The
Company recorded $252,433 and $707,389 of share-based compensation expense for
the three and nine months ended September 30, 2009, respectively, for equity
compensation awards. The Company recorded $368,105 and $1,072,538 of
share-based compensation expense for the three and nine months ended September
30, 2008, respectively, for equity compensation awards. The Company
presents the expenses related to stock-based compensation awards in the same
expense line items as cash compensation paid to the same employees.
Stock
Option Plan
On May 29,
2009, the Board of Directors approved the Company's Amended and Restated 2003
Stock Option and Incentive Plan, the (“2003 Plan”), to increase the number of
shares subject to the 2003 Plan by 850,000. The amendment and restatement of the
2003 plan was approved by the Company’s shareholders on June 5,
2009. This resulted in a total of 2,350,000 shares of common stock
being reserved for issuance under the 2003 Plan. The Company issues new shares
upon share option exercises from its authorized shares. Stock-based awards are
granted with an exercise price equal to the market price of the Company’s stock
on the date of grant. The Company’s stock-based awards contain service or
performance conditions. Awards generally vest annually over 3 to 4
years. Awards have 10-year contractual terms.
The
Company reports earnings per share in accordance with Accounting Standards
Codification 260, Earnings Per
Share (ASC 260), (formerly SFAS No. 128, Earnings per Share), which establishes standards
for computing and presenting earnings per share. Basic earnings per share is
computed by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
and the number of dilutive potential common share equivalents during the period.
Under the treasury stock method, unexercised “in-the-money” stock options are
assumed to be exercised at the beginning of the period or at issuance, if later.
The assumed proceeds are then used to purchase common shares at the average
market price during the period.
Effective
January 1, 2009, the Company adopted Accounting Standards Codification
260-10, Earnings Per
Share (ASC 260-10), (formerly FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities). ASC 260-10 clarifies that share-based payment awards that
entitle their holders to receive non-forfeitable dividends before vesting should
be considered participating securities. As participating securities, these
instruments are included in the calculation of basic and diluted earnings per
share. Adoption of this pronouncement is retroactive to prior reporting
periods. Basic and diluted earnings per share for the three and nine
months ended September 30, 2009 and 2008 are as follows:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,511,925 |
|
|
$ |
1,104,203 |
|
|
$ |
2,990,419 |
|
|
$ |
2,534,690 |
|
Income
allocated to participating securities
|
|
|
(6,753 |
) |
|
|
(7,176 |
) |
|
|
(11,170 |
) |
|
|
(15,423 |
) |
Income
available to common stockholders
|
|
|
1,505,172 |
|
|
|
1,097,027 |
|
|
|
2,979,249 |
|
|
|
2,519,267 |
|
Basic
weighted average common shares outstanding
|
|
|
11,385,679 |
|
|
|
11,329,422 |
|
|
|
11,379,128 |
|
|
|
11,294,928 |
|
Basic
earnings per share
|
|
$ |
0.13 |
|
|
$ |
0.10 |
|
|
$ |
0.26 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,511,925 |
|
|
$ |
1,104,203 |
|
|
$ |
2,990,419 |
|
|
$ |
2,534,690 |
|
Income
allocated to participating securities
|
|
|
(6,647 |
) |
|
|
(7,079 |
) |
|
|
(11,021 |
) |
|
|
(15,176 |
) |
Income
available to common stockholders
|
|
|
1,505,278 |
|
|
|
1,097,124 |
|
|
|
2,979,398 |
|
|
|
2,519,514 |
|
Weighted
average common shares outstanding
|
|
|
11,385,679 |
|
|
|
11,329,422 |
|
|
|
11,379,128 |
|
|
|
11,294,928 |
|
Diluted
potential common shares
|
|
|
190,228 |
|
|
|
156,567 |
|
|
|
156,593 |
|
|
|
184,869 |
|
Diluted
weighted average common shares and potential common shares
|
|
|
11,575,907 |
|
|
|
11,485,989 |
|
|
|
11,535,721 |
|
|
|
11,479,797 |
|
Diluted
earnings per share
|
|
$ |
0.13 |
|
|
$ |
0.10 |
|
|
$ |
0.26 |
|
|
$ |
0.22 |
|
Equity
awards of 854,102 and 1,005,880 shares were outstanding for the three and nine
months ended September 30, 2009, respectively, but not included in the
computation of diluted earnings per share because the awards’ impact on earnings
per share was anti-dilutive. Equity awards of 903,208 and 677,402
shares were outstanding for the three and nine months ended September 30, 2008,
respectively, but not included in the computation of diluted earnings per share
because the awards’ impact on earnings per share was anti-dilutive.
Inventories
consist of the following:
| | September 30,
| | December 31,
| |
| | | 2009 | | | 2008 | |
Raw materials
| | $ | 2,670,826 | | $ | 2,556,588 | |
Work-in-process
| | | 3,181,543 | | | 2,354,736 | |
Finished goods
| | | 1,098,823 | | | 608,430 | |
Total
| | $ | 6,951,192 | | $ | 5,519,754 | |
Inventories
are stated at the lower of cost or market, with cost being determined using the
first-in, first-out (FIFO) method. Work-in-process and finished goods
inventories include materials, labor, and manufacturing
overhead. Inventories increased from December 31, 2008 due to the
planned inventory build up in preparation for moving some equipment to our
Bedford manufacturing facility.
|
Accrued
expenses consist of the
following:
|
|
|
September
30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Payroll
and benefits
|
|
$ |
1,480,093 |
|
|
$ |
1,380,901 |
|
Clinical
trial costs
|
|
|
863,034 |
|
|
|
285,500 |
|
Professional
fees
|
|
|
645,451 |
|
|
|
332,570 |
|
Other
|
|
|
297,264 |
|
|
|
326,248 |
|
Total
|
|
$ |
3,285,842 |
|
|
$ |
2,325,219 |
|
9.
|
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 product. The Company may also warrant that the products it
manufactures do not infringe, violate or breach any 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. Based on the Company’s historical activity in
combination with its insurance policy coverage, the Company believes the
estimated fair value of these indemnification agreements is minimal. The Company
has no accrued warranties and has no history of claims paid.
