ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following section contains statements that are not statements of historical fact and are forward-looking statements within the meaning of the federal securities laws. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievement to differ materially from anticipated results, performance, or achievement, expressed or implied in such forward-looking statements. These statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties. We discuss many of these risks and uncertainties at the beginning of this Annual Report on Form10-K and under the sections captioned “Business” and “Risk Factors.” The following discussion should also be read in conjunction with the consolidated financial statements and the Notes thereto appearing elsewhere in this Annual Report on Form 10-K.

Management Overview

We are a global joint preservation company that creates and delivers meaningful advancements in early intervention orthopedic care. Based on our collaborations with clinicians to understand what they need most to treat their patients, we develop minimally invasive products that restore active living for people around the world. We are committed to leading in high opportunity spaces within orthopedics, including osteoarthritis, or OA, pain management, regenerative solutions, sports medicine soft tissue repair and bone preserving joint technologies.

We have thirty years of global expertise developing, manufacturing and commercializing products based on our hyaluronic acid, or HA, technology platform. HA is a naturally occurring polymer found throughout the body that is vital for proper joint health and tissue function. Our proprietary technologies for modifying the HA molecule allow product properties to be tailored specifically to multiple uses, including enabling longer residence time to support OA pain management and creating a solid form of HA called Hyaff, which is a platform utilized in our regenerative solutions portfolio.

In early 2020, we expanded our overall technology platform, product portfolio, and significantly enhanced our commercial infrastructure, especially in the United States, through our strategic acquisitions of Parcus Medical, a sports medicine and instrumentation solutions provider focused on soft tissue repair, and Arthrosurface, a company specializing in bone preserving partial and total joint replacement solutions. Through these acquisitions, we have transformed our company. We expanded our addressable market from the over $1 billion global OA pain management market to the over $8 billion global joint preservation market (which includes the faster growing sports medicine soft tissue repair and extremities segments), advanced our commercial capabilities, instituted systems and process to support our transformation, and expanded our product pipeline and research and development expertise in our target markets.

As we look towards the future, our business is positioned to capture value within our target market of joint preservation. We believe our success will be driven by our:

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● Energized and experienced team focused on strong values, talent, and culture.

For additional information regarding our business, please refer to “Item 1. Business” of this Annual Report on Form 10-K.

Key Developments during the Year Ended December 31, 2021

COVID-19 Pandemic

As discussed more fully in the section captioned “Results of Operations – Year ended December31, 2021 compared to year ended December31, 2020”below, the COVID-19 pandemic impacted our full year financial condition and operations. In March 2020, the World Health Organization declared the spread of the COVID-19 virus a pandemic. This pandemic has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. There has been significant volatility in our results on a quarterly basis due to the worldwide cancellation or delay of elective procedures, staffing shortages and supply chain disruptions, as well as the impact on timelines associated with certain clinical studies. While elective procedure volume had a limited recovery after the initial pandemic impacts seen in the early parts of second quarter of 2020 due to the easing of COVID-19 related restrictions in certain jurisdictions, areas of the United States and other countries have recently seen, and continue to see, fluctuating infection rates increasing as the result of emerging variants of COVID-19. Continuing fluctuations in infection rates in the United States and other countries make future results difficult to predict despite recent advances in the vaccination rates of certain parts of the population. Please see the section captioned “Part I. Item 1A. Risk Factors” of this Annual Report on Form 10-K for additional information with respect to the risks faced by our business in light of the COVID-19 pandemic. As a result of the COVID-19 pandemic, we have taken many precautions to provide a safe work environment for our employees and customers, including the establishment and implementation of a work from home policy, where possible. Despite increasing vaccination rates and other efforts to return to a more normalized business environment, the pandemic continues to have an impact on our business in certain jurisdictions and a resurgence of COVID-19 as a result of emerging variants or other factors, as has occurred in certain jurisdictions, could result in additional government lockdowns or other restrictions, quarantine requirements, staffing shortages or supply chain disruptions that could impact our business and operations. We may also have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities. We have had some disruption in our ability to supply products to our customers due to supply chain disruptions and staffing shortages which has caused back orders or delays in certain shipments to our customers. Our commercial day-to-day operations have been impacted due to the worldwide cancellations and/or delays of elective procedures and restrictions on travel for both our employees and our clinician customers, and timelines associated with certain clinical studies and research and development programs have been delayed. While the impact has been limited to these items to date, we caution that there continues to be a possibility for potential future implementation of certain additional restrictions or other challenges associated with infections, staffing shortages or supply chain disruptions due to COVID-19 and it current or new variants in certain jurisdictions. The impact of these challenges are currently unknown, but could be significant.

Products

OA Pain Management

Our OA Pain Management product family consists of Monovisc, Orthovisc, Cingal, and Hyvisc, our injectable, HA-based viscosupplement offerings that are indicated to provide pain relief from osteoarthritis conditions.

Joint Preservation and Restoration

Our Joint Preservation and Restoration product family consists of: (a) our portfolio of over 150 bone preserving joint technology products, including partial joint replacement, joint resurfacing, and minimally invasive and bone sparing implants, designed to treat upper and lower extremity orthopedic conditions caused by trauma, injury and arthritic disease; (b) our line of sports medicine soft tissue repair solutions used to repair and reconstruct damaged ligaments and tendons due to sports injuries, trauma and disease; and (c) our orthopedic regenerative solutions products, including Hyalofast and Tactoset.

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Non-Orthopedic

Our Non-Orthopedic product family consists of legacy HA-based products that are marketed principally for non-orthopedic applications, including our adhesion barrier product, advanced wound care products, our ear, nose and throat products, and our ophthalmic products.

For additional information with respect to our products, including information related to how they are sold and new product development initiatives, please see the sections captioned “Products,” “Sales Channels,” and “Research and Development” contained within “Part I. Item I. Business” of this Annual Report on Form 10-K.

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Results of Operations

Year ended December31, 2021 compared to year ended December31, 2020

Statement of Operations Detail

Year Ended December 31,

(in thousands, except percentages)

Gross margin 56 % 53 %

Operating expenses:

Interest and other expense, net (188 ) (302 ) 114 (38% )

Revenue

Revenue for the year ended December 31, 2021 was $147.8 million, an increase of $17.3 million, or 13%, compared to prior year. The increase in revenue was primarily driven by partial recovery from the initial impact of the COVID-19 pandemic on sales volumes and related strategic partner ordering patterns as well as from growing commercial adoption of new products. The increase for 2021 was also in part due to inclusion of full first quarter results of Parcus Medical and Arthrosurface, which we acquired on January 24, 2020 and February 3, 2020, respectively.

The following table presents product revenue by product family for fiscal years 2021 and 2020 (dollars in thousands):

Years Ended December 31,

Revenue from our OA Pain Management product family increased 8% for the year ended December 31, 2021, as compared to prior year, due primarily to partial recovery from the initial impact of the COVID-19 pandemic on sales volumes and related strategic partner ordering patterns.

Revenue from our Joint Preservation and Restoration product family increased 23% for the year ended December 31, 2021, as compared to prior year, due primarily to organic growth as the initial impact of the COVID-19 pandemic on elective procedures begins to lift in various worldwide jurisdictions, especially in the United States during 2021. We also saw rapidly growing commercial adoption of new regenerative, soft tissue and bone sparing joint products introduced in 2019, 2020 and 2021. The increase was also due in part to the inclusion of full year results from Parcus Medical and Arthrosurface which were acquired in the first quarter of 2020.

Revenue from our non-orthopedic product family increased 20% for the year ended December 31, 2021, as compared to prior year, primarily due to timing of distributor sales as well as due to higher revenues from legacy products during the first quarter.

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Gross Profit and Margin

Gross profit for the year ended December 31, 2021 was $82.9 million, or gross margin of 56%, as compared with $69.0 million, or gross margin of 53%, for the year ended December 31, 2020. The increase in gross profit for the year ended December 31, 2021, primarily resulted from revenue growth and lower amortization of inventory step up costs related to the Arthrosurface and Parcus Medical acquisitions. This increase was partially offset by higher product rationalization charges, as well as lower production levels and increased reserves caused in part by staffing and supply chain challenges resulting from the COVID-19 pandemic. Gross margin includes the impact of inventory step-up associated with the Arthrosurface and Parcus Medical acquisitions, as well as acquisition-related amortization expenses. These expenses together increased cost of revenue by $12.7 million, or 9 points of gross margin, for the year ended December 31, 2021 as compared to increased cost of revenue of $16.9 million, or 13 points of gross margin for the same periods in 2020.

Research and Development

Research and development expenses for the year ended December 31, 2021 were $27.3 million, an increase of $3.9 million, or 17%, as compared to the prior year, primarily due to product development activities associated with the development of new product candidates in our research and development pipeline, execution of the Cingal pilot study and Hyalofast clinical trial.

For additional information on our research and development activities, please see the section captioned “Part I. Item 1. Business—Research and Development” in this Annual Report on Form 10-K.

Selling, General and Administrative

Selling, general and administrative, or SG&A, expenses for the year ended December 31, 2021 were $74.1 million, an increase of $14.0 million, or 23%, as compared to the prior year. The increase in SG&A expenses for the year ended December 31, 2021 was primarily related to full period expenses from Parcus Medical and Arthrosurface, expansion of our commercial capability in the United States and expanded marketing activities and other operational capabilities to support the growing business needs, higher stock based compensation expense, and a non-cash loss on disposal of fixed assets, partially offset by the absence of transaction costs incurred in 2020 related to acquisitions of Parcus Medical and Arthrosurface. Certain activities were curtailed in the year ended December 31, 2020 due to cost optimization in light of the early stages of the COVID-19 pandemic.

Goodwill Impairment Charge

Contingent Consideration Fair Value Change

In the year ended December 31, 2021, we recorded a $21.1 million net benefit related to the change in fair value of our contingent consideration liabilities incurred associated with the acquisition of Parcus Medical and Arthrosurface in 2020. The liability for contingent consideration is remeasured at each reporting period until the contingency is resolved. The decrease in fair value of the contingent consideration was due primarily to the decrease in the likelihood that certain contingent milestones would be achieved or because certain contingent milestones were not achieved. Also, in July 2021, we made a regulatory milestone payment in connection with the Arthrosurface acquisition in the amount of $10.0 million upon obtaining a regulatory clearance for a reverse shoulder implant system.

Income Taxes

The benefit from income taxes was $1.7 million for the year ended December 31, 2021, resulting in an effective tax rate of (70.4%). The benefit from income taxes was $4.6 million for the year ended December 31, 2020, resulting in an effective tax rate of 16.2%. The net change in the effective tax rate for the year ended December 31, 2021, as compared to the prior year, was primarily due to lower income before tax in 2021, favorable state tax apportionment, a $0.9 million tax benefit on the decrease in the fair value of contingent consideration and the release of a valuation allowance initially recorded in 2020 in the amount of $0.9 million due to increased likelihood regarding the realizability of certain net deferred tax assets in Italy.

