonment and noncash impairment of assets. The remaining $0.9 million related to cash payments anticipated to occur in 2013, primarily for employee termination costs. The restructuring plan was completed in 2013, with a $286,843 benefit to the statement of operations for the year ended December 31, 2013, based on actual expenses and payment settlements. Interest income (expense), net. Net interest expense was $127,186 for the year ended December 31, 2013, as compared to $187,777 in the same period ended 2012. The decrease is the result of the lower balance on our outstanding variable interest rate debt during 2013. On November 29, 2013, the Company terminated the Credit Agreement entered into on January 31, 2008 among the Company, as borrower, Anika Securities, Inc., a wholly owned subsidiary of the Company, as guarantor, each of the lenders from time to time party thereto, and Bank of America, N.A., as administrative agent. In connection with the termination, the Company pre-paid in full its entire outstanding debt under the Agreement plus accrued interest. The outstanding debt balance of $8,400,000 was pre-paid and we did not incur any pre-payment penalties. - 39 - -------------------------------------------------------------------------------- Income taxes. Provisions for income taxes were $11,905,010 and $7,769,961 for the years ended December 31, 2013 and 2012, respectively. The decrease in the effective tax rate in 2013 of 3.1%, as compared to 2012, is primarily due to increased R&D tax credits, increased deductible stock option expenses resulting from increased exercise activity, and a favorable foreign tax rate differential. A reconciliation of the U.S. federal statutory tax rate to the effective tax rate for the periods ending December 31 is as follows: Year ended December 31, 2013 2012 Statutory federal income tax rate 35.0 % 35.0 % State tax expense, net of federal benefit 4.8 % 6.4 % Permanent items, including nondeductible expenses (0.2 %) 0.9 % State investment tax credit (0.1 %) (0.2 %) Federal, state and foreign research and development credits (0.5 %) (1.2 %) Foreign rate differential 0.1 % 2.5 % Domestic production deduction (2.4 %) (3.6 %) Effective income tax rate 36.7 % 39.8 % As of December 31, 2013, the Company had net operating losses ("NOL") for federal income tax purposes in Italy of $9,353,750 with no expiration date. In connection with the preparation of the financial statements, the Company performed an analysis to ascertain if it was more likely than not that it would be able to utilize, in future periods, the net deferred tax assets associated with its NOL carry-forward. We have concluded that the positive evidence outweighs the negative evidence and, thus, that the deferred tax asset 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, 2013, and 2012, respectively. The 2010 through 2013 tax years remain subject to examination by the Internal Revenue Service ("IRS") and other taxing authorities for U.S. federal and state purposes. The 2009 through 2013 tax years remain subject to examination by the applicable governmental authorities in Italy. Net income. For the year ended December 31, 2013, net income was $20,574,521, or $1.39 per diluted share, compared to $11,757,460, or $0.82 per diluted share, for the same period last year. The primary drivers for this increase in net income were an increase in product gross profit due to improvements in operating efficiencies and streamlining of manufacturing operations with the consolidation into one facility, a more favorable product mix, and lower general and administrative expenses. - 40 - --------------------------------------------------------------------------------Year ended December 31, 2012 compared to year ended December 31, 2011 Statement of Operations Detail Year Ended December 31, 2012 2011 Inc/(Dec) Inc/(Dec) Product revenue $ 68,010,169 $ 61,956,386 $ 6,053,783 10 % Licensing, milestone and contract revenue 3,348,336 2,822,249 526,087 19 % Total revenue 71,358,505 64,778,635 6,579,870 10 % Operating expenses: Cost of product revenue 28,988,621 26,783,738 2,204,883 8 % Research & development 5,388,036 6,168,937 (780,901 ) (13 %) Selling, general & administrative 14,728,662 17,858,558 (3,129,896 ) (18 %) Restructuring charges 2,537,988 - 2,537,988 - Total operating expenses 51,643,307 50,811,233 832,074 2 % Income from operations 19,715,198 13,967,402 5,747,796 41 % Interest income (expense), net (187,777 ) (182,388 ) (5,389 ) 3 % Income before income taxes 19,527,421 13,785,014 5,742,407 42 % Provision for income taxes 7,769,961 5,318,334 2,451,627 46 % Net income $ 11,757,460 $ 8,466,680 $ 3,290,780 39 % Product gross profit $ 39,021,548 $ 35,172,648 $ 3,848,900 11 % Product gross margin 57 % 57 % Total Revenue. Total revenue for the year ended December 31, 2012 increased by $6,579,870 to $71,358,505. The increase in total revenue was primarily due to increased orthobiologics product revenue in 2012 as compared to 2011. Product revenue by product line. Product revenue for the year ended December 31, 2012 was $68,010,169, an increase of $6,053,783, or 10%, compared to the prior year. Year Ended December 31, 2012 2011 Inc/(Dec) Inc/(Dec) Orthobiologics $ 49,954,112 $ 39,858,139 $ 10,095,973 25 % Dermal 1,384,403 3,681,166 (2,296,763 ) (62 %) Surgical 5,022,456 4,976,261 46,195 1 % Ophthalmic 8,784,011 10,963,822 (2,179,811 ) (20 %) Veterinary 2,865,187 2,476,998 388,189 16 % $ 68,010,169 $ 61,956,386 $ 6,053,783 10 % Revenue from orthobiologics increased $10,095,973, or 25%, in 2012 compared to 2011. The improvement in orthobiologics product revenue was due primarily an increase in domestic ORTHOVISC sales, offset by decreases in Anika S.r.l.'s orthopedic revenue which was down in all geographic regions. Our U.S. orthobiologics product revenue for 2012 increased 42% compared to 2011. This increase reflected Mitek's continued market penetration to an estimated market share of 15% in 2012 versus 14% share in 2011. International orthobiologics product revenue in 2012 decreased 21% compared to 2011. The decrease in international revenue was driven primarily by the continued economic stagnation being experienced throughout Europe. Dermal revenue decreased $2,296,763, or 62%, in 2012 compared to 2011. The decrease was primarily due to Anika S.r.l.'s advanced wound care products revenue which totaled $976,388 in 2012, as compared to $3,331,618 in 2011, due to continued economic challenges faced in the Italian market as well as the impact of changing to a distributor-based sales model in 2012 in Italy, combined with the poor performance of Anika S.r.l.'s distributor in the U.S. territory. Aesthetic dermatology revenue was $408,015 for the year ended December 31, 2012, versus $369,548 for the prior year. Sales of our surgical products increased $46,195, or 1%, as compared to 2011. This product group consists primarily of Anika S.r.l.'s Hyalobarrier anti-adhesion and ENT products. Our anti-adhesion products include INCERT and Hyalobarrier. Our leading ear, nose and throat care product is Merogel. Anika S.r.l. is partnered with Medtronic for worldwide distribution (except for Italy) of its ENT products. - 41 --------------------------------------------------------------------------------- Revenue from ophthalmic products in 2012 decreased $2,179,811, or 20%, compared to revenue for these products in 2011. The decrease was primarily attributable to B&L's plan to shift manufacturing to an alternative supplier. B&L accounted for 11% of product revenue for the year ended 2012. Veterinary revenue increased $388,189, or 16%, in 2012 as compared to 2011. Sales of HYVISC are made to a single customer under an exclusive agreement which expires December 31, 2014. Licensing, milestone and contract revenue. Licensing, milestone and contract revenue for the year ended December 31, 2012 was $3,348,336, compared to $2,822,249 for 2011. Licensing and milestone revenue includes the ratable recognition of the $27,000,000 in up-front and milestone payments related to the JNJ Agreement. These amounts are being recognized in income ratably over the ten-year initial term of the agreement, or $2,700,000 per year. The year 2013 is the last year for the recognition of these milestone payments. In November 2012, Mitek exercised its option and extended the JNJ Agreement for an additional five years through December 2018. In December 2011, the Company entered into a fifteen-year licensing and supply agreement with Mitek, Inc. to market MONOVISC in the U.S. The Company received an initial payment of $2,500,000 in December 2011, which is also being recognized ratably over the life of the underlying agreement of fifteen years. The Company is entitled to receive additional payments from Mitek, following FDA approval and commercial launch of the product, as well as payments related to future regulatory, clinical and sales milestones. Product gross profit and margin. Product gross profit for the year ended December 31, 2012 was $39,021,548, or 57.4% of product revenue, compared with $35,172,648, or 56.8% of product revenue, for the year ended December 31, 2011. The increase in product gross profit was primarily due to improvements in Anika's overall product sales mix, as compared to the prior year, with increasing sales of our higher-margin orthobiologics products as a percent of our overall product sales being the primary driver, as well as the realization of operational efficiencies from our new manufacturing facility