On
January 31, 2008, the Company entered into an unsecured Credit Agreement
(the “Agreement”) with Bank of America, under which the Company was provided
with a revolving credit line through December 31, 2008 of up to a maximum
principal amount at any time outstanding of $16,000,000. The Company recorded
approximately $171,000 as deferred issuance costs, which is being amortized over
the life of the long-term debt. The Company borrowed the maximum amount of
$16,000,000 in 2008 to finance its new facility construction and validation
capital project. On December 31, 2008, in accordance with the Agreement,
the outstanding revolving credit loans were converted into a term loan with
quarterly principal payments of $400,000 and a final installment of $5,200,000
due on the maturity date of December 31, 2015. Long-term debt
principal payments over the next five years are $1,600,000 per
year.
The
Company made three quarterly principal payments of $400,000 on March 31,
2009, June 30, 2009 and September 30, 2009, respectively. The
interest payable on our debt is determined, at the Company’s option, based on
either LIBOR plus 0.75% or the lender’s prime rate. As of September
30, 2009, the Company had an outstanding debt balance of $14,800,000, at an
interest rate of 1.05%. The Company capitalized interest expense of $0 and
$98,183 for the three and nine months ended September 30, 2009,
respectively, as part of construction in progress related to the Company’s new
facility build-out in accordance with ASC 835-20, Capitalization of Interest
Costs.
Income tax
expense was $460,232 and $357,751 for the three months ended September 30, 2009
and 2008, respectively. Income tax expense was $948,899 and $921,182
for the nine months ended September 30, 2009 and 2008,
respectively. The effective tax rates were 23.3% and 24.5% for the
three months ended September 30, 2009 and 2008, respectively. The
effective tax rates were 24.1% and 26.7% for the nine months ended September 30,
2009 and 2008, respectively. The decrease in effective tax rates was
primarily due to increases in research tax credits. During the first
nine months of 2009, there was no change to the Company’s ASC 740 tax
reserves. Our U.S. federal income tax returns for the years
2005, 2006, 2007, and 2008 remain subject to examination, and our state income
tax returns for the years 2006, 2007 and 2008 remain subject to
examination.
On
December 12, 2007, Colbar Lifescience Ltd. (“Colbar”), a subsidiary of
Johnson and Johnson, filed an opposition proceeding before the U.S.
Patent & Trademark Office’s Trademark Trial & Appeal Board
(“Trademark Board”), objecting to one of the Company’s applications to register
the trademark ELEVESS, alleging that the mark is confusingly similar to Colbar’s
previous mark EVOLENCE. The only potential relief available in this proceeding
is the denial of the Company’s trademark application; no damages or injunctive
relief are possible. In October 2008, Colbar filed a petition with the
Trademark Board requesting cancellation of the Company’s second ELEVESS
trademark that had been registered in September 2008. The Company believes
Colbar’s claim and petition are without merit, and has denied all substantive
allegations in the notice of opposition, and the parties are exploring
settlement possibilities. As of September 30, 2009, the carrying value of
the intangible asset related to ELEVESS was $892,157 and the Company does not
believe any impairment of the asset has occurred. Please also refer
to Note 3 under “Long-lived Assets” for more discussions on the ELEVESS trade
name intangible asset.
ITEM
2.
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This
Quarterly Report on Form 10-Q 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, including statements
regarding:
|
·
|
our
future sales and product revenues, including geographic expansions,
possible retroactive price adjustments, and expectations of unit volumes
or other offsets to price
reductions;
|
|
·
|
our
manufacturing capacity and efficiency gains and work-in-process
manufacturing operations;
|
|
·
|
the
timing, scope and rate of patient enrollment for clinical
trials;
|
|
·
|
the
development of possible new
products;
|
|
·
|
our
ability to achieve or maintain compliance with laws and
regulations;
|
|
·
|
the
timing of and/or receipt of the Food and Drug Administration (“FDA”),
foreign or other regulatory approvals and/or reimbursement approvals of
current, new or potential products, and any limitations on such
approvals;
|
|
·
|
negotiations
with potential and existing partners, including our performance under any
of our existing and future distribution or supply agreements or our
expectations with respect to sales and sales threshold milestones pursuant
to such agreements;
|
|
·
|
the
level of our revenue or sales in particular geographic areas and/or for
particular products, and the market share for any of our
products;
|
|
·
|
our
current strategy, including our corporate objectives and research and
development and collaboration
opportunities;
|
|
·
|
our
and Bausch & Lomb’s performance under the existing supply
agreement for certain of our ophthalmic viscoelastic products, our ability
to remain the exclusive global supplier for AMVISC and AMVISC Plus to
Bausch & Lomb, and our expectations regarding revenue from
ophthalmic products;
|
|
·
|
our
ability, and the ability of our distribution partner, to market our
aesthetic dermatology product;
|
|
·
|
our
expectations regarding our joint health products, including expectations
regarding new products, expanded uses of existing products, new
distribution and revenue growth;
|
|
·
|
our
intention to increase market share for joint health products in
international and domestic markets or otherwise penetrate growing markets
for osteoarthritis of the knee and other
joints;
|
|
·
|
our
expectations regarding next generation osteoarthritis/joint health product
developments, clinical trials, regulatory approvals, and commercial
launches;
|
|
·
|
our
expectations regarding HYVISC
sales;
|
|
·
|
our
expectations regarding the development and commercialization of INCERT,
and the market potential for
INCERT;
|
|
·
|
our
expectations regarding HYDRELLE product sales in the
U.S.;
|
|
·
|
our
ability to license our aesthetics product to new distribution partners
outside of the United States;
|
|
·
|
our
expectations regarding product gross
margin;
|
|
·
|
our
expectations regarding next generation osteoarthritis/joint health product
developments, clinical trials, regulatory approvals, and commercial
launches;
|
|
·
|
our
expectations regarding our U.S. MONOVISC trials and the timing of the
related premarket approval (“PMA”) filing with the
FDA;
|
|
·
|
our
expectations regarding the commencement of our clinical trial for CINGAL
and our ability to obtain regulatory approvals for
CINGAL;
|
|
·
|
our
expectations regarding our existing aesthetics product’s line
extensions;
|
|
|
our
expectation for increases in operating expenses, including research and
development and selling, general and administrative
expenses;
|
|
·
|
the
rate at which we use cash, the amounts used and generated by operations,
and our expectation regarding the adequacy of such
cash;
|
|
·
|
our
expectation for capital expenditures spending and decline in interest
income;
|
|
·
|
possible
negotiations or re-negotiations with existing or new distribution or
collaboration partners;
|
|
·
|
our
expectations regarding our existing manufacturing facility and the
Bedford, MA facility, our expectations related to costs, including
financing costs, to build-out and occupy the new facility, the timing of
construction, and our ability to obtain FDA licensure for the
facility;
|
|
·
|
our
abilities to comply with debt
covenants;
|
|
·
|
our
ability to obtain additional funds through equity or debt financings,
strategic alliances with corporate partners and other sources, to the
extent our current sources of funds are
insufficient;
|
|
·
|
our
plans to address the FDA’s Warning Letter and Form 483 Notice of
Observations and the impact any associated regulatory action would have on
our business and operations; and
|
|
·
|
our
abilities to successfully defend our ELEVESS
trademark.