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Net Income (Loss)

For the year ended December 31, 2021, net income was $4.1 million, or $0.28 per diluted share, compared to net loss of $24.0 million, or $1.69 per diluted share, for the prior year. The increase in net income and diluted earnings per share was primarily due to increased revenue, reduction in the fair value of contingent consideration and the absence of goodwill impairment charges, partially offset by higher operating expenses primarily driven by increased spending to expand our commercial capability in the United States and development of new products and clinical trial activity.

Non-GAAP Financial Measures

We present certain information with respect to adjusted gross profit and adjusted gross margin, adjusted Earnings Before Interest, Tax, Depreciation and Amortization, or EBITDA, adjusted net income, adjusted diluted earnings per share or adjusted EPS, which are financial measures not based on any standardized methodology prescribed by accounting principles generally accepted in the United States, or GAAP, and is not necessarily comparable to similarly titled measures presented by other companies.

We have presented adjusted gross profit and adjusted gross margin, adjusted EBITDA, adjusted net income, adjusted EPS, because they are key measures used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business. We believe these financial measures help identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. In particular, we believe that the exclusion of these items in calculating these measures can provide a useful tool for period-to-period comparisons of our core operating performance. Accordingly, we believe that these measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects and allowing for greater transparency with respect to key financial metrics used by our management in their financial and operational decision-making.

Adjusted Gross Profit and Adjusted Gross Margin

We define adjusted gross profit as our gross profit excluding amortization of certain acquired intangible assets, the impact of inventory fair-value step up associated with our recent acquisitions and certain product rationalization charges. The amortized assets contribute to revenue generation, and the amortization of such assets will likely continue in future periods until such assets are fully amortized. These assets include the fair value of certain identified assets acquired in acquisitions, including developed technology and acquired tradenames. We define adjusted gross margin as adjusted gross profit divided by total revenue.

The following is a reconciliation of adjusted gross profit to gross profit for the years ended December 30, 2021 and 2020, respectively:

Years Ended December 31,

Product rationalization charges 2,445 1,920

Acquisition related intangible asset amortization 6,248 5,844

Acquisition related inventory step up 6,465 11,082

Adjusted gross margin 66 % 67%

Adjusted gross profit for the year ended December 31, 2021 increased $10.2 million to $98.1 million representing 66% of revenue. Adjusted gross profit for the year ended December 31, 2020 was $87.9 million, or 67% of revenue. This increase in adjusted gross profit for the year ended December 31, 2021 as compared to 2020, primarily resulted from higher revenue due to organic growth of revenues as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially in the United States, as well as the inclusion of full period results from Parcus Medical and Arthrosurface in 2021 as we acquired these businesses in early 2020. The decrease in adjusted gross margin for the year ended December 31, 2021 as compared to 2020, is due primarily to unfavorable production volumes and increased reserves caused partially by supply chain and staffing challenges, due largely to the impact of the COVID-19 pandemic.

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Adjusted EBITDA

We present information below with respect to adjusted EBITDA, which we define as our net income (loss) excluding interest and other income, net, income tax benefit (expense), depreciation and amortization, stock-based compensation, product rationalization, and acquisition-related expenses. We have also excluded the impacts of goodwill impairment charges and changes in the fair value of contingent consideration associated with our acquisition transactions in early 2020.

Adjusted EBITDA is not prepared in accordance with US GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with US GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest US GAAP equivalent. Some of these limitations are:

The following is a reconciliation of adjusted EBITDA to net income (loss) for the years ended December 31, 2021 and 2020, respectively:

Years Ended December 31,

Interest and other expense, net 188 302

Benefit from income taxes (1,707 ) (4,642 )

Depreciation and amortization 7,169 6,844

Product rationalization charges 2,445 2,892

Acquisition related expenses - 4,168

Acquisition related intangible asset amortization 7,148 6,620

Acquisition related inventory step up 6,465 11,082

Goodwill impairment - 42,520

Change in fair value of contingent consideration (21,095 ) (28,666 )

Adjusted EBITDA for year ended December 31, 2021, decreased $7.5 million as compared to 2020. The decrease in adjusted EBITDA was primarily due to an increase in operating expenses largely attributable to expansion of our commercial capability in the United States and an increase in clinical trial activity, both of which had been largely curtailed during 2020 in response to the COVID-19 pandemic, as well as a non-cash impairment charge related to fixed assets, partially offset by an increase in revenue.

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Adjusted Net Income (Loss) and Adjusted EPS

We present information below with respect to adjusted net income (loss) and adjusted EPS. We define adjusted net income (loss) as our net income (loss) excluding acquisition-related expenses, amortization and depreciation of acquired assets, the impact of inventory fair-value step up on cost of revenue and the impacts of goodwill impairment charges and changes in the fair value of contingent consideration, as well as certain impairment charges, including impairment related to IPR&D assets and non-cash product rationalization charges, each on a tax effected basis. Acquisition related expenses are those that we would not have incurred except as a direct result of acquisition transactions. Acquisition related expenses consist of investment banking, legal, accounting, and other professional and related expenses. The amortized assets contribute to revenue generation, and the amortization of such assets will recur in future periods until such assets are fully amortized. These assets include the estimated fair value of certain identified assets acquired in acquisitions, including in-process research and development, developed technology, customer relationships and acquired tradenames. We define adjusted EPS as US GAAP diluted earnings per share excluding the above adjustments to net income (loss) used in calculating adjusted net income (loss), each on a per share and tax effected basis.

The following is a reconciliation of adjusted net income (loss) to net income (loss) for the years ended December 31, 2021 and 2020, respectively:

Years Ended December 31,

Product rationalization charges, tax effected 1,830 2,376

IPR&D impairment, tax effected 448 1,414

Acquisition related expenses, tax effected - 3,146

Acquisition related intangible asset amortization, tax effected 5,386 4,997

Acquisition related inventory step up 4,810 8,365

Goodwill impairment, tax effected - 37,702

Adjusted net income (loss) $ (371 ) $ 10,146

The following is a reconciliation of adjusted EPS to diluted earnings (loss) per share for the years ended December 31, 2021 and 2020, respectively (in thousands, expect per share data):

Years Ended December 31,

Diluted earnings (loss) per share $ 0.28 $ (1.69 )

Product rationalization charges, tax effected 0.13 0.17

IPR&D impairment, tax effected 0.03 0.10

Acquisition related expenses per share, tax effected - 0.22

Acquisition related intangible asset amortization, tax effected 0.37 0.35

Acquisition related inventory step up 0.33 0.59

Goodwill impairment, tax effected - 2.65

Change in fair value contingent consideration, tax effected (1.16 ) (1.68 )

Adjusted diluted earnings (loss) per share $ (0.02 ) $ 0.71

Adjusted net income (loss) in 2021, decreased $10.5 million as compared to 2020. The decrease in adjusted net income for the period was primarily due to an increase in selling and marketing expenses primarily attributable to increased cost to support our commercial capability in the United States, an increase in research and development expenses, an increase in share-based compensation expense due largely to forfeitures of unvested shares during the comparable period, a non-cash impairment charge related to fixed assets, production volumes and supply chain and staffing challenges, as well as a decrease in tax benefits.

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Year ended December31, 2020 compared to year ended December31, 2019

Statement of Operations Detail

Year Ended December 31,

(in thousands, except percentages)

Gross margin 53 % 75 %

Operating expenses:

Change in fair value of contingent consideration (28,666 ) - (28,666 ) -

Revenue

Revenue for the year ended December 31, 2020 was $130.5 million, an increase of $15.9 million, or 14%, compared to prior year. This increase was primarily driven by growth in our Joint Preservation and Restoration product family, as a result of our acquisitions of Parcus Medical and Arthrosurface in early 2020, offset by a decrease in revenue from our OA Pain Management products due to the impact of the COVID-19 pandemic on elective procedure volumes worldwide.

The following table presents product revenue by product family for fiscal years 2020 and 2019 (dollars in thousands):

Years Ended December 31,

Revenue from our OA Pain Management product family decreased, primarily due to the worldwide impact of the COVID-19 pandemic on elective procedure volumes. Revenue from our Joint Preservation and Restoration products increased primarily from the addition of revenue from the Arthrosurface and Parcus Medical product portfolios following their early 2020 acquisition by us, offset in part by the impact of the COVID-19 pandemic on elective surgery procedure volumes worldwide. Revenue from our Non-Orthopedic product family decreased due to the impact of the COVID-19 pandemic on procedure volumes worldwide. Revenue for the year ended December 31, 2019 includes licensing related revenue in the amount of $0.1 million which was zero in 2020.

Gross Profit and Margin

Gross profit for the year ended December 31, 2020 was $69.0 million, or gross margin of 53%, as compared with $85.9 million, or gross margin of 75%, for the year ended December 31, 2019. The decrease in gross margin was primarily due to the inventory step-up associated with the Arthrosurface and Parcus Medical acquisitions, as well as acquisition-related amortization expenses, which together increased cost of revenue by $16.9 million, or 13 points of gross margin, for the year ended December 31, 2020. Gross margin also decreased due to lower volumes as a result of the COVID-19 pandemic. In addition, during the year ended December 31, 2020, gross profit decreased due to a non-cash inventory impairment charge of $1.9 million following our determination not to pursue CE Mark renewals for certain of our legacy HA-based products primarily in the Non-Orthopedic product family.

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Research and Development

Research and development expenses for the year ended December 31, 2020 were $23.4 million, an increase of $6.8 million, or 41%, as compared to the prior year, primarily due to activities associated with new product development in our research and development pipeline, including those related to Parcus Medical and Arthrosurface following their acquisition in the first quarter of 2020, as well as preparation and initial execution activities for the Cingal Pilot study and certain European post-market clinical studies to support CE Mark approvals for our products, Hyalofast clinical study activities, and IPR&D impairment charges related to Hyalonect and Hyalobone projects.

For additional information on our research and development activities, please see the section captioned “Part I. Item 1. Business—Research and Development” in this Annual Report on Form 10-K.

Selling, General and Administrative

Selling, general and administrative, or SG&A, expenses for the year ended December 31, 2020 were $60.1 million, an increase of $25.1 million, or 72%, as compared to the prior year. The increase was primarily related to expenses associated with operating Parcus Medical and Arthrosurface following their acquisition in the first quarter of 2020, including incremental expenses to integrate our commercial infrastructure, as well as incentive compensation, partially offset by a decrease in stock compensation expense due to the forfeiture of unvested equity awards.