after consolidation of sites. The positive effect of the improved product sales mix was partially offset by the negative impact of a previously disclosed temporary scale-up issue experienced as we consolidated all of our manufacturing activities into our Bedford facility from our now-closed Woburn facility. Anika S.r.l. outsourced manufacturing of its medical devices to its former parent company, Fidia Farmaceutici, contributing to its then current lower gross margins. The Company continued to make progress on its plan to transfer a significant portion of Anika S.r.l.'s medical device product manufacturing to our Bedford facility and successfully began manufacturing ACP gel products there during the fourth quarter of 2012. Research and development. R&D expenses for the year ended December 31, 2012 decreased by $780,901, or 13%, as compared to the prior year, due to the timing of the start of certain clinical trials. R&D as a percentage of revenue was 8% and 10% for the years ended 2012 and 2011, respectively. Selling, general and administrative. Selling, general and administrative expenses for the year ended December 31, 2012 decreased by $3,129,896, or 18%, as compared to 2011. This decrease was primarily due to valuation gains associated with the re-measurement of euro-based assets into U.S. dollars as the Dollar weakened during 2012, as compared to 2011, combined with the placing in service the remainder of the Bedford facility, and lower legal and professional fees, offset by exit costs associated with the closing of our Woburn facility. Restructuring charges. On December 28, 2012 the Company announced the closure of its tissue engineering facility in Abano Terme, Italy due to the inability to meet strict regulatory standards, established by the EMA, which became effective January 1, 2013. As a result of the plan, the Company recorded restructuring and associated impairment charges in the fourth quarter of approximately $2.5 million. Of the total restructuring and associated impairment charges, approximately $1.6 million related to the abandonment and noncash impairment of assets. The remaining $0.9 million relates to cash payments anticipated to occur in 2013, primarily for employee termination costs. Interest income (expense), net. Net interest expense was $187,777 for the year ended December 31, 2012, as compared to $182,388 in the same period ended 2011. The modest increase was the result of increased rates on our outstanding variable interest rate debt. Income taxes. Provisions for income taxes were $7,769,961 and $5,318,334 for the years ended December 31, 2012 and 2011, respectively. The increase in effective tax rate in 2012 of 1.2%, as compared to 2011, was primarily due to an increase in the federal statutory tax rate and the accompanying foreign rate differential, partially offset by increased domestic production deductions all resulting from increased domestic taxable income. - 42 - --------------------------------------------------------------------------------A reconciliation of the U.S. federal statutory tax rate to the effective tax rate for the periods ending December 31 is as follows: Year ended December 31, 2012 2011 Statutory federal income tax rate 35.0 % 34.0 % State tax expense, net of federal benefit 6.4 % 5.7 % Permanent items, including nondeductible expenses 0.9 % 0.9 % State investment tax credit (0.2 %) (0.2 %) Federal, state and foreign research and development credits (1.2 %) (0.4 %) Foreign rate differential 2.5 % 0.9 % Domestic production deduction (3.6 %) (2.3 %) Effective income tax rate 39.8 % 38.6 % As of December 31, 2012, the Company had NOL's for federal income tax purposes in Italy of $9,144,154 with no expiration date. For Massachusetts state income tax purposes, the Company also had an investment tax credit carry-forward of $298,769 expiring through 2021. In connection with the preparation of the financial statements, the Company performed an analysis to ascertain if it was more likely than not that it would be able to utilize, in future periods, the net deferred tax assets associated with its NOL carry-forward and its investment tax credit carry-forward. We concluded that the positive evidence outweighs the negative evidence and, thus, that those deferred tax assets not otherwise subject to a valuation allowance are realizable on a "more likely than not" basis. As such, we did not record a valuation allowance at December 31, 2012, and 2011, respectively. The 2010 through 2012 tax years remain subject to examination by the IRS and other taxing authorities for U.S. federal and state purposes. The 2009 through 2012 tax years remain subject to examination by the applicable governmental authorities in Italy. Net income. For the year ended December 31, 2012, net income was $11,757,460, or $0.82 per diluted share, compared to $8,466,680, or $0.62 per diluted share, for the same period last year. The primary drivers behind this increase in net income were an increase in product sales with a more favorable product mix, lower clinical spending due to timing of clinical trial efforts, and lower legal and professional fees. These items were partially offset by the fourth quarter 2012 restructuring charge and an increase in our effective tax rate. 