|
Furthermore,
additional statements identified by words such 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 which do not relate to historical
matters, also identify forward-looking statements. You should not rely on
forward looking statements because they involve known and unknown risks,
uncertainties and other factors, some of which are beyond our control, including
those factors described in the section titled “Item 1A. Risk Factors” in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
These risks, uncertainties and other factors may cause our actual results,
performance or achievement to be materially different from anticipated future
results, performance or achievement, expressed or implied by the forward-looking
statements. These forward- looking statements are based upon the current
assumptions of our management and are only expectations of future results. You
should carefully review all of these factors, and you should be aware that there
may be other factors that could cause these differences, including those factors
discussed herein and in the “Management’s Discussions and Analysis of Financial
Condition and Results of Operations” section of this Quarterly Report on
Form 10-Q, as well as the risk factors described in our Annual Report on
Form 10-K for the year ended December 31, 2008 and in our press
releases and other filings with the Securities and Exchange Commission. We
undertake no obligation to publicly update or revise any forward-looking
statement to reflect changes in underlying assumptions or factors of new
information, future events or other changes.
Management
Overview
Anika
Therapeutics, Inc. (“Anika,” the “Company,” “we,” “us,” or “our”) was
incorporated in 1992 as a Massachusetts company. Anika 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. Our currently manufactured and
marketed products consist of ORTHOVISC®, which is an HA product used in
the treatment of some forms of osteoarthritis in humans; AMVISC®, AMVISC® Plus, STAARVISC™-II, and
ShellGel™, each an injectable ophthalmic viscoelastic HA product. HYVISC®, which is an HA product used in
the treatment of equine osteoarthritis, INCERT®, an HA based anti-adhesive for
surgical applications, ORTHOVISC® mini, a treatment for
osteoarthritis targeting small joints available in Europe, and MONOVISC™, a
single-injection osteoarthritis product based on our proprietary cross-linking
technology and available in Europe, Turkey, and Canada. In the U.S. and several
countries in Latin America, ORTHOVISC is marketed by DePuy Mitek, Inc.
(“DePuy Mitek”), a subsidiary of Johnson & Johnson (collectively,
“JNJ”), under the terms of a licensing, distribution, supply and marketing
agreement. Outside the U.S., ORTHOVISC has been approved for sale since 1996 and
is marketed by distributors in approximately 20 countries. We developed and
manufacture AMVISC® and
AMVISC® Plus for
Bausch & Lomb Incorporated under a multiyear supply agreement. We also
produce STAARVISC™-II, which is distributed by STAAR Surgical
Company and Shellgel™ for Hoya Surgical Optics, Inc. HYVISC® is marketed in the U.S. through
Boehringer Ingelheim Vetmedica, Inc. INCERT® is currently marketed in three
countries outside of the U.S. Our aesthetic dermatology business is designed to
have a family of products for facial wrinkles and scar
remediation. Our initial aesthetic dermatology product is approved in
the U.S., EU, Canada and certain countries in South America. This product is
marketed in the U.S. by Coapt Systems, Inc. (“Coapt”) under the name of
HYDRELLE™. Internationally, this product is marketed under the
ELEVESS™ name. Products in development include a next generation
HYDRELLE/ELEVESS™ line extension, and joint health related
products.
Osteoarthritis
Business
Our joint
health products include ORTHOVISC, ORTHOVISC mini, and
MONOVISC. ORTHOVISC mini, and MONOVISC are our
two newest joint health products and became available during the second quarter
of 2008. Our revenue from joint health products has increased 31.2%
and 24.3% for the three and nine months ended September 30, 2009 compared with
the same periods in 2008. This increase is reflective of our
continued focus in this therapeutic area, an area with favorable demographics of
an aging population looking to remain active. Our strategy is to continue to add
new products, to expand the indications for usage of the products, and to add
additional countries to our distribution network. The joint health area has been
the fastest growing area for the Company, growing from 39% of our product
revenue in 2005 to 62% of our product revenue for the first nine months of this
year. We continue to seek new distribution partnerships around the
world and we expect total joint health product sales to increase in 2009
compared to 2008.
Ophthalmic
Business
Our
ophthalmic business includes HA viscoelastic products used in ophthalmic
surgery. For the three and nine months ended September 30, 2009,
sales of ophthalmic products contributed 26.8% and 28.6% of our product revenue,
respectively. Ophthalmic sales were relatively flat for the three
month period in 2009 compared to the same period in 2008. Ophthalmic
sales decreased by 5.5% for the nine month period in 2009 compared to the same
period in 2008. The decrease in sales for the nine month period was
primarily due to order timing and inventory management by our
partners. Sales to Bausch & Lomb accounted for 94.0% and
94.5% of ophthalmic sales for the three and nine months ended September 30,
2009, respectively, and contributed 25.2% and 27.0% of product revenue for the
same periods.