Goodwill Impairment Charge

We assess goodwill for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. U.S. government policy responses to the COVID-19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of domestic elective surgical procedures. As a result of these events during the first quarter of 2020, we performed a quantitative assessment of goodwill impairment related to the Parcus Medical and Arthrosurface reporting unit as of March 31, 2020. The results of these interim impairment tests indicated that the estimated fair value of this reporting unit was less than its carrying value. Consequently, a non-cash goodwill impairment charge of $18.1 million was recorded in the quarter ended March 31, 2020. The decline in fair value was primarily due to decreases in immediate term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures which directly impact the Parcus Medical and Arthrosurface reporting unit. We also performed our annual impairment testing related to the Parcus Medical and Arthrosurface reporting unit in the fourth quarter of 2020. The results of the annual impairment test indicated that the estimated fair value of the reporting unit was less than its carrying value. This was primarily due to a decline in projected net cash flows as a result of the continued impact of COVID-19 on revenue and related cash flows, the expectation that the economic recovery will take longer than expected to materialize, and additional projected investment to support future growth. Consequently, a non-cash goodwill impairment charge was recorded in the amount of $24.4 million during the fourth quarter of 2020. The total non-cash goodwill impairment charge with respect to the reporting unit amounted to $42.5 million for the year ended December 31, 2020.

Contingent Consideration Fair Value Change

In the year ended December 31, 2020, we recorded a $28.7 million net benefit related to the change in fair value of our contingent consideration liabilities incurred as a result of the acquisition of Parcus Medical and Arthrosurface in the first quarter of 2020. The liability for contingent consideration is remeasured at each reporting period until the contingency is resolved. The decrease in fair value of the contingent consideration was largely due to a decrease in revenue projections related primarily to the COVID-19 pandemic. On October 15, 2020, we received FDA clearance for the WristMotion Total Arthroplasty System, triggering a $5 million regulatory-based milestone payment per the Arthrosurface merger agreement.

Income Taxes

The benefit from income taxes was $4.6 million for the twelve-month period ended December 31, 2020, based on an effective tax rate of 16.2%. The provision for income taxes was $8.9 million for the twelve-month period ended December 31, 2019, based on an effective tax rate of 24.7%. The net decrease in the effective tax rate benefit for the year ended December 31, 2020, as compared to the prior year, was primarily due to the $4.8 million tax expense on the impairment of non-tax deductible goodwill, partially offset by the $1.9 million tax benefit on the decrease in the fair value of the contingent consideration.

Net Income (Loss)

For the year ended December 31, 2020, net loss was $23.9 million, or $1.69 net loss per diluted share, compared to net income of $27.2 million, or $1.89 net income per diluted share, for the prior year. The decrease in net income and diluted earnings per share was primarily a result of the increased expenses associated with acquisitions of Parcus Medical and Arthrosurface previously discussed, in addition to the unfavorable impact on sales and gross profit from the COVID-19 pandemic.

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Concentration of Risk

We have historically derived the majority of our revenue from a small number of customers, most of whom resell our products to end-users and are significantly larger companies than us. For the year ended December 31, 2021, Mitek accounted for 45% of revenue, as compared to 49% in prior year. While we believe that our expanded commercial infrastructure will substantially diversify our revenue base, we expect to continue to be dependent on a small number of large customers, especially Mitek, for a sizeable portion of our revenues in the near-term future. The failure of these customers to purchase our products in the amounts they historically have or in amounts that we expect could materially impact our business.

In addition, if present and future customers terminate their purchasing arrangements with us, significantly reduce or delay their orders, or seek to renegotiate their agreements on terms less favorable to us, our business, financial condition, and results of operations will be adversely affected. If we accept terms less favorable than the terms of the current agreements, such renegotiations may have a material adverse effect on our business, financial condition, and/or results of operations. Furthermore, in any future negotiations we may be subject to the perceived or actual leverage that these customers may have given their relative size and importance to us. Any termination, change, reduction, or delay in orders could seriously harm our business, financial condition, and results of operations. Accordingly, unless and until we diversify and expand our customer base, our future success will significantly depend upon the timing and size of future purchases by our largest customers and the financial and operational success of these customers. The loss of any one of our major customers or the delay of significant orders from such customers, even if only temporary, could reduce or delay our recognition of revenues, harm our reputation in the industry, and reduce our ability to accurately predict cash flow, and, as a consequence, it could seriously harm our business, financial condition, and results of operations.

See Note 13, Revenue by Product Family, by Significant Customer and by Geographic Location; Geographic Information, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information regarding significant customers.

Liquidity and Capital Resources

We require cash to fund our operating activities and to make capital expenditures and other investments in the business. We expect that our requirements for cash to fund these uses will increase as our operations expand. We continue to generate cash from operating activities and believe that our operating cash flows, cash currently on our balance sheet and availability under our credit facility will be sufficient to allow us to continue to invest in our existing business, to manage our capital structure on a short and long-term basis, and to meet our anticipated operating cash needs. Cash, cash equivalents, and investments aggregated $94.4 million and $98.3 million, and working capital totaled $138.7 million and $140.5 million, at December 31, 2021 and 2020, respectively. We are closely monitoring our liquidity and capital resources for any potential impact that the COVID-19 pandemic may have on our operations.

We entered into a Third Amendment to Credit Agreement, on November 12, 2021, with Bank of America N.A. as administrative agent, amended and restated our existing revolving line of credit agreement dated October 24, 2017 and provides up to $75.0 million in the form of a senior revolving line of credit. Subject to certain conditions, we may request up to an additional $75.0 million for a maximum aggregate commitment of $150.0 million. As a precautionary measure at the beginning of the COVID-19 pandemic, we executed a drawdown of $50.0 million in April 2020, all of which we repaid during the year ended December 31, 2020. As of December 31, 2021, and 2020, there were no outstanding borrowings and we are in compliance with the terms of the credit facility.

Summary of Cash Flows (in thousands):

Years Ended December 31,

Cash provided by (used in)

Effect of exchange rate changes on cash 69 327 (133 )

The following changes contributed to the net change in cash and cash equivalents from 2020 to 2021.

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Operating Activities

Cash provided by operating activities was $8.4 million, $13.1 million, $37.0 million for 2021, 2020 and 2019. The change in 2021 was primarily attributable to payment of contingent consideration, as well as normal variations in the timing of collections, timing of certain state tax payments and a decrease in cash outflows related to acquisition related expenses. In July 2021, we paid contingent consideration in the amount of $10.0 million, $2.8 million of which was classified within operating activities and the remaining $7.2 million was classified within financing activities.

For the foreseeable future, we expect to continue to invest substantial resources in research and development for new products and clinical trials as well as continued investment in our commercial infrastructure to support our growth strategy. These costs will be funded with a combination of cash on hand and cash expected to be generated from future operations.

Investing Activities

Investing activities used $3.1 million and $71.3 million in 2021 and 2020, and provided $39.7 million in 2019. The significant use of cash from investing activities in 2020 was primarily due to the $94.6 million of consideration paid, net of cash acquired, for the acquisitions of Parcus Medical and Arthrosurface. Capital expenditures totaled $5.1 million, $1.6 million, and $2.8 million for 2021, 2020 and 2019, respectively.

Financing Activities

Cash used in financing activities was $6.8 million, $3.8 million and $8.1 million for 2021, 2020 and 2019. The change was primarily due to the portion of the contingent consideration payment related to financing activities, as described above, in 2021.

For a discussion of our liquidity and capital resources as of December 31, 2020, and our cash flow activities for the fiscal year ended December 31, 2020, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 5, 2021, which is incorporated by reference in this Report.

Contractual Obligations and Other Commercial Commitments

The table below summarizes our non-cancelable operating leases, purchase commitments, and contractual obligations related to future periods which are not reflected in our consolidated balance sheet at December 31, 2021. Purchase commitments relate primarily to non-cancellable inventory commitments and capital expenditures entered in the normal course of business:

Payments due by period (in thousands)

Less than More than

Total 1 year 1 - 3 years 3 - 5 years 5 years

Accounting for Off-Balance Sheet Arrangements

We do not use special purpose entities or other off-balance sheet financing techniques, except for operating leases as disclosed in the contractual obligations table above, that we believe have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, or capital resources.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, which consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We monitor our estimates on an ongoing basis for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.

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We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout this section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Business Combinations and Contingent Consideration

Amounts paid for acquisitions are allocated to the intangible and tangible assets acquired and liabilities assumed, if any, based on their fair values at the dates of acquisition. This purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets and deferred revenue obligations. Critical estimates include, but are not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions determined by management. Any excess of purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of comprehensive income. The fair value of contingent consideration includes estimates and judgments made by management regarding the probability that future contingent payments will be made.

We use the income approach to determine the fair value of certain identifiable intangible assets including developed technology and IPR&D. This approach determines fair value by estimating after-tax cash flows attributable to these assets over their respective useful lives and then discounting these after-tax cash flows back to a present value. The estimated economic lives were determined using a variety of indicators including historical usage, evolutionary changes and other observable market data. We base our assumptions on estimates of future cash flows, expected growth rates and expected trends in technology. We base the discount rate used to arrive at the present value used in this method as of the date of acquisition on the time value of money and certain industry-specific risk factors. We use the relief-from-royalty method of the income approach to determine the fair value of trade names. This approach determines fair value by estimating the after-tax royalty savings attributable to owning the intangible asset and then discounting these after-tax royalty savings back to a present value. We base our assumptions on the estimated revenue attributable to the trade name and the estimated royalty rate attributable to the trade name. We use the avoided costs/lost profits method to determine the fair of customer relationships. This approach determines fair value by estimating the projected revenues related to the asset and estimated costs to recreate the intangible asset. We believe the estimated purchased customer relationships, developed technologies, trade name, and in process research and development amounts so determined represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges which could be material. In addition, estimated economic lives of certain acquired assets are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.

We used the comparative sales method to determine the fair value of work-in-process (“WIP”) and finished goods inventory acquired and ultimately the inventory step- up required. The fair value of WIP inventory was estimated as the selling price less the sum of (a) costs to complete, (b) costs of disposal, and (c) a reasonable profit allowance for the selling effort of the acquiring entity based on profit for similar products. The fair value of finished goods inventory was estimated as the selling price less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity based on profit for similar products.