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 and investments and debt, have met our cash requirements. Cash and cash equivalents totaled $63.3 million and $44.1 million, and working capital totaled approximately $85.3 million and $62.9 million, at December 31, 2013 and December 31, 2012, respectively. The Company believes it has adequate financial resources to support its business for at least the next twelve months. Cash provided by operating activities was $25,165,001, $10,548,677 and $10,173,134 for 2013, 2012, and 2011, respectively. Cash provided by operating activities increased by $14,616,324 in 2013, as compared to the same period ended 2012. The increase was primarily attributable to increased net income in the current year combined with improvements in accounts receivable collections and the positive effect of deferred income taxes. These were partially offset by the building of inventories to meet anticipated demand. Cash used in investing activities was $253,155, $1,504,707 and $1,400,348 in 2013, 2012 and 2011, respectively. The decrease in cash used in investing activities in 2013, as compared to the same period in the prior year, is a result of fewer capital purchases associated with our Bedford facility during the current year. Cash used in financing activities was $5,689,229, $758,854, and $1,165,340 for 2013, 2012, and 2011, respectively. Cash used in financing activities for 2013 of $9.6 million was due to the pre-payment of long-term debt of $8.4 million in November 2013, and quarterly payment of principle of $0.4 million in each of the first three quarters of 2013. This cash decrease is partially offset by $3.1 million of proceeds from exercises of stock options. - 43 - --------------------------------------------------------------------------------Concentration of Risk A portion of the Company's accounts receivable arising from product sales within Italy by Anika S.r.l. are due from public hospitals and other government-funded healthcare agencies. As of December 31, 2013, the Company's accounts receivable from all Italian customers totaled approximately $1.2 million of which public hospital and agency receivables were approximately $0.2 million. The history with our Italian customers has been such that many of the public healthcare providers funded by the Italian government have been slow to pay with several maintaining outstanding balances over one year past due. The Company continuously evaluates these accounts receivables for potential risks associated with, among other things, governmental funding and reimbursement practices. We have established an allowance against the gross value of these trade receivables based upon specifically identifiable risks and other currently available information. For customers where payment is expected over periods of time longer than one year, revenue and trade receivables have been discounted over the estimated period of time for collection. Allowances for doubtful accounts have been increased for these customers, but have been immaterial to date. The Company will continue to work closely with these customers, monitor the economic situation and take appropriate actions as necessary. See Note 13, Revenue by Product Group, by Significant Customer and by Geographic region; Geographic Information, in the accompanying Consolidated Financial Statements for information regarding significant customers. 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 below, 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. Recent Accounting Pronouncements In February 2013, the Financial Accounting Standards Board ("FASB") issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The provisions of ASU 2013-02 are effective for annual and interim periods beginning after December 15, 2012. The objective of this update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this update seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles to be reclassified in its entirety to net income. The adoption of this amendment did not have a material impact on our consolidated financial position, results of operations, or cash flows. In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The provisions of ASU 2013-05 are effective for annual