Veterinary
Business
Sales of
HYVISC, our veterinary product for the treatment of equine osteoarthritis,
contributed 5.8% and 6.7% of our product revenue for the three and nine months
ended September 30, 2009, respectively, and decreased by 17.2% and 24.5%
compared to the same periods in 2008. We believe the decrease for
these periods was primarily due to inventory management by our partner,
Boehringer Ingelheim Vetmedica. We expect HYVISC sales in 2009 will
be lower than in 2008.
Anti-adhesion
Business
INCERT,
approved for sale in Europe and Turkey, is designed as a family of HA based
products, with chemically modified, cross-linked HA, for prevention of
post-surgical adhesions. We commenced INCERT sales during the second
quarter of 2006. INCERT is currently marketed in three countries. We
see potential for expanded indications for the use of INCERT, but have made this
a secondary goal to the successful launch and expanded distribution of our joint
health and aesthetic products. There are currently no plans at this time to
distribute INCERT in the U.S.
Aesthetic
Dermatology Business
Our
aesthetic dermatology business is designed to have a family of products for
facial wrinkles and scar remediation, and is intended to compete with
collagen-based and other HA-based products currently on the market. 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. and certain countries in South America. This product is marketed in the
U.S. by Coapt under the name of HYDRELLE™. Our distribution agreement
with Coapt was signed in May 2009. Coapt began selling the product in
the third quarter of 2009. Internationally the product is marketed
under the ELEVESS™ name. We continue to focus on the development and
expansion of the product in additional countries.
Products
in development include MONOVISC for U.S. marketing approval, and additional next
generation joint health related products. Our first next generation
osteoarthritis product is MONOVISC, a single-injection treatment product that
uses a non-animal source HA, and is our first osteoarthritis product based on
our proprietary crosslinked HA-technology. We received Conformité Européene (CE)
Mark approval for the MONOVISC product in October 2007 and began sales in Europe
during the second quarter of 2008, following a small, post marketing clinical
study. In the U.S., we filed an Investigational Device Exemption, or an IDE
application, with the FDA, and completed the clinical segment of the U.S.
MONOVISC pivotal trial in June 2009, and a follow-on retreatment study in
September 2009. We are currently analyzing the data and expect to complete a PMA
filing with the FDA before the end of 2009. Our second single-injection
osteoarthritis product under development is CINGAL, which is based on the same
technology platform used in MONOVISC, with an added active therapeutic molecule
to provide broad pain relief for a long period of time.
FDA
Warning Letter
In July
2008, we received a Warning Letter (the “Warning Letter”) from the FDA in
response to an earlier FDA Form 483 Notice of Observations issued to us
following an inspection at our current manufacturing facility in Woburn,
Massachusetts. We have fully cooperated with the FDA to address the issues in
the Form 483 filing and have issued a response to the FDA’s Warning Letter.
We have developed a corrective action plan and we have provided the FDA with
progress reports. On September 15, 2008, the FDA issued a letter to us
indicating that the responses submitted by us were sufficient. The
FDA did conduct an initial follow up inspection of the Company’s Woburn facility
and discussions are ongoing to address all issues and clear the Warning Letter
as rapidly as possible. We expect to have an additional inspection of
the Woburn facility in the near future. Product quality is the highest concern
to us and we are committed to the continual improvement of our quality
systems. Failure to comply with applicable regulatory requirements
and to address the issues raised by the FDA in the Warning Letter could result
in regulatory action. Any such regulatory action would be expected to have a
material adverse effect on our business and operations.
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 financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these 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 3 to the Consolidated Financial Statements of our
Quarterly Reports on Form 10-Q for the three and nine month periods ended
September 30, 2009 and 2008, respectively, and our Annual Report on
Form 10-K for the year ended December 31, 2008.
Revenue
Recognition
The
Company’s revenue recognition policies are in accordance with Accounting
Standards Codification 605, Revenue Recognition (ASC
605), and Accounting Standards Codification 808, Collaborative Arrangements
(ASC 808), (formerly the SEC SAB No. 101, Revenue Recognition in Financial
Statements, as amended by SEC SAB No. 104, Revenue Recognition, and EITF
No. 00-21, Revenue
Arrangements with Multiple Deliverables, and EITF No. 07-1 Accounting for Collaborative
Arrangements), which became effective on January 1,
2009. Adoption of ASC 808 did not
impact our financial statements for the three and nine month periods ended
September 30, 2009 and 2008.
Reserve
for Obsolete/Excess Inventory
Inventories
are stated at the lower of cost or market. We regularly review our inventories
and record a provision for excess and obsolete inventory based on certain
factors that may impact the realizable value of our inventory including, but not
limited to, technological changes, market demand, inventory cycle time,
regulatory requirements and significant changes in our cost structure. If
ultimate usage varies significantly from expected usage or other factors arise
that are significantly different than those anticipated by management,
additional inventory write-down or increases in obsolescence reserves may be
required.
We
generally produce finished goods based upon specific orders or in anticipation
of specific orders. As a result, we generally do not establish reserves against
finished goods. We evaluate the value of inventory on a quarterly basis and may,
based on future changes in facts and circumstances, determine that a write-down
of inventory is required in future periods.
Stock-based
Compensation
The
Company accounts for stock-based compensation under the provisions of Accounting
Standards Codification 718, Compensation – Stock
Compensation (ASC 718), (formerly SFAS No. 123R, Share-Based
Payment), which establishes accounting for equity instruments
exchanged for employee services. Under the provisions of ASC 718, share-based
compensation cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense over the employee’s
requisite service period (generally the vesting period of the equity
grant).