For contingent consideration, we update these estimates and the related fair value of contingent consideration at each reporting period based on the estimated probability of achieving the earn-out targets and applying a discount rate that measures the risk associated with the expected contingent payments. Under the Parcus Medical and Arthrosurface merger agreements, there are contingent consideration milestones totaling up to $100 million payable from 2020 to 2022. Parcus Medical has net sales milestones annually from 2020 to 2022, while Arthrosurface had both regulatory and net sales milestones in 2020 and 2021. As of December 31, 2021, the remaining regulatory milestone and the net sales milestone related to Arthrosurface were not achieved. The fair value of the Parcus Medical contingent consideration is estimated using a Monte Carlo simulation. Changes in the fair value can result from changes pertaining to the achievement of the defined milestones and changes in assumed discount rates. Changes in the fair value of contingent consideration are recorded in our consolidated statements of operations. As of December 31, 2021, the contingent consideration for Parcus Medical associated with net sales in 2021 amounted to $4.3 million, which is included in current liabilities. We do not expect the remaining earn-out milestone under the Parcus Medical merger agreement to be achieved.

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Revenue Recognition – General

Pursuant to ASC 606, we recognize revenue when a customer obtains control of promised goods or services. The amount of revenue that is recorded reflects the consideration that we expect to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are capable of being distinct or distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation.

We generate sales principally through three types of customers: (i) commercial partnerships (ii) hospitals and ASCs, and (iii) distributors, referred to as distribution model.

For commercial partnership sales, we sell our products directly to these partners, who perform the vast majority of the downstream sales and marketing activities to customers and end-users. These arrangements may include the grant of certain licenses, performance of development services, and the supply of product. Our largest such customer, Mitek, represented 45% of total revenues for the year-ended December 31, 2021. We recognize revenue from product sales when the customer obtains control of our product, which typically occurs upon shipment to the customer. Commercial partnership agreements may also include sales-based royalties and milestones. As we considered the license to be the predominant item to which the royalties relate for these agreements, sales-based royalties and milestones are only recognized when the later of the underlying sale occurs or the performance obligation to which some or all of the sales-based royalty has been satisfied (or partially satisfied). This is generally in the same period that our licensees complete their product sales in their territory, for which we are contractually entitled to a percentage-based royalty. We record royalty revenues based on estimated net sales of licensed products as reported to us by our commercial partners. Differences between actual and estimated royalty revenues have not been material and are typically adjusted in the following quarter when the actual amounts are known. Revenue from sales-based royalties is included in revenues in our consolidated statement of operations.

For sales to hospitals and ASCs, which generally pairs in-house sales representatives with local or regional distributors, the inventory is generally consigned so that products are available when needed for surgical procedures. No revenue is recognized upon the placement of inventory into consignment, as we retain the ability to control the inventory. Revenue is recognized typically as of the date of surgical implantation of the product.

For distributor sales, we sell our products to our distributors, generally outside the United States, who subsequently resell the products to sub-distributors and health care providers, among others. We recognize revenue from product sales when the distributor obtains control of our product, which typically occurs upon shipment to the distributor, in return for agreed-upon, fixed-price consideration. Performance obligations are generally settled quickly after purchase order acceptance; therefore, the value of unsatisfied performance obligations at the end of any reporting period is generally insignificant. We sell to a diversified base of distributors and, therefore, believes there is no material concentration of credit risk.

Certain of our supply agreements contain terms that represent a promise to deliver product at the customer’s discretion that are considered distributor options. We assess if these options provide a material right to the licensee, and if so, they are accounted for as separate performance obligations. Our supply agreements do not provide options that are considered material rights.

Our payment terms are consistent with prevailing practice in the respective markets in which we do business. Most of our customers make payments based on contract terms, which are not affected by contingent events that could impact the transaction price. Payment terms fall within the one-year guidance for the practical expedient, which allows us to forgo adjustment of the contractual payment amount of consideration for the effects of a significant financing component. Our contracts with customers do not customarily provide a right of return, unless certain product quality standards are not met.

Some of our distributor agreements have volume-based discounts with tiered pricing which are generally prospective in nature. These prospective discounts together with any free-of-charge sample units offered are evaluated as potential material rights. If the prospective discounts or free-of-charge sample units are considered material rights, these would be separate performance obligations and a portion of the sales transaction price is allocated to the material right. Revenue allocated to the material right is recognized when the additional goods are transferred to the customer or when the option expires. During 2021, the consideration allocated to material rights was not significant.

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We receive payments from our customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional. Deferred revenue was $1.0 million and $0.2 million as of December 31, 2021 and 2020, respectively.

Generally, customer contracts contain Free on Board (“FOB”) or Ex-Works shipping point terms where the customer pays the shipping company directly for all shipping and handling costs. In those contracts in which we pay for the shipping and handling, the associated costs are generally recorded along with the product sale at the time of shipment in cost of revenue when control over the products has transferred to the customer. Value-add and other taxes we collected concurrently with revenue-producing activities are excluded from revenue. Our general product warranty does not extend beyond an assurance that the product or services delivered will be consistent with stated contractual specifications, which does not create a separate performance obligation. We recognize the incremental costs of obtaining contracts as an expense when incurred as the amortization period of the assets that we otherwise would have recognized is one year or less in accordance with the practical expedient in paragraph ASC 340-40-25-4. These costs are included in selling, general and administrative expenses.

Inventories

Inventories are primarily stated at the lower of standard cost and net realizable value, with approximate cost determined using the first-in, first-out method. Work-in-process and finished goods inventories include materials, labor, and manufacturing overhead. Manufacturing variances attributable to abnormally low production are expensed in the period incurred. Inventory costs associated with product candidates that have not yet received regulatory approval are capitalized if we believe there is probable future commercial use and future economic benefit.

Our policy is to write-down inventory when conditions exist that suggest inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for our products and market conditions. We regularly evaluate 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. Inventory needs and alternative usage avenues are explored within these processes to mitigate inventory exposure. We recorded an inventory reserve of $2.9 million in 2021 based on future sales forecasts as a result of our product rationalization efforts with respect to certain of our Joint Preservation and Restoration product family.

When recorded, inventory write-downs are intended to reduce the carrying value of inventory to its net realizable value. If actual demand for our products deteriorates, or if market conditions are less favorable than those projected, additional inventory write-downs may be required. Other long-term assets include inventory expected to remain on hand beyond one year.

Goodwill and 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. Goodwill is not amortized but is subject to impairment test annually or more frequently if events or changes in circumstances suggest that the carrying value of goodwill may not be recoverable, utilizing either the qualitative or quantitative method.

We test goodwill for impairment at the reporting unit level on an annual basis as of November 30 or more frequently if we believe indicators of impairment exist. We have two reporting units: the legacy Anika reporting unit and a newly created reporting unit established in 2020 upon the acquisitions of Parcus Medical and Arthrosurface. The remaining goodwill as of December 31, 2021 pertains to the legacy Anika reporting unit, as the goodwill with respect to the newly created reporting unit was fully impaired in 2020.

We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. When using the qualitative method in 2021, we considered several factors, including the following:

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Significant assumptions utilized in the impairment analysis included valuation multiple with respect to revenue and weighted-average cost of capital. Based on sensitivity analysis performed on key assumptions at November 30, 2021, a 10% decrease valuation multiples or a 10% increase in the weighted average cost of capital assumption would not have resulted in a fair value below the reporting unit’s carrying value. Accordingly, we determined it was not more likely than not that the fair value of the legacy Anika reporting unit is less than its carrying amount and thus goodwill was not impaired as of November 30, 2021.

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. We conduct annual impairment tests of IPR&D, by comparing the fair value of each IPR&D project to its carrying value. If the carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of the IPR&D project exceeds its fair value. We estimate the fair value for IPR&D using the income approach which incorporates significant estimates and assumptions related to the forecasted results including revenues, expenses, expected economic life of the asset, contributory asset charges and discount rates to estimate future cash flows. During 2021 and 2020, we decided not to further invest in certain of our projects and recorded an impairment charge in the amount of $0.6 million and $1.4 million in 2021 and 2020, respectively, in research and development expenses in the consolidated statements of operations. Based on a sensitivity analysis performed on key assumptions at November 30, 2021 with respect to the remaining IPR&D, a 10% decrease in the long-term growth factor assumption, or 10% increase in the weighted average cost of capital assumption would not have resulted in a fair value below the IPR&D carrying value.

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements is included in Note 2 to the consolidated financial statements in this Annual Report on Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We manage our investment portfolio in accordance with our investment policy. The primary objectives of our investment policy are to preserve principal, maintain a high degree of liquidity to meet operating and other needs, and obtain competitive returns subject to prevailing market conditions without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and investments in a variety of high-quality securities, including money market funds and U.S. treasury bills. The investments are classified as available-for-sale and consequently are recorded at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss). Our portfolio of cash equivalents and investments is subject to interest rate fluctuations, changes in credit quality of the issuer, and other factors.

Foreign Currency Exchange Risk

Foreign currency risk arises from our investments in subsidiaries owned and operated in non-U.S. countries. Such risk is also a result of transactions with customers in countries outside the United States. Approximately $6.4 million of our revenue was denominated in foreign currencies (primarily the Euro) for the year ended December 31, 2021. Gains and losses arising from transactions denominated in foreign currencies are primarily related to intercompany accounts that have been determined to be temporary in nature and cash, accounts payable, and accounts receivable denominated in non-functional currencies. We also utilize clinical vendors that are located in various countries outside of the United States and invoice us in their local currency and we have one major supplier contract denominated in a foreign currency. We do not engage in foreign currency hedging arrangements for these transactions, and, consequently, foreign currency fluctuations may adversely affect our earnings. Unfavorable fluctuations in exchange rates would have a negative impact on our financial statements. The impact of currency exchange rate fluctuations related to our international subsidiaries on our financial statements were insignificant in 2021. We recognize foreign currency gains or losses arising from our operations in the period incurred.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ANIKA THERAPEUTICS,INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34) 44

Consolidated Balance Sheets as of December 31, 2021 and 2020 46

Notes to Consolidated Financial Statements 50

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Anika Therapeutics, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Anika Therapeutics, Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income (loss), cash flows, and stockholders’ equity for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America (GAAP).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Inventories — Refer to Notes 2 and 5 to the financial statements

Critical Audit Matter Description

The Company evaluates inventory each reporting period for excess quantities and obsolescence, establishing reserves when necessary based upon historical experience, assessment of economic conditions, and expected demand. Once recorded, these reserves are considered permanent adjustments to the carrying value of inventory. As of December 31, 2021, the Company has total inventories of $55.0 million, net of excess quantities and obsolescence reserves.

We identified the reserve for excess quantities and obsolete inventory as a critical audit matter because of the significant estimates and assumptions management makes to quantify and to record the reserve, including the determination of expected demand. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the methodology and the reasonableness of assumptions including expected demand.