and interim periods beginning after December 15, 2013. The objective of the amendments in this update is to resolve the diversity in practice about whether Subtopic 810-10, Consolidation-Overall, or Subtopic 830-30, Foreign Currency Matters-Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. The adoption of this amendment will not have a material impact on our consolidated financial position, results of operations, or cash flows. In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The provisions of ASU 2013-11 are effective for annual and interim periods beginning after December 15, 2013. The main provisions of ASU 2013-11 require an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for the following; a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with certain exceptions. The adoption of this amendment will not have a material impact on our consolidated financial position, results of operations, or cash flows. - 44 - --------------------------------------------------------------------------------Contractual Obligations and Other Commercial Commitments We incurred significant capital investments related to the build-out of our new facility in Bedford, Massachusetts, as well as the Anika S.r.l. acquisition. Our future capital requirements and the adequacy of available funds will depend, on numerous factors, including: · Market acceptance of our existing and future products; · The success and sales of our products under current and future distribution agreements; · The successful commercialization of products in development; · Progress in our product development efforts; · The magnitude and scope of such efforts; · Any potential acquisitions of products, technologies or businesses; · Progress with pre-clinical studies, clinical trials and product approvals and clearances by the FDA and other agencies; · The cost of maintaining adequate manufacturing capabilities; · The cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; · 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; · The cost of maintaining adequate inventory levels to meet current and future product demands; and · The successful management of Anika S.r.l. We cannot assure you that we will record profits in future periods. To the extent that 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, strategic alliances with corporate partners, or through other sources. 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. However, we believe that our existing cash and cash equivalents and future cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. See Item 1A. "Risk Factors." The terms of any future equity financings may be dilutive to our stockholders and the terms of any debt financings may contain restrictive covenants, which could 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. No assurance can be given that any additional financing may be made available to us or may be available on acceptable terms should such a need arise. The table below summarizes our non-cancelable operating leases and contractual obligations at December 31, 2013: Payments due by period Less than More than Total 1 year 2 - 3 years 4 - 5 years 5 years Operating Leases (1) $ 10,505,956 $ 1,627,388 $ 3,211,485 $ 1,943,000 $ 3,724,083 Purchase Commitments 5,169,047 5,161,476 7,571 - - Total $ 15,675,003 $ 6,788,864 $ 3,219,056 $ 1,943,000 $ 3,724,083 - 45 --------------------------------------------------------------------------------- (1) Included in this line is a lease we entered into on January 4, 2007, pursuant to which we lease our Corporate Headquarters facility, The Facility consists of approximately 134,000 square feet of general office, R&D and manufacturing space located in Bedford, Massachusetts. The Lease has an initial term of ten and one-half years, and commenced on May 1, 2007. We have an option under the Lease to extend its terms for up to four periods beyond the original expiration date subject to the condition that we notify the landlord that we are exercising each option at least one year prior to the expiration of the original or current term thereof. The first three renewal options each extend the term an additional five years with the final renewal option extending the term six years. Our administrative and R&D personnel began occupying the Bedford facility in November of 2007. The Bedford facility was fully validated and approved by applicable regulatory authorities in 2012. We completed the manufacturing space consolidation and moved all domestic operations into the Bedford facility during the second quarter of 2012. Also included in the table above is the lease entered into in Italy related to Anika S.r.l. The lease for our Italian facility commenced on December 30, 2009 for a period of six years. |