What changed in this filing

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Item 1. Financial Statements

2021-05-07 compared with 2020-11-05 · 342 added, 961 removed, 423 unchanged (75% of the section changed)

4 unchanged sentences

(in thousands, except per share data)

September 30,

Current assets:

2 unchanged sentences

$ 95,817  

20,542  

27,480  

Accounts receivable, net of reserves of $ 1,055  and $ 962 at September 30, 2020 and December 31, 2019, respectively

Accounts receivable, net of reserves of $ 1,411 and $ 1,523 at March 31, 2021 and December 31, 2020, respectively

26,509  

15 unchanged sentences

20,292  

15,420  

Intangible assets, net

11 unchanged sentences

14,793  

Contingent consideration –

current portion

24,830  

13,090  

Total current liabilities

4 unchanged sentences

22,320  

Long-term debt

25,000  

Deferred tax liability

10,738  

11,895  

Lease liabilities

3 unchanged sentences

Stockholders’

Preferred stock, $ 0.01 par value;

1,250 shares authorized, no shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

Common stock, $ 0.01 par value;

90,000 shares authorized, 14,208 and 14,308 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

90,000 shares authorized, 14,366 and 14,329 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

Additional paid-in-capital

17 unchanged sentences

(in thousands, except per share data)

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Product revenue

$ 31,694  

$ 29,615  

$ 97,769  

$ 84,745  

Licensing, milestone and contract revenue

Total revenue

31,694  

29,697  

97,769  

84,838  

Three Months Ended March 31,

Cost of Revenue

Operating expenses:

Cost of product revenue

14,351  

45,487  

20,098  

Research & development

15,799  

12,581  

Selling, general & administrative

15,903  

44,884  

22,713  

Research and development

Selling, general and administrative

Goodwill impairment

18,144  

Change in fair value of contingent consideration

( 16,176 )  

Total operating expenses

39,621  

17,648  

108,138  

55,392  

Income (loss) from operations

( 7,927 )  

12,049  

( 10,369 )  

29,446  

Interest and other income (expense), net

( 228 )  

( 118 )  

Income (loss) before income taxes

( 8,155 )  

12,531  

( 10,487 )  

30,959  

Income from operations

Interest and other income, net

Income before income taxes

Provision for (benefit from) income taxes

( 1,744 )  

( 2,161 )  

Net income (loss)

$ ( 6,411 )  

$ 9,200  

$ ( 8,326 )  

$ 23,142  

Basic net income (loss) per share:

Net income (loss)

$ ( 0.45 )  

$ 0.65  

$ ( 0.59 )  

$ 1.65  

Basic weighted average common shares outstanding

14,205  

14,070  

14,202  

14,065  

Diluted net income (loss) per share:

Net income (loss)

$ ( 0.45 )  

$ 0.64  

$ ( 0.59 )  

$ 1.62  

Diluted weighted average common shares outstanding

14,205  

14,387  

14,202  

14,266  

Net income (loss)

$ ( 6,411 )  

$ 9,200  

$ ( 8,326 )  

$ 23,142  

Net income (loss) per share:

Weighted average common shares outstanding:

Foreign currency translation adjustment

( 622 )  

Comprehensive income (loss)

$ ( 5,889 )  

$ 8,578  

$ ( 7,724 )  

$ 22,350  

Comprehensive income

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

3 unchanged sentences

(in thousands)

For the Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

Additional Paid

2 unchanged sentences

Balance, January 1, 2021

14,308  

$ 48,707  

$ 245,426  

$ ( 5,898 )  

$ 288,378  

Vesting of restricted stock units

Forfeiture of restricted stock awards

Stock-based compensation expense

( 207 )  

Retirement of common stock for minimum tax withholdings

( 141 )  

Repurchase of common stock

( 139 )  

Other comprehensive loss

( 129 )  

Balance, March 31, 2020

14,198  

$ 48,360  

$ 251,219  

$ ( 6,027 )  

$ 293,694  

Issuance of common stock for equity awards

2 unchanged sentences

Retirement of common stock for minimum tax withholdings

( 59 )  

( 7,708 )  

Other comprehensive income

Balance, June 30, 2020

14,204  

$ 50,609  

$ 243,511  

$ ( 5,818 )  

$ 288,444  

Vesting of restricted stock units

Stock-based compensation expense

Retirement of common stock for minimum tax withholdings

( 24 )  

( 6,411 )  

Other comprehensive income

Balance, September 30, 2020

14,208  

$ 52,505  

$ 237,100  

$ ( 5,296 )  

$ 284,451  

For the Nine Months Ended September 30, 2019

Balance, March 31, 2021

Three Months Ended March 31, 2020

Additional Paid

3 unchanged sentences

Issuance of common stock for equity awards

Retirement of common stock for minimum tax withholdings

Stock-based compensation expense

Other comprehensive loss

Balance, March 31, 2019

Issuance of common stock for equity awards

Forfeiture of restricted stock

Vesting of restricted stock units

Forfeiture of restricted stock awards

Stock-based compensation expense

Retirement of common stock for minimum tax withholdings

Repurchase of common stock

Other comprehensive income

Balance, June 30, 2019

Issuance of common stock for equity awards

Forfeiture of restricted stock

Stock-based compensation expense

Retirement of common stock for minimum tax withholding

Other comprehensive loss

Balance, September 30, 2019

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

Balance, March 31, 2020

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

Anika Therapeutics, Inc.