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How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the reserve for excess quantities and obsolete inventory including management’s estimate of expected demand, included the following, among others:

/s/ Deloitte & Touche LLP

Boston, Massachusetts

March 10, 2022

We have served as the Company’s auditor since 2017.

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Anika Therapeutics, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except per share data)

December 31,

Current assets:

Prepaid expenses and other current assets 8,289 8,754

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accrued expenses and other current liabilities 17,847 14,793

Contingent consideration – current portion 4,315 13,090

Contingent consideration – long term portion - 22,320

Commitments and contingencies (Note 12)

Stockholders’ equity:

Accumulated other comprehensive loss (5,718 ) (4,542 )

Total liabilities and stockholders’ equity $ 347,535 $ 365,605

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

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Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except per share data)

For the Years Ended December 31,

Operating expenses:

Goodwill impairment charge - 42,520 -

Change in fair value of contingent consideration (21,095 ) (28,666 ) -

Interest and other (expense) income, net (188 ) (302 ) 1,873

(Benefit from) provision for income taxes (1,707 ) (4,642 ) 8,928

Net income (loss) per share:

Weighted average common shares outstanding:

Foreign currency translation adjustment (1,176 ) 1,356 (372 )

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

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Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(in thousands)

Accumulated

Common Stock Other Total

Number of $.01 Par Additional Paid Retained Comprehensive Stockholders'

Shares Value in Capital Earnings Loss Equity

Vesting of restricted stock units 17 – – – – –

Forfeiture of restricted stock awards (13 ) – – – – –

Stock-based compensation expense – – 6,087 – – 6,087

Retirement of common stock for minimum tax withholdings (5 ) – (293 ) – – (293 )

Other comprehensive loss – – – – (372 ) (372 )

Issuance of common stock for equity awards 123 1 1,523 - - 1,524

Vesting of restricted stock units 54 - - - - -

Forfeiture of restricted stock awards (9 ) - - - - -

Stock-based compensation expense - - 5,386 - - 5,386

Retirement of common stock for minimum tax withholdings (8 ) - (262 ) - - (262 )

Repurchase of common stock (139 ) (1 ) 1 - - -

Other comprehensive income - - - - 1,356 1,356

Issuance of common stock for equity awards 32 - 1,128 - - 1,128

Vesting of restricted stock units 92 1 (1 ) - - -

Stock-based compensation expense - - 11,085 - - 11,085

Other comprehensive income - - - - (1,176 ) (1,176 )

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

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Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

For the years ended December 31,

Cash flows from operating activities:

Amortization of acquisition related intangible assets 7,837 7,381 1,034

Amortization of acquisition related inventory step-up 6,465 11,082 -

Goodwill impairment charge - 42,520 -

Change in fair value of contingent consideration (21,095 ) (28,666 ) -

Loss on impairment of intangible asset 600 2,439 389

Provision (recovery) for doubtful accounts 64 549 (499 )

Changes in operating assets and liabilities:

Prepaid expenses, other current and long-term assets 1,424 (1,783 ) (1,641 )

Accrued expenses, other current and long-term liabilities 3,510 (142 ) 3,805

Payments of contingent consideration (2,780 ) (522 ) -

Cash flows from investing activities:

Purchases of property and equipment (5,143 ) (1,628 ) (2,827 )

Net cash (used in) provided by investing activities (3,118 ) (71,264 ) 39,691

Cash flows from financing activities:

Payments made on finance leases (201 ) (208 ) -

Proceeds from long term debt - 50,000 -

Repayments of long term debt - (50,350 ) -

Repurchases of common stock - - (30,000 )

Payments of contingent consideration (7,220 ) (4,478 ) -

Net cash used by financing activities (6,779 ) (3,774 ) (8,142 )

Exchange rate impact on cash 69 327 (133 )

(Decrease) increase in cash and cash equivalents (1,431 ) (61,646 ) 68,421

Supplemental disclosure of cash flow information:

Cash paid for income taxes, net of refunds $ 1,233 $ 993 $ 9,257

Non-cash investing activities:

Contingent consideration fair value on acquisition date $ - $ 69,076 $ -

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

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Anika Therapeutics,Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

1. Nature of Business

Anika Therapeutics, Inc. (“the Company”) is a global joint preservation company that creates and delivers meaningful advancements in early intervention orthopedic care, including in the areas of osteoarthritis (“OA”) pain management, regenerative solutions, soft tissue repair and bone preserving joint technologies.

In early 2020, the Company expanded its overall technology platform through its strategic acquisitions of Parcus Medical, LLC (“Parcus Medical”), a sports medicine implant and instrumentation solutions provider focused on sports medicine and soft tissue repair, and Arthrosurface Inc. (“Arthrosurface”), a company specializing in less invasive, bone preserving partial and total joint replacement solutions. These acquisitions broadened the Company's product portfolio, developed over its 30 years of expertise in hyaluronic acid technology, into joint preservation and restoration, added higher-growth revenue streams, increased its commercial capabilities, diversified its revenue base, and expanded its product pipeline and research and development expertise.

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

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

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Anika Therapeutics, Inc. and its wholly owned subsidiaries, Anika Securities, Inc., Anika Therapeutics S.r.l. (“Anika S.r.l.”), Anika Therapeutics Limited, Parcus Medical and Arthrosurface. All intercompany balances and transactions have been eliminated in consolidation.

Reclassification of Prior Period Amounts

Certain prior period financial information has been reclassified to conform to current period presentation. The Company reclassified certain prior period amounts in the significant components of the Company’s deferred tax assets and liabilities as of December 31, 2020, in Note 17,Income Taxes, to conform to current year classification.

Foreign Currency Translation

The functional currency of Anika S.r.l. is the Euro, and the functional currency of Anika Therapeutics Limited is the British Pound Sterling. Assets and liabilities of the foreign subsidiaries are translated using the exchange rate existing on each respective balance sheet date. Revenues and expenses are translated using the average exchange rates for the period. The translation adjustments resulting from this process are included in stockholders’ equity as a component of accumulated other comprehensive income (loss) which resulted in a gain (loss) from foreign currency translation of ($1.2) million, $1.3 million, and ($0.4) million for the years ended December 31, 2021, 2020, and 2019, respectively.

Gains and losses resulting from foreign currency transactions are recognized in the consolidated statements of operations. Recorded balances that are denominated in a currency other than the functional currency are remeasured to the functional currency using the exchange rate at the balance sheet date and gains or losses are recorded in the statements of operations. The Company recognized a gain (loss) from foreign currency transactions of ($0.4) million, $0.3 million, and ($0.3) million during the years ended December 31, 2021, 2020, and 2019, respectively.

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Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. In determining the adequacy of the allowance for doubtful accounts, management specifically analyzes individual accounts receivable, historical bad debts, customer concentrations, customer creditworthiness, current and reasonable and supportable forecasts of future economic conditions, accounts receivable aging trends, and changes in the Company’s customer payment terms. A summary of activity in the allowance for doubtful accounts is as follows:

December 31,

Amounts recovered (92 ) (86 ) (505 )

Amounts written off (73 ) (78 ) (33 )

Translation adjustments (72 ) 90 (31 )

Revenue Recognition

Pursuant to ASC 606,Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when a customer obtains control of promised goods or services. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are capable of being distinct or distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Revenue

The Company generate sales principally through three types of customers: (i) commercial partnerships (ii) hospitals and ASCs, and (iii) distributors, referred to as the distribution model.

For commercial partnership sales, the Company sells its products directly to these partners, who perform the vast majority of the downstream sales and marketing activities to customers and end-users. These arrangements may include the grant of certain licenses, performance of development services, and the supply of product. The Company’s largest such customer, DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopaedics, Inc., part of the Johnson & Johnson Medical Companies (“Mitek”), represented 45%, 49% and 71% of total revenues for the years-ended December 31, 2021, 2020 and 2019 respectively. The Company completed the performance obligations related to granted licenses and development services under the agreements with Mitek prior to 2016 and has no remaining material performance obligations. The Company recognizes revenue from product sales when the customer obtains control of the Company’s product, which typically occurs upon shipment to the customer. Commercial partnership agreements may also include sales-based royalties and milestones. As the Company considered the license to be the predominant item to which the royalties relate for these agreements, sales-based royalties and milestones are only recognized when the later of the underlying sale occurs or the performance obligation to which the sales-based royalty has been satisfied (or partially satisfied). This is generally in the same period that the Company’s licensees complete their product sales in their territory, for which the Company is contractually entitled to a percentage-based royalty. The Company records royalty revenues based on estimated net sales of licensed products as reported to the Company by its commercial partners. Differences between actual and estimated royalty revenues have not been material and are typically adjusted in the following quarter when the actual amounts are known. Revenue from sales-based royalties is included in revenue in the consolidated statement of operations. The Company’s certain supply agreements represent a promise to deliver product at the customer’s discretion that are considered distributor options. The Company assesses if these options provide a material right to the licensee, and if so, they are accounted for as separate performance obligations. Substantially all of the Company’s supply agreements do not provide options that are considered material rights.

For sales to hospitals and ASCs, which generally pairs in house sales representatives with local or regional distributors, the inventory is generally consigned so that products are available when needed for surgical procedures. No revenue is recognized upon the placement of inventory into consignment, as the Company retains the ability to control the inventory. Revenue is typically recognized as of the date of surgical implantation of the product.

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For distributor sales, the Company sells its products principally to distributors, generally outside the United States, who subsequently resell the products to sub-distributors and health care providers, among others. The Company recognizes revenue from product sales when the distributor obtains control of the Company’s product, which typically occurs upon shipment to the distributor, in return for agreed-upon, fixed-price consideration. Performance obligations are generally settled quickly after purchase order acceptance; therefore, the value of unsatisfied performance obligations at the end of any reporting period is generally insignificant. The Company sells to a diversified base of distributors and, therefore, believes there is no material concentration of credit risk.

The Company’s payment terms are consistent with prevailing practice in the respective markets in which the Company does business. Most of the Company’s customers make payments based on contract terms, which are not affected by contingent events that could impact the transaction price. Payment terms fall within the one-year guidance for the practical expedient, which allows the Company to forgo adjustment of the contractual payment amount of consideration for the effects of a significant financing component. The Company’s contracts with customers do not customarily provide a right of return, unless certain product quality standards are not met.

Some of the Company’s distributor agreements have volume-based discounts with tiered pricing which are generally prospective in nature. These prospective discounts together with any free-of-charge sample units offered are evaluated as potential material rights. If the prospective discounts or free-of-charge sample units are considered material rights, these would be separate performance obligations and a portion of the sales transaction price is allocated to the material right. Revenue allocated to the material right is recognized when the additional goods are transferred to the customer or when the option expires. During 2021, the consideration allocated to material rights was not significant.