The
Company estimates the fair value of stock options and stock appreciation rights
using the Black-Scholes valuation model. Key input assumptions used to estimate
the fair value of stock options and stock appreciation rights include the
exercise price of the award, the expected award term, the expected volatility of
the Company’s stock over the award’s expected term, the risk-free interest rate
over the award’s expected term, and the Company’s expected annual dividend
yield. The Company uses historical data on exercise of stock options and other
factors to estimate the expected term of share-based awards. The
Company also evaluates forfeitures periodically and adjusts
accordingly. The expected volatility assumption is based on the
unadjusted historical volatility of the Company’s common stock. The risk-free
interest rate assumption is based on U.S. Treasury interest rates at the time of
grants. Estimates of fair value are not intended to predict actual future events
or the value ultimately realized by persons who receive equity
awards. For awards with a performance condition vesting feature, when
achievement of the performance condition is deemed probable, the Company
recognizes compensation cost on a graded-vesting basis over the awards’ expected
vesting periods. The Company assesses probability on a quarterly
basis.
Income
Taxes
The
Company accounts for uncertain income tax positions using a benefit recognition
model with a two-step approach, a more-likely-than-not recognition criterion and
a measurement attribute that measures the position as the largest amount of tax
benefit that is greater than 50% likely of being realized upon ultimate
settlement in accordance with Accounting Standards Codification 740, Income Taxes (ASC 740),
(formerly FIN 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109). If
it is not more likely than not that the benefit will be sustained on its
technical merits, no benefit will be recorded. Uncertain tax positions that
relate only to timing of when an item is included on a tax return are considered
to have met the recognition threshold. It is the Company’s policy to classify
accrued interest and penalties as part of the accrued ASC 740 liability and
record the expense in the provision for income taxes.
We record
a deferred tax asset or liability based on the difference between the financial
statement and tax basis of assets and liabilities, as measured by the enacted
tax rates assumed to be in effect when these differences reverse. As of
September 30, 2009, management determined that it is more likely than not that
the deferred tax assets will be realized and, therefore, a valuation allowance
has not been recorded.
Asset
Valuation
Asset
valuation includes assessing the recorded value of certain assets, including
accounts receivable, investments, inventories, and intangible assets. We use a
variety of factors to assess valuation, depending upon the asset. Accounts
receivable are evaluated based upon the credit-worthiness of our customers, our
historical experience, and the age of the receivable. The determination of
whether unrealized losses on investments are other than temporary is based upon
the type of investments held, market conditions, length of the impairment,
magnitude of the impairment and ability to hold the investment to maturity.
Should current market and economic conditions deteriorate, our ability to
recover the cost of our investments may be impaired. The recoverability of
inventories is based upon the types and levels of inventory held and forecasted
demand. Should current market and economic conditions deteriorate, our actual
recovery could be less than our estimate. Intangible assets are evaluated based
upon the expected period the asset will be utilized, forecasted cash flows, and
customer demand. Our intangible asset consists of our ELEVESS trade name. During
the second quarter of 2009, we signed an exclusive distribution agreement with
Coapt for the distribution in the United States of Anika’s aesthetic dermatology
products for facial wrinkles. Coapt is marketing this product under
the name HYDRELLE™, which caused the Company to perform a recoverability test in
accordance with SFAS No. 144 requirements in order to determine if the carrying
value for the ELEVESS trade name was impaired. Our existing aesthetic
dermatology product continues to be marketed outside of the U.S. under the
ELEVESS™ name. The analysis concluded that the undiscounted cash flow
exceeds the carrying value of the ELEVESS asset group. Significant
assumptions underlying the recoverability of the intangible asset include:
future cash flow, growth projections, product life cycle and useful life
assumptions. The ultimate recoverability of the asset is dependent on us
securing additional distributors. Recoverability of the carrying value of the
asset may also be impacted by the outcome of the pending trade name opposition.
Changes in these assumptions could materially impact the Company’s ability to
realize the value of its intangible asset. As of September 30, 2009,
the carrying value of the intangible assets related to ELEVESS was
$892,157.
On January
1, 2009, the Company adopted Accounting Standards Codification 350, Intangibles – Goodwill and Other
(ASC 350), (formerly FSP No. 142-3, Determination of the Useful Life of
Intangible Assets). ASC 350 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under former SFAS No. 142,
Goodwill and Other Intangible
Assets. The adoption did not have an impact on our financial
position and results of operations for the three and nine month periods ended
September 30, 2009.
Property
and Equipment
Results
of Operations
Three
and nine months ended September 30, 2009 compared to three and nine months ended
September 30, 2008.
Product
Revenue
Product
revenue for the quarter ended September 30, 2009 was $10,087,130, an increase of
18.3%, compared to the third quarter of 2008. Product revenue for the
nine months ended September 30, 2009 was $27,376,966, an increase of 10.5%,
compared to the nine months ended September 30, 2008.