The Company receives payments from its customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when its right to consideration is unconditional. Deferred revenue was $1.0 million and $0.2 million as of December 31, 2021 and 2020, respectively.

Generally, customer contracts contain Free on Board (“FOB”) or Ex-Works shipping point terms where the customer pays the shipping company directly for all shipping and handling costs. In those contracts in which the Company pays for the shipping and handling, the associated costs are generally recorded along with the product sale at the time of shipment in cost of revenue when control over the products has transferred to the customer. Value-add and other taxes collected by the Company concurrently with revenue-producing activities are excluded from revenue. The Company’s general product warranty does not extend beyond an assurance that the product or services delivered will be consistent with stated contractual specifications, which does not create a separate performance obligation. The Company recognizes the incremental costs of obtaining contracts as an expense when incurred as the amortization period of the assets that the Company otherwise would have recognized is one year or less in accordance with the practical expedient in paragraph ASC 340-40-25-4. These costs are included in selling, general and administrative expenses.

Licensing, Milestone and Contract Revenue

The agreements with Mitek include variable consideration such as contingent development and regulatory milestones. Since 2016, there have been no remaining regulatory milestones related to the Mitek agreements. In general, variable consideration is included in the transaction price only to the extent a significant reversal in the amount of cumulative revenue recognized is not probable to occur.

Cash and Cash Equivalents

The Company considers only those investments which are highly liquid, readily convertible to cash, and that mature within 90 days from date of purchase to be cash equivalents. The Company’s cash equivalents consist of money market funds.

Investments

All of the Company’s investments are classified as available-for-sale which consist of U.S. treasury bills and are carried at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income (loss), net of related income taxes. For securities sold prior to maturity, the cost of securities sold is based on the specific identification method. Realized gains and losses on the sale of investments are recorded in interest and other income, net. Interest is recorded when earned. Investments with original maturities greater than approximately three months and remaining maturities less than one year are classified as short-term investments. Investments with remaining maturities greater than one year are classified as long-term investments. The Company had no investments as of December 31, 2021.

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All of the Company’s investments are subject to a periodic impairment review. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether (i) the Company intends to sell, or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through earnings. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors.

Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in the consolidated statement of operations as a component of credit loss expense. Available-for-sale securities are charged-off against the allowance or, in the absence of any allowance, written down through earnings when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.

During the years ended December 31,2021,2020 and 2019, the Company did not record any impairment charges on its available-for-sale securities because it is not more likely than not that the Company will be required to sell these securities before the recovery of their cost basis.

Concentration of Credit Risk

The Company has no significant off-balance sheet risks related to foreign exchange contracts, option contracts, or other foreign hedging arrangements. The Company’s cash equivalents and investments are held with two major international financial institutions.

The Company, by policy, routinely assesses the financial strength of its customers. As a result, the Company believes that its accounts receivable credit risk exposure is limited.

As of December 31,2021 and 2020, Mitek represented 41% and 44%, respectively, of the Company’s accounts receivable balance. No other single customer accounted for more than 10% of accounts receivable in either period.

Inventories

Inventories are primarily stated at the lower of standard cost and net realizable value, with approximate cost determined using the first-in, first-out method. Work-in-process and finished goods inventories include materials, labor, and certain manufacturing overhead. Manufacturing variances attributable to abnormally low production are expensed in the period incurred. Inventory costs associated with product candidates that have not yet received regulatory approval are capitalized if the Company believes there is probable future commercial use and future economic benefit.

The Company’s policy is to write-down inventory when conditions exist that suggest inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for the Company’s products and market conditions. The Company regularly evaluates the ability to realize the value of inventory based on a combination of factors including, but not limited to, historical usage rates, forecasted sales or usage, product end of life dates, and estimated current or future market values. Purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure.

When recorded, inventory write-downs are intended to reduce the carrying value of inventory to its net realizable value. If actual demand for the Company’s products deteriorates, or if market conditions are less favorable than those projected, additional inventory write-downs may be required. Other long-term assets include inventory expected to remain on hand beyond one year.

Leases

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the circumstances present and evaluates whether the lease is an operating lease or a finance lease at the commencement date. Operating and finance leases with a term greater than one year are recognized on the consolidated balance sheet as right-of-use assets, lease liabilities, and, if applicable, long-term lease liabilities. The Company includes renewal options to extend the lease in the lease term where it is reasonably certain that it will exercise these options. Operating and finance lease liabilities and the corresponding right-of-use assets are recorded based on the present values of lease payments over the lease terms. The Company elected an accounting policy to combine the non-lease components (which include common area maintenance, taxes and insurance) with the related lease component. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rates, which are the rates that would be incurred to borrow on a collateralized basis, over similar terms, amounts equal to the lease payments in a similar economic environment. Variable payments that do not depend on a rate or index are not included in the lease liability and are recognized as incurred. Lease contracts do not include residual value guarantees nor do they include restrictions or other covenants. Certain adjustments to the right-of-use assets may be required for items such as initial direct costs paid, incentives received or lease prepayments. If significant events, changes in circumstances, or other events indicate that the lease term or other inputs have changed, the Company would reassess lease classification, remeasure the finance and operating lease liabilities by using revised inputs as of the reassessment date, and adjust the right-of-use asset. Operating lease expense is recognized on a straight-line basis over the lease term. Finance lease expense is recognized based on the effective-interest method over the lease term.

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Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, which are typically:

Asset Estimated useful life (in years)

Computer equipment and software 3 - 10

Furniture and fixtures 5 - 7

Equipment 5 - 20

Leasehold improvements Shorter of useful life or term of lease

Maintenance and repairs are charged to expense when incurred; additions and improvements are capitalized. Fully depreciated assets are retained in the accounts until they are no longer used and no further charge for depreciation is made in respect of these assets. When an item is sold, retired or removed from service, the cost and related accumulated depreciation is relieved, and the resulting gain or loss, if any, is recognized in income.

Construction-in-process assets are stated at cost, which includes the cost of construction and other direct costs attributable to the construction. Construction-in-process assets are not depreciated until such time as the relevant assets are completed and put into use.

Goodwill and IPR&D Assets

Goodwill is the amount by which the purchase price of acquired net assets in a business combination exceeded the fair values of net identifiable assets on the date of acquisition. Acquired In-Process Research and Development (“IPR&D”) represents the fair value assigned to research and development assets that the Company acquires that have not been completed at the date of acquisition or are pending regulatory approval in certain jurisdictions. The value assigned to the acquired IPR&D is determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting revenue from the projects, and discounting the net cash flows to present value.

Goodwill and IPR&D are not amortized but are evaluated for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The goodwill impairment assessment is performed by reporting unit. A reporting unit is the operating segment, or a business one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. The Company has two reporting units: the legacy Anika reporting unit, which specializes in therapies based on its hyaluronic acid, or HA, technology platform, and a newly formed reporting unit established in 2020 upon the acquisitions of Parcus Medical and Arthrosurface. Factors that the Company considers important, on an overall company basis, that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the Company’s use of the acquired assets or the strategy for its overall business, significant negative industry or economic trends, a significant decline in the Company’s stock price for a sustained period, or a reduction of its market capitalization relative to net book value.

Under US GAAP, the Company has the option to perform a qualitative assessment to determine if it is necessary to perform the impairment test. If the Company concludes, based on a qualitative assessment, it is not more likely than not that the Goodwill or the IPR&D asset is impaired, the Company is not required to perform the quantitative test. The Company has an unconditional option to bypass the qualitative assessment in any period and proceed directly to the quantitative impairment test.

To conduct quantitative impairment tests of goodwill, the fair value of the reporting unit is compared to its carrying value. If the reporting unit’s carrying value exceeds its fair value, the Company records an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value, not to exceed the recorded amount of goodwill. The Company recorded a non-cash goodwill impairment charge with respect to the newly formed reporting unit amounted to $42.5 million for the year ended December 31, 2020. Please see Note 8,Goodwill for further details.

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The Company performed a qualitative annual assessment for impairment of the remaining goodwill with respect to legacy Anika reporting unit as of November 30, 2021, including consideration of (i) general macroeconomic factors, (ii) industry and market conditions, and (iii) the extent of the excess of the fair value over the carrying value indicated in prior impairment testing. Accordingly, the Company determined it was not more likely than not that the fair value of the legacy Anika reporting unit is less than its carrying amount and thus goodwill was not impaired as of November 30, 2021.

To conduct impairment tests of IPR&D, the fair value of the IPR&D project is compared to its carrying value. If the carrying value exceeds its fair value, the Company records an impairment loss to the extent that the carrying value of the IPR&D project exceeds its fair value. The Company estimates the fair value for IPR&D using the income approach, which is based on the Multi-Period Excess Earnings Method (“MPEEM”). MPEEM measures economic benefit indirectly by calculating the income attributable to an asset after appropriate returns are paid to complementary assets used in conjunction with the subject asset to produce the earnings associated with the subject asset, commonly referred to as contributory asset charges. This approach incorporates significant estimates and assumptions related to the forecasted results including revenues, expenses, expected economic life of the asset, contributory asset charges and discount rates to estimate future cash flows.

Long-Lived Assets

Long-lived assets primarily include property and equipment and intangible assets with finite lives. The Company’s intangible assets are comprised of purchased developed technologies, patents, trade names, customer relationships and distributor relationships. These intangible assets are carried at cost, net of accumulated amortization. Amortization is recorded on a straight-line basis over the intangible assets' useful lives, which range from approximately five to sixteen years. The Company reviews long-lived assets for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis.

In determining the useful lives of intangible assets, the Company considers the expected use of the assets and the effects of obsolescence, demand, competition, anticipated technological advances, changes in surgical techniques, market influences and other economic factors. For technology-based intangible assets, the Company considers the expected life cycles of products, absent unforeseen technological advances, which incorporate the corresponding technology.

Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance. The accounting standard establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

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:

The Company’s financial assets have been classified as Level 1. The Company’s financial assets (which include cash equivalents and investments) have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing third party pricing services. The Company’s financial liabilities have been classified as Level 3. The Company’s financial liabilities (which include contingent considerations as discussed in Note 4 – Fair Value Measurements) have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing a third-party valuation specialist.

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Research and Development

Research and development costs consist primarily of salaries and related expenses for personnel, clinical trial expenses and fees paid to outside consultants and outside service providers. Research and development costs are expensed as incurred.

Stock-Based Compensation

The Company has stock-based compensation plans under which it grants various types of equity-based awards, the cost of which is based on the grant-date fair value of the underlying award and recognized over the period during which an employee is required to provide service in exchange for the award, which is generally the vesting period.