|
|
Three
Months Ended September 30,
|
|
|
Increase (Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
Joint
Health
|
|
$ |
6,136,101 |
|
|
$ |
4,676,247 |
|
|
$ |
1,459,854 |
|
|
|
31.2 |
% |
Ophthalmic
|
|
|
2,705,897 |
|
|
|
2,703,095 |
|
|
|
2,802 |
|
|
|
0.1 |
% |
Veterinary
|
|
|
584,709 |
|
|
|
706,553 |
|
|
|
(121,844 |
) |
|
|
-17.2 |
% |
Aesthetics
|
|
|
623,358 |
|
|
|
383,320 |
|
|
|
240,038 |
|
|
|
62.6 |
% |
Other
|
|
|
37,065 |
|
|
|
54,550 |
|
|
|
(17,485 |
) |
|
NM
|
|
|
|
$ |
10,087,130 |
|
|
$ |
8,523,765 |
|
|
$ |
1,563,365 |
|
|
|
18.3 |
% |
|
|
Nine
Months Ended September 30,
|
|
|
Increase (Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
Joint
Health
|
|
$ |
16,854,428 |
|
|
$ |
13,563,901 |
|
|
$ |
3,290,527 |
|
|
|
24.3 |
% |
Ophthalmic
|
|
|
7,832,072 |
|
|
|
8,283,984 |
|
|
|
(451,912 |
) |
|
|
-5.5 |
% |
Veterinary
|
|
|
1,833,644 |
|
|
|
2,427,570 |
|
|
|
(593,926 |
) |
|
|
-24.5 |
% |
Aesthetics
|
|
|
761,532 |
|
|
|
399,370 |
|
|
|
362,162 |
|
|
|
90.7 |
% |
Other
|
|
|
95,290 |
|
|
|
95,405 |
|
|
|
(115 |
) |
|
NM
|
|
|
|
$ |
27,376,966 |
|
|
$ |
24,770,230 |
|
|
$ |
2,606,736 |
|
|
|
10.5 |
% |
Our joint
health products consist of ORTHOVISC, ORTHOVISC mini and MONOVISC, the latter
two of which are currently only available outside the United
States. Revenue from joint health products increased $1,459,854, or
31.2%, in the third quarter of 2009 from the third quarter of
2008. For the nine months ended September 30, 2009, joint health
product sales increased $3,290,527, or 24.3%, compared with the same period in
2008. The improvement in joint health product revenue for the
three and nine months ended September 30, 2009 was primarily due to increases in
ORTHOVISC revenue. Our U.S. joint health product revenue in the third quarter of
2009 totaled $4,388,677, compared to $3,113,165 in the same period last year, an
increase of 41%. Our U.S. joint health product revenue for the nine months ended
September 30, 2009 totaled $12,148,161, compared to $9,593,935 in the same
period last year, an increase of 26.6%. The increase reflects DePuy Mitek’s
underlying volume driven sales increases to end-users of 34.6% and 32.8% for the
three and nine months ended September 30, 2009 compared to the same periods in
2008, as a result of their continued marketing efforts. International
joint health product revenue in the third quarter of 2009 increased 11.8% to
$1,747,424, from $1,563,082 in the third quarter last year. International joint
health product revenue in the nine months ended September 30, 2009 increased
18.5% to $4,706,267, from $3,969,966 in the same period last year. The increase
in international revenue during the three and nine months ended September 30,
2009 was led by increased product shipments to France, Hungary, Canada, and
Turkey. We expect joint health product revenue to increase in 2009
compared to 2008, both domestically and internationally.
Our sales
of ophthalmic products increased $2,802, or 0.1%, and decreased $451,912, or
5.5% for the three and nine months ended September 30, 2009, respectively, as
compared with the same periods last year. The change in ophthalmic product sales
for the three and nine month period was primarily related to order timing and
inventory management by our partners.
Sales of
HYVISC, our veterinary product, decreased 17.2% and 24.5% for the three and nine
months ended September 30, 2009 compared with the same periods last
year. We believe the decrease for the period was primarily due to
inventory management by our partner, Boehringer Ingelheim
Vetmedica. We expect HYVISC revenue in 2009 to be lower than in
2008.
Sales of
our aesthetics products increased $240,038 and $362,162 for the three and nine
months ended September 30, 2009 as compared to the same periods last year. The
increase in revenue for both periods was primarily due to the commencement of
sales in the third quarter to our new United States distributor, Coapt Systems,
Inc. Coapt is marketing the product in the U.S. under the brand name
HYDRELLE™. In key markets outside of the U.S., we continue to seek
marketing and distribution partners to commercialize ELEVESS.
Licensing,
milestone and contract revenue. Licensing, milestone and contract revenue
for the quarter ended September 30, 2009 was $705,634 compared to $681,250 for
the same period last year. For the nine month period ended September
30, 2009, licensing, milestone and contract revenue was $2,139,798 compared to
$2,043,753 for the same period last year. The increase was due to a
new product development contract with an existing
distributor. Licensing and milestone revenue includes the ratable
recognition of $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 expected life of the agreement, or $675,000 per quarter through the
fourth quarter of 2013.
Product gross profit. Product
gross profit for the three and nine month periods ended September 30, 2009 were
$6,535,756 and $17,319,766, or 64.8% and 63.3% of product revenue, respectively.
Product gross profit for the three and nine month periods ended September 30,
2008 were $5,018,779 and $14,404,644, or 58.9% and 58.2% of product revenue,
respectively. The increases in product gross profit dollars and margin for the
three and nine month periods in 2009 were primarily due to increased sales of
our more profitable joint health products resulting in a more favorable product
mix compared to the same periods in 2008, and increased manufacturing activity
in our Woburn facility to build inventory in preparation for moving our
operations to the Bedford facility. We expect a small decline in
gross margin in the fourth quarter due to lower manufacturing activity while the
equipment is re-installed in Bedford.
Research &
development. Research and development expenses for the quarter ended
September 30, 2009 were $2,382,146, an increase of $580,585, or 32.2%, compared
to $1,801,561 for the quarter ended September 30, 2008. For the nine
months ended September 30, 2009, research and development expenses were
$6,862,683, an increase of $1,908,163, or 38.5%, compared to $4,954,520 for the
same period in 2008. The increases in research and development
expenses for the three and nine month periods were primarily related to our
ongoing U.S.-based clinical trials for MONOVISC, the post-marketing aesthetics
dermatology study in people of color, manufacturing validation activities at our
Bedford facility, as well as other continuing new product development
projects. We expect research and development spending will increase
at a slower rate in the future related to next generation joint health products,
our aesthetics product line extension products, and other research and
development programs in the pipeline.
Selling, general &
administrative. Selling, general and administrative expenses for the
quarter ended September 30, 2009 were $2,842,991, an increase of $275,991, or
10.8%, compared to $2,567,000 for the quarter ended September 30,
2008. For the nine months ended September 30, 2009, selling, general
and administrative expenses were $8,613,525, an increase of $97,753, or 1.1%
compared to $8,515,772 for the same period in 2008. The increases in
both the three and nine month periods were primarily the result of higher
professional fees, which more than offset a decrease in marketing
expenses. Operating expenses related to the Bedford facility were
flat year-over-year. The prior year’s spending included additional
marketing expenses as a result of the MONOVISC and ORTHOVISC mini launches
product launches in Europe. We expect general and administrative
expenses in 2009 to be higher than 2008.
Interest income (expense),
net. Net interest expense for the three months ended September 30, 2009
was $44,096 compared to a net interest income of $130,486 for the same period
last year. For the nine months ended September 30, 2009, net interest
expense was $44,038, compared to a net interest income of $477,767 for the same
period last year. The decrease was primarily attributable to lower
interest rates as a result of the current rate environment. The net
expense for the three months ended September 30, 2009 represents interest
expense related to our facilities’ asset retirement obligations, and the
interest expense on our outstanding debt balance, which was capitalized during
the construction/validation stages prior to July 1, 2009.
Income taxes. Provisions for
income taxes were $460,232 and $357,751 for the three months ended September 30,
2009 and 2008, respectively. Provisions for income taxes were
$948,899 and $921,182 for the nine months ended September 30, 2009 and 2008,
respectively. The effective tax rates for the nine months ended
September 30, 2009 and 2008 were 24.1% and 26.7%, respectively. The
decrease in effective tax rates was primarily due to an increase in research
credits in 2009. During the nine months
ended September 30, 2009, there was no change to the Company’s ASC 740 tax
reserves. Our U.S. federal income tax returns for the years 2005,
2006, 2007, and 2008 remain subject to examination, and our state income tax
returns for the years 2006, 2007 and 2008 remain subject to
examination.
Liquidity
and Capital Resources
We require
cash to fund our operating expenses and capital expenditures. We expect that our
requirement for cash to fund operations will increase as the scope of our
operations expand. After 2009, we expect our capital expenditures to
significantly decrease. Prior to 2008, we funded our cash requirements from
operations as well as from existing cash and investments on hand. In 2008, we
borrowed $16 million under a line of credit with Bank of America to partially
fund our Bedford, Massachusetts facility capital project. At September 30, 2009,
cash and cash equivalents totaled $38,540,295 compared to $43,193,655 at
December 31, 2008, and working capital totaled $45,882,102 and $46,797,626,
respectively. The company believes that
its existing cash and cash equivalents as of September 30, 2009, and the
company's future cash flow from operations, are sufficient to meet the cash
requirements of its businesses for the foreseeable future.
Cash used
in operating activities was $73,034 for the nine months ended September 30, 2009
compared with cash provided by operating activities of $2,220,091 for the nine
months ended September 30, 2008. This change was primarily due to
increases in inventory and accounts receivable working capital needs, partially
offset by the timing of payments to vendors.
Cash used
in investing activities was $3,410,825 for the nine months ended September 30,
2009, compared to $11,374,426 for the nine months ended September 30,
2008. During the first nine months in 2009, cash used in investing
activities was related to our Bedford facility capital
expenditures. During the first nine months in 2008, cash used in
investing activities was due to approximately $14.9 million in capital
expenditures related to our new facility, partially offset by the maturity in
February 2008 of a short-term tax exempt municipal bond of $3,500,000,
which was purchased in February of 2007. We expect our capital
expenditures in 2010 to decrease compared to 2009 as the new facility capital
project winds down. The new facility capital project cost is
approximately $33 million (including interior construction, equipment, furniture
and fixtures). Construction commenced in May 2007 and validation
of the facility is expected to be completed in 2010. At September 30,
2009, there was approximately $1 million remaining to be spent to complete the
project. We expect to begin manufacturing at the Bedford,
Massachusetts facility in late 2009. There can be no assurance that
we will be successful in qualifying the new facility under FDA and European
Union regulations.
Cash used
in financing activities was $1,169,501 for the first nine months in 2009, which
was due to our principal payments on the long-term debt in the amount of $1.2
million. This was partially offset by small amounts from employee
stock exercise proceeds and related tax benefits. Cash provided by
financing activities was $8,619,010 for the first nine months ended September
30, 2008 as a result of the $8,000,000 borrowed under the Company’s unsecured
credit facility, and proceeds of $476,811 from employee stock option exercises,
and a tax benefit from the exercise of stock options of
$229,920. This was partially offset by debt issuance costs of
$87,721.
Recent
Accounting Pronouncements
On January
1, 2009, we adopted the following new accounting pronouncements:
Accounting
Standards Codification 808, Collaborative Arrangements
(ASC 808), (formerly EITF No. 07-1 Accounting for Collaborative
Arrangements). ASC 808 defines collaborative arrangements and
establishes reporting requirements for transactions between participants in a
collaborative arrangement and between participants in the arrangement and third
parties. ASC 808 requires collaborators to present the results of activities for
which they act as the principal on a gross basis and report any payments
received from (made to) other collaborators based on other applicable GAAP or,
in the absence of other applicable GAAP, based on analogous authoritative
accounting literature, or a reasonable, rational, and consistently applied
accounting policy election. Further, ASC 808 clarifies that the determination of
whether transactions within a collaborative arrangement are part of a
vendor-customer (or analogous) relationship subject to ASC 605 (formerly
EITF No. 01-9). ASC 808 was applied retrospectively to all prior periods
presented for all collaborative arrangements existing as of the effective date.
Adoption of ASC 808
did not impact our financial statements for the three and nine month
periods ended September 30, 2009 and 2008.
Accounting
Standards Codification 260-10, Earnings Per Share (ASC 260),
(formerly FSP EITF 03-6-1 Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities)
clarifies that share-based payment awards that entitle their holders to receive
non-forfeitable dividends before vesting should be considered participating
securities. As participating securities, these instruments are included in the
calculation of basic earnings per share. ASC 260 is effective for the Company in
2009. The adoption of ASC 260-10 did not have a material impact on the Company’s
earnings per share calculations.
Accounting
Standards Codification 805, Business Combinations (ASC
805), (formerly SFAS No. 141(R), Business Combinations, which
revised SFAS No. 141, Business Combinations). The
standard retains the purchase method of accounting for acquisitions, but
requires a number of changes, including changes in the way assets and
liabilities are recognized in the purchase accounting. It also changes the
recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. The adoption did not have a material impact on our financial
statements.
Accounting
Standards Codification 350, Intangibles – Goodwill and
Other (ASC 350), (formerly FSP No.142-3, Determination of the Useful Life of
Intangible Assets), amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under former SFAS No. 142, Goodwill and Other Intangible
Assets. The intent of this standard is to improve the consistency between
the useful life of a recognized intangible asset under former SFAS No. 142
and the period of expected cash flows used to measure the fair value of the
asset under ASC 805, Business
Combinations, and other U.S. generally accepted accounting
principles. The adoption of this pronouncement did not impact our financial
statements in the three and nine months ended September 30, 2009.