For performance-equity awards with market-based conditions, compensation cost is measured at the date of the award and is recorded over the vesting period, regardless of the likelihood of achievement of the market-based performance criteria. For performance-based equity awards with financial and business milestone achievement targets, compensation cost is based on the probable outcome of the performance conditions. Changes to the probability assessment and the estimated shares expected to vest will result in adjustments to the related stock-based compensation expense that will be recorded in the period of the change. If the performance targets are not achieved, no compensation cost is recognized, and any previously recognized compensation cost is reversed.

See Note 14,Equity Incentive Plan, for a description of the types of stock-based awards granted, the compensation expense related to such awards, and detail of equity-based awards outstanding.

Income Taxes

The Company’s income tax expense includes U.S. and international income taxes. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effects of these timing differences are reported as deferred tax assets and liabilities. Deferred tax assets are recognized for the estimated future tax effects of deductible temporary differences, tax operating losses, and tax credit carryforwards (including investment tax credits). Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes that it is more likely than not that all or a portion of deferred tax assets will not be realized, the Company establishes a valuation allowance to reduce the deferred tax assets to the appropriate valuation. To the extent the Company establishes a valuation allowance or increases or decreases this allowance in a given period, it includes the related tax expense or tax benefit within the tax provision in the consolidated statement of operations in that period.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), which includes foreign currency translation adjustments. For the purposes of comprehensive income (loss) disclosures, the Company does not record tax provisions or benefits for the net changes in the foreign currency translation adjustment, as it intends to indefinitely reinvest undistributed earnings of its foreign subsidiary. Accumulated other comprehensive income (loss) is reported as a component of stockholders' equity.

Segment Information

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its President and Chief Executive Officer as of December 31, 2021. Based on the criteria established by ASC 280,Segment Reporting, the Company has one operating and reportable segment.

Contingencies

In the normal course of business, the Company is involved from time-to-time in various legal proceedings and other matters such as contractual disputes, which are complex in nature and have outcomes that are difficult to predict. The Company records accruals for loss contingencies to the extent that it concludes that it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. The Company considers all relevant factors when making assessments regarding these contingencies. Although the outcomes of any potential legal proceedings are inherently difficult to predict, the Company does not expect the resolution of any potential legal proceedings to have a material adverse effect on its financial position, results of operations, or cash flow.

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Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12,Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify US GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The Company adopted ASU 2019-12 as of January 1, 2021. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures.

3. Business Combinations

Parcus Medical, LLC

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

The acquisition of Parcus Medical has been accounted for as a business combination under ASC 805, Business Combinations (“ASC 805”). Under ASC 805, assets acquired and liabilities assumed in a business combination are recorded at their fair value as of the acquisition date. The Company’s consolidated financial statements include results of operations for Parcus Medical from the January 24, 2020 acquisition date.

Consideration Transferred

Pursuant to the Parcus Medical Merger Agreement, the Company acquired all outstanding equity of Parcus Medical for estimated total purchase consideration of $75.1 million, as of January 24, 2020 which consisted of:

Cash consideration $ 32,794

Deferred consideration 1,642

Estimated fair value of contingent consideration 40,700

Estimated total purchase consideration $ 75,136

Pursuant to the Parcus Medical Merger Agreement, contingent consideration represents additional payments that the Company may be required to make in the future could total up to $60.0 million depending on the level of net sales of Parcus Medical products generated from 2020 through 2022. The fair value of contingent consideration related to net sales as of January 24, 2020 was determined based on a Monte Carlo simulation model in an option pricing framework at the acquisition date, whereby a range of possible scenarios were simulated. There also was deferred consideration related to certain purchase price holdbacks, which was resolved within one year of the acquisition date in accordance with the Parcus Merger. The liability for contingent and deferred consideration is included in current and long-term liabilities on the consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved. As of December 31, 2021, the net sales related contingent consideration amounted to $4.3 million, which is included in current liabilities. The Company does not expect any further milestones to be achieved as of December 31, 2021. See Note 4,Fair Value Measurements, for additional discussion of contingent consideration as of December 31, 2021.

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

Fair Value of Net Assets Acquired

The estimate of fair value as of the acquisition date required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable, however, actual results may differ from these estimates.

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

Recognized identifiable assets acquired and liabilities assumed:

Cash and cash equivalents $ 196

Accounts receivable 2,029

Prepaid expenses and other current assets 364

Property and equipment, net 1,099

Right-of-use assets 944

Accounts payable, accrued expenses and other current liabilities (2,763 )

Other long-term liabilities (594 )

Lease liabilities (735 )

Net assets acquired 55,508

Estimated total purchase consideration $ 75,136

The acquired intangible assets based on estimates of fair value as of January 24, 2020 are as follows:

Developed technology $ 41,100

Customer relationships 1,100

Total acquired intangible assets $ 44,000

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

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The fair value of developed technology will be amortized over a useful life of 15 years, the fair value of customer relationships over 10 years, and the fair value of the trade name over 5 years.

The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and assigned to the newly established reporting unit for Parcus Medical and Arthrosurface. The goodwill is attributable to the workforce of the business and the value of future technologies expected to arise after the acquisition. Goodwill will not be amortized and is expected to be deductible for income tax purposes as the acquisition of the limited liability company is an asset purchase for tax purposes. See Note 8,Goodwill, for further discussion.

Arthrosurface, Inc.

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

The acquisition of Arthrosurface has been accounted for as a business combination under ASC 805. Under ASC 805, assets acquired and liabilities assumed in a business combination are recorded at their fair values as of the acquisition date. Anika’s consolidated financial statements include results of operations for Arthrosurface from the February 3, 2020 acquisition date.

Consideration Transferred

Pursuant to the Arthrosurface Merger Agreement, the Company acquired all outstanding equity of Arthrosurface for estimated total purchase consideration of $90.3 million, as of February 3, 2020 which consisted of:

Cash consideration $ 61,909

Estimated fair value of contingent consideration 28,376

Estimated total purchase consideration $ 90,285

Pursuant to the Arthrosurface Merger Agreement, the Company could be required to make future payments of up to $40.0 million depending on the achievement of regulatory milestones and the level of net sales of Arthrosurface products from 2020 through 2021. The fair value of contingent consideration related to regulatory milestones as of February 3, 2020 was determined through a scenario-based discounted cash flow analysis using scenario probabilities and regulatory milestone dates. The fair value of contingent consideration related to net sales achievement as of February 3, 2020 was determined based upon a Monte Carlo simulation approach at acquisition date, whereby a range of possible scenarios were simulated. The Company paid $5.0 million in October 2020 and $10.0 million in July 2021 based upon the achievement of two distinct regulatory milestones. As of December 31, 2021, the remaining regulatory milestone and the net sales milestone were not achieved. See Note 4,Fair Value Measurements, for additional discussion of contingent consideration as of December 31, 2021 and 2020.

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

Fair Value of Net Assets Acquired

The estimate of fair value required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable. However, actual results may differ from these estimates.

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

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Recognized identifiable assets acquired and liabilities assumed:

Cash and cash equivalents $ 1,072

Accounts receivable 5,368

Prepaid expenses and other current assets 535

Property, plant and equipment 3,394

Other long-term assets 7,548

Accounts payable, accrued expenses and other liabilities (3,929 )

Deferred tax liabilities (11,147 )

Net assets acquired 67,393

Estimated total purchase consideration $ 90,285

Intangible assets acquired consist of:

Developed technology $ 37,000

Customer relationships 7,900

Total acquired intangible assets $ 48,900

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

The fair value of developed technology that will be amortized over an estimated useful life of 15 years, the fair value of customer relationships over 10 years, and the fair value of trade names over 5 years. A total of $0.6 million represents the fair value of IPR&D with an indefinite useful life which was impaired during the quarter ended December 31, 2021. See Note 7,Acquired Intangible Assets, Net, for further discussion.

The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and assigned to the newly established reporting unit for Parcus Medical and Arthrosurface. The goodwill is attributable to the workforce of the business and the value of future technologies expected to arise after the acquisition. Goodwill will not be amortized and is not expected to be deductible for income tax purposes as the acquisition of the corporation is a stock purchase for tax purposes. See Note 8,Goodwill, for further discussion.

Pro forma Information

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

The unaudited pro forma information for the year ended December 31, 2021 and 2020 was calculated after applying the Company’s accounting policies and the impact of acquisition date fair value adjustments. The pro forma financial information presents the combined results of operations of Anika, Parcus Medical and Arthrosurface as if the acquisitions had occurred on January 1, 2019 after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are factually supportable and directly attributable to the acquisitions.

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

The following table presents unaudited supplemental pro forma information:

Years Ended December 31,

4. Fair Value Measurements

The Company held investments in the form of U.S. treasury bills of $2.5 million at December 31, 2020 that it had classified as available-for-sale securities. Unrealized losses and the associated tax impact on the Company’s available-for-sale securities were insignificant as of December 31, 2020. There were no available-for-sale securities as of December 31, 2021.

The Company’s investments are all classified within Levels 1 of the fair value hierarchy and are valued based quoted prices in active markets. For cash, current receivables, accounts payable, and interest accrual, the carrying amounts approximate fair value, because of the short maturity of these instruments, and therefore fair value information is not included in the table below. Contingent consideration related to the previously described business combinations are classified within Level 3 of the fair value hierarchy as the determination of fair value uses considerable judgement and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability.

The classification of the Company’s cash equivalents and investments within the fair value hierarchy is as follows:

Active Markets Significant Other Significant

for Identical Assets Observable Inputs Unobservable Inputs

December 31, 2021 (Level 1) (Level 2) (Level 3) Amortized Cost

Cash equivalents:

Other current liabilities:

Contingent Consideration - Short Term $ 4,315 $ - $ - $ 4,315 $ -

Active Markets Significant Other Significant

for Identical Assets Observable Inputs Unobservable Inputs

December 31, 2020 (Level 1) (Level 2) (Level 3) Amortized Cost

Cash equivalents:

Investments:

Other current and long-term liabilities:

Contingent Consideration - Short Term $ 13,090 $ - $ - $ 13,090 $ -

Contingent Consideration - Long Term 22,320 - - 22,320 -

Total other current and long-term liabilities $ 35,410 $ - $ - $ 35,410 $ -

There were no transfers between fair value levels in 2021 or 2020.

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Contingent Consideration

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

Years Ended December 31

Balance, beginning January 1 $ 35,410 $ -

Under the Parcus Medical Merger Agreement and Arthrosurface Merger Agreement, there are earn-out milestones totaling up to $100 million payable from 2020 to 2022. Parcus Medical has net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface has both regulatory and net sales earn-out milestones annually in 2020 and 2021.

In order to determine the fair value of contingent consideration at each reporting date, the projected contingent payment amounts were discounted back to the current period using a discounted cash flow model or a Monte Carlo simulation approach. The unobservable inputs used in the fair value measurement of the Company’s contingent consideration are the probabilities of successful achievement, the net sales estimates, the weighted average cost of capital used for the Monte Carlo simulation, discount rate and the periods in which the milestones are expected to be achieved. The discount rates used for the net sales earn-out milestone ranged from 3.1% - 3.4%. The weighted average cost of capital for Parcus Medical decreased from 11.4% as of December 31, 2020 to 11.3% as of December 31, 2021. The weighted average cost of capital for Arthrosurface was 11.4% as of December 31, 2020. Increases or decreases in the discount rate would result in a lower or higher fair value measurement, respectively.

As of December 31, 2020, the probability of successful achievement of the regulatory earn-out milestones was determined to be in a range of 60%-75%. In October 2020, the Company made a regulatory-based milestone payment of $5.0 million pursuant to the terms of the Arthrosurface Merger Agreement as a result of regulatory clearance for the WristMotion Total Arthroplasty System.

As of December 31, 2021, a net sales growth milestone with respect to the Parcus Merger Agreement was achieved, and a liability in the amount of $4.3 million was recorded in current liabilities. In June 2021, the Company received regulatory clearance for a reverse shoulder implant system, which triggered a $10.0 million regulatory milestone payment per the terms of the Arthrosurface Merger Agreement. This amount was paid in July 2021. As of December 31, 2021, the remaining regulatory milestone and the net sales milestone under the Arthrosurface Merger Agreement were not achieved. The Company does not expect the remaining milestone under the Parcus Medical Merger Agreement to be achieved.

The overall fair value of the contingent consideration decreased by $21.1 million and $28.7 million during the years ended December 31, 2021 and 2020, respectively, due primarily to the decrease in the likelihood that certain contingent milestones would be achieved.

5. Inventories

Inventories consist of the following:

December 31,

Inventories are stated net of inventory reserves of approximately $9.1 million and $6.9 million, as of December 31, 2021 and 2020, respectively.

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6. Propertyand Equipment

Property and equipment is stated at cost and consists of the following:

December 31,

Depreciation expense was $6.5 million, $6.1 million, and $5.0 million for the years ended December 31,2021,2020, and 2019, respectively.

7. Acquired Intangible Assets, Net

Intangible assets consist of the following:

Total amortization expense with respect to the definite-lived acquired intangible assets was $7.8 million, $7.4 million and $1.0 million for the years ended December 31,2021,2020, and 2019.

During the fourth quarter of 2021, the Company decided not to further invest in a joint technology IPR&D project, as it is no longer aligned with the Company’s core strategic focus. As a result, the Company recorded an impairment charge in the amount of $0.6 million in research and development expenses in the Company’s consolidated statements of operations.

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During the fourth quarter of 2020, the Company decided not to further invest in its Hyalobone and Hyalonect IPR&D projects as they were no longer aligned with the Company’s core strategic focus. As a result, the Company recorded an impairment charge in the period totaling $1.4 million recorded in research and development expenses in the Company’s consolidated statements of operations.

The Company performed its annual assessment of the remaining IPR&D intangible asset as of November 30, 2021. The Company estimated the fair value of the IPR&D intangible assets using the income approach which is based on the Multi-Period Excess Earnings Method (“MPEEM”). MPEEM measures economic benefit indirectly by calculating the income attributable to an asset after appropriate returns are paid to complementary assets used in conjunction with the subject asset to produce the earnings associated with the subject asset, commonly referred to as contributory asset charges. This approach incorporates significant estimates and assumptions related to the forecasted results including revenues, expenses, expected economic life of the asset, contributory asset charges and discount rates to estimate future cash flows. While assumptions utilized are subject to a high degree of judgment and complexity, the Company made its best estimate of future cash flows under a high degree of economic uncertainty that existed as of November 30, 2021. In developing its assumptions, the Company also considered observed trends of its industry participants. No impairment existed as the estimated fair value of the remaining IPR&D intangible asset was greater than its carrying value.

During 2020, the Company determined that it would not pursue CE Mark renewals for certain of its legacy products, which resulted in an impairment of certain developed technology related assets in the amount of $1.0 million in 2020. During 2019, the Company recorded $0.4 million of impairments, including a $0.3 million impairment charge for the Hyalospine developed technology asset as the Company made the decision not to renew its CE Mark as the product was not aligned with the Company’s core strategic focus. The impairment charges in 2020 and 2019 were recorded in selling, general and administrative expenses on the Company’s consolidated statements of operations.

8. Goodwill

The following table provides a rollforward of goodwill for the years ended December 31, 2021 and 2020:

Years Ended December 31

Effect of foreign currency adjustments (632 ) 719

In the first quarter of 2020, the Company acquired Parcus Medical and Arthrosurface, as further discussed in Note 3,Business Combinations. As a result of the acquisitions, the Company determined that it had two reporting units. The newly formed reporting unit includes Parcus Medical and Arthrosurface, which share similar economic and qualitative characteristics. This reporting unit produces soft tissue repair surgical products, instruments and joint implants. The legacy Anika business remains in one reporting unit, which specializes in therapies based on its hyaluronic acid, or HA, technology platform. At the beginning of 2021, the remaining goodwill balance was related to the legacy Anika reporting unit, as the goodwill related to the newly created reporting unit was entirely impaired in 2020.

2021 Goodwill Impairment Assessment

As part of its annual impairment testing as of November 30, 2021, for the goodwill related to the legacy Anika reporting unit, the Company performed a qualitative assessment including consideration of (i) general macroeconomic factors, (ii) industry and market conditions, and (iii) the extent of the excess of the fair value over the carrying value indicated in prior impairment testing. The Company determined it was not more likely than not that the fair value of the legacy Anika reporting unit is less than its carrying amount and thus goodwill was not impaired as of November 30, 2021.

2020 Goodwill Impairment Assessment

Government policy responses to the COVID-19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of global elective surgical procedures. As a result, the widespread economic volatility triggered impairment testing in the first quarter of 2020, and accordingly, the Company performed interim impairment testing on the goodwill balances of its reporting units. The Company also performed its annual impairment testing in the fourth quarter of 2020.

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The Company estimated the fair value of the reporting units using a discounted cash flow method, which is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the reporting units beyond the cash flows from the discrete projection period. The Company determined that a discounted cash flow model provided the best approximation of fair value of the reporting units for the purpose of performing the impairment test. This approach incorporates significant estimates and assumptions related to the forecasted results including revenues, expenses, the achievement of certain cost synergies, terminal growth rates and discount rates to estimate future cash flows. While assumptions utilized are subject to a high degree of judgment and complexity, the Company made its best estimate of future cash flows under a high degree of economic uncertainty that existed as of November 30, 2020. In developing its assumptions, the Company also considered observed trends of its industry participants.

For the legacy Anika reporting unit, the Company performed a qualitative assessment including consideration of (i) general macroeconomic factors, (ii) industry and market conditions, and (iii) the extent of the excess of the fair value over the carrying value indicated in prior impairment testing. The Company determined it was not more likely than not that the fair value of the legacy Anika reporting unit is less than its carrying amount and thus goodwill was not impaired as of March 31, 2020. As part of its annual impairment testing, the Company decided to perform a quantitative assessment related to the legacy Anika reporting unit as of November 30, 2020, due to the expectation that the economic recovery will take longer than expected to materialize. The results of the impairment test indicated that the estimated fair value of the legacy Anika reporting unit was greater than its carrying value, therefore the Company did not record any impairment charges related to the legacy Anika reporting unit for the year ended December 31, 2020.

For its newly created reporting unit, which includes Parcus Medical and Arthrosurface, the Company performed an interim quantitative assessment of goodwill impairment as of March 31, 2020. The Company estimated the fair value of the reporting unit using a discounted cash flow method. The results of the interim impairment test indicated that the estimated fair value of the reporting unit was less than its carrying value. This was primarily due to decreases in near term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures primarily due to the COVID-19 pandemic which directly impact the reporting unit. Consequently, a non-cash goodwill impairment charge was recorded in the amount of $18.1 million during the first quarter of 2020. As part of its annual impairment testing, the Company performed a quantitative assessment related to the newly created reporting unit as of November 30, 2020. The results of the annual impairment test indicated that the estimated fair value of the reporting unit was less than its carrying value. This was primarily due to a decline in projected net cash flows as a result of the continued impact of COVID-19 on revenue and related cash flows, the expectation that the economic recovery will take longer than expected to materialize, and additional projected investment to support future growth. Consequently, a non-cash goodwill impairment charge was recorded in the amount of $24.4 million during the fourth quarter of 2020. The total non-cash goodwill impairment charge with respect to the reporting unit amounted to $42.5 million for the year ended December 31, 2020. There was no remaining goodwill with respect the newly created reporting unit as of December 31, 2020.

9. Leases

The Company leases its buildings and manufacturing facilities under operating leases. As of December 31, 2021, the Company had real estate leases in Bedford, Massachusetts, Franklin, Massachusetts, Sarasota, Florida, Warsaw, Indiana and Padova, Italy. The current term of the Bedford lease extends to 2022 with several lease renewal options into 2038, and the current term of the Padova lease extends to 2032, with a right to terminate at the Company’s option in 2026 without penalty.

As a result of the acquisition of Parcus Medical and Arthrosurface, the Company acquired operating and finance leases for corporate offices, manufacturing and warehouse facilities and machineries. The operating leases consist of one real estate lease in Franklin, Massachusetts (Franklin lease) and two real estate leases in Sarasota, Florida (Sarasota lease). The current term of the Franklin lease extends to 2023, and the current term of the Sarasota lease extends to 2024 which may be extended by mutual agreement of the parties. The finance leases include equipment utilized in the Company’s manufacturing facility in Sarasota, Florida.

The significant assumptions in recognizing the right-of-use asset and lease liability are as follows:

Incremental borrowing rate. The Company derives its incremental borrowing rate from information available at the lease commencement date in determining the present value of lease payments. The incremental borrowing rate represents a collateralized rate of interest the Company would have to pay to borrow over a similar term an amount equal to the lease payments in a similar economic environment. The Company’s lease agreements do not provide implicit rates. As the Company did not have any external borrowings at the transition date with comparable terms to its lease agreements, the Company estimated its incremental borrowing rate based on its credit quality, line of credit agreement and by comparing interest rates available in the market for similar borrowings, and adjusting this amount based on the impact of collateral over the term of the lease. The weighted average discount rate at December 31, 2021 is 4.1% and 4.9% for operating leases and finance leases, respectively.

ANIK US Equity

ANIK · 10-K · period ended 2021-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ANIK US Equity☆

ANIK · 10-K · period ended 2021-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ANIK US Equity