On
June 3, 2009, the FASB approved the FASB Accounting Standards
Codification, or the Codification, as the single source of authoritative
nongovernmental Generally Accepted Accounting Principles, or GAAP, in the United
States. The Codification is effective for interim and annual periods ending
after September 15, 2009. Upon the effective date, the Codification will be
the single source of authoritative accounting principles to be applied by all
nongovernmental U.S. entities. All other accounting literature not included
in the Codification will be nonauthoritative.. The Codification does not change
or alter existing GAAP and there was no impact on our consolidated financial
position or results of operations.
Effective
last quarter, we implemented Accounting Standards Codification 855, Subsequent Events (ASC 855),
(formerly SFAS No. 165, Subsequent Events). This
standard establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued. The adoption of ASC 855 did not impact our financial position or
results of operations. We evaluated all events or transactions that occurred
through November X, 2009, the date we issued these financial statements. During
this period we did not have any material recognizable subsequent
events.
Effective
last quarter, the Company also implemented Accounting Standards Codification
825, Financial
Instruments (ASC 825), (formerly FSP 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments). The adoption of this standard has resulted in
the disclosure of the fair value of the Company’s long term debt instrument on a
quarterly basis. Since ASC 825 addresses disclosure requirements, the adoption
of this ASC did not impact our financial position or results of
operations. The carrying value of our debt instrument was $14,800,000
at September 30, 2009. The estimated fair value of our debt
instrument was approximately $14,100,000 at September 30, 2009. The
fair value was estimated using market observable inputs and interest rate
measurements.
In
August 2009, the FASB issued Accounting Standards Update 2009-05, Fair Value Measurements and
Disclosures (Topic 820). The purpose of this update is to clarify that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using a valuation technique that uses either the quoted price of the identical
liability when traded as an asset or quoted prices for similar liabilities or
similar liabilities when traded as assets or another valuation technique that is
consistent with the principles of Topic 820. This guidance is effective upon
issuance. There was no material impact to the Company from the adoption of this
update.
In
October 2009, the FASB issued Accounting Standards Update 2009-13, Multiple-Deliverable Revenue
Arrangements – a consensus of the FASB Emerging Issues Task Force (Topic
605), which amends the revenue guidance under ASC 605. This update requires
entities to allocate revenue in an arrangement using estimated selling prices of
the delivered goods and services based on a selling price hierarchy. This
guidance eliminates the residual method of revenue allocation and requires
revenue to be allocated using the relative selling price method. This update is
effective for fiscal years ending after June 15, 2010, and may be applied
prospectively for revenue arrangements entered into or materially modified after
the date of adoption or retrospectively for all revenue arrangements for all
periods presented. We are currently evaluating the impact this update will have
on our consolidated financial statements.
Contractual
Obligations and Other Commercial Commitments
We have
made significant capital investments related to the build-out and validation of
our facility in Bedford, Massachusetts. This capital project has been financed
with cash on hand and the proceeds of a $16,000,000 unsecured credit agreement
with Bank of America (the “Credit Agreement”) entered into on January 31, 2008.
We borrowed the maximum amount of $16,000,000 in 2008, initially under an
interest only line of credit, and on December 31, 2008 the balance was
converted into a term loan with quarterly principal payments of $400,000 and a
final installment of $5,200,000 due on the maturity date of December 31,
2015. Long-term debt principal payments over the next five years are
$1,600,000 per year. We commenced making quarterly principal payments in
2009. Total debt outstanding was $14,800,000 as of September 30,
2009. Construction of this facility commenced in May 2007 and
validation is expected to be completed in 2010. 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 and others, 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.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
There have
been no material changes to our market risks since the date of our Annual Report
on Form 10-K for the year ended December 31, 2008.
As of
September 30, 2009, we did not utilize any derivative financial instruments,
market risk sensitive instruments or other financial and commodity instruments
for which fair value disclosure would be required under Accounting Standards
Codification 825, Financial
Instruments (ASC 825), (formerly SFAS No. 107, Disclosures about Fair Value of
Financial Instruments) and Accounting Standards Codification 815, Derivatives and Hedging (ASC
815), (formerly SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities). Our investments consist of money
market funds primarily invested in U.S. Treasury obligations and repurchase
agreements secured by U.S. Treasury obligations, and municipal bonds that
are carried on our books at amortized cost, which approximates fair market
value.
Primary
Market Risk Exposures
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Our
primary market risk exposures are in the areas of interest rate risk and
currency rate risk. We have two supplier contracts denominated in foreign
currencies. Unfavorable fluctuations in exchange rates would have a negative
impact on our financial statements. The impact of changes in currency exchange
rates for the two contracts on our financial statements were immaterial during
the first nine months of 2009. Our investment portfolio of cash equivalents and
long-term debt are subject to interest rate fluctuations. As of
September 30, 2009, we were subject to interest rate risk on
$14.8 million of variable rate debt. The interest payable on our debt is
determined, at the Company's option, based on either LIBOR plus 0.75% or the
lender’s prime rate and, therefore, is affected by changes in market interest
rates. Based on the outstanding debt amount as of September 30, 2009, we would
have a decrease in future annual cash flows of approximately $141,333 for every
1% increase in the interest rate over the next twelve month period.
ITEM
4.
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CONTROLS
AND PROCEDURES
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(a)
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Evaluation
of disclosure controls and
procedures.
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As
required by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended, (“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 principal financial officer have concluded that our disclosure controls and
procedures are effective 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 Securities and
Exchange Commission rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports it files or
submits under the Exchange Act is accumulated and communicated to the Company’s
management, including our chief executive officer and chief financial officer,
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 may from time to time
make changes aimed at enhancing their effectiveness and to ensure that our
systems evolve with our business.
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(b)
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Changes
in internal controls over financial
reporting.
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There were
no changes in our internal control over financial reporting during the third
quarter of fiscal year 2009 that have materially affected, or that are
reasonably likely to materially affect, our internal controls over financial
reporting.