2 unchanged sentences

(in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities:

Net income (loss)

$ 2,838  

2 unchanged sentences

Depreciation and amortization

Payment of interest expense on finance leases

( 22 )  

Non-cash operating lease cost

2 unchanged sentences

Change in fair value of contingent consideration

( 16,176 )  

Loss on disposal of fixed assets

3 unchanged sentences

( 1,162 )  

Provision (recovery) for doubtful accounts

Recovery for doubtful accounts

( 21 )  

1 unchanged sentence

Amortization of acquisition related inventory step-up

Accretion of amortized cost of investments

Changes in operating assets and liabilities:

1 unchanged sentence

( 2,478 )  

Prepaid expenses, other current and long-term assets

( 4,040 )  

Prepaid expenses, other current and long-term assets

Accounts payable

( 1,904 )  

Operating lease liabilities

2 unchanged sentences

( 1,254 )  

Net cash provided by operating activities

( 1,242 )  

Net cash (used in) provided by operating activities

( 2,431 )  

4 unchanged sentences

14,990  

87,594  

Purchases of investments

( 20,035 )  

Purchases of property and equipment

( 417 )  

Net cash used in investing activities

( 88,073 )  

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Payments made on finance leases

( 155 )  

Repurchases of common stock

Repayments of long term debt

( 25,351 )  

Proceeds from long term debt

50,000  

Cash paid for tax withheld on vested restricted stock awards

( 332 )  

Proceeds from exercises of equity awards

Payments made on finance leases

( 119 )  

Net cash provided by (used in) financing activities

Net cash used in financing activities

( 451 )  

Exchange rate impact on cash

(Decrease)/Increase in cash and cash equivalents

( 70 )  

Decrease in cash and cash equivalents

( 1,218 )  

6 unchanged sentences

Supplemental disclosure of cash flow information:

Right-of-use assets obtained in exchange for operating lease liabilities as of January 1, 2019

$ 24,110  

Non-cash Investing Activities:

Purchases of property and equipment included in accounts payable and accrued expenses

Right of use assets  

Consideration for acquisitions included in accounts payable and accrued expenses

2 unchanged sentences

$ 69,076  

Non-cash Financing Activities:

Operating lease liabilities  

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

ANIKA THERAPEUTICS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3 unchanged sentences

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 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 surgical repair and reconstruction of ligaments and tendons, and Arthrosurface, Incorporated (“Arthrosurface”), a joint preservation technology company specializing in less invasive joint replacement solutions.

These acquisitions broadened Anika's product portfolio into joint preservation and restoration, added high-growth revenue streams, increased its commercial capabilities, diversified its revenue base, and expanded its product pipeline and research and development expertise.

(“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.

(“Arthrosurface”), a company specializing in less invasive, bone preserving partial and total joint replacement solutions.

These acquisitions broadened Anika's product portfolio, developed over its nearly 30 years of expertise in hyaluronic acid technology, into joint preservation and restoration, added high-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 biotechnology and medical device industries including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, commercialization of existing and new products, and compliance with U.S.

Food and Drug Administration (“FDA”) and foreign regulations and approval requirements, as well as the ability to grow the Company’s business through appropriate commercial strategies.

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 impact that COVID- 19 may have on its financial position and operations moving forward due to the numerous uncertainties.

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.

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.

Basis of Presentation

The accompanying unaudited consolidated financial statements and related notes have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and in accordance with accounting principles generally accepted in the United States (“US GAAP”).

The accompanying unaudited consolidated financial statements and related notes have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and in accordance with accounting principles generally accepted in the United States (“US GAAP”).

The financial statements include the accounts of Anika Therapeutics, Inc.

1 unchanged sentence

Inter-company transactions and balances have been eliminated.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been omitted pursuant to SEC rules and regulations relating to interim financial statements.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been or omitted pursuant to SEC rules and regulations relating to interim financial statements.

The December 31, 2020 balances reported herein are derived from the audited consolidated financial statements.

In the opinion of management, these unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the consolidated financial statements.

The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s annual financial statements filed with its Annual Report on Form 10 -K for the year ended December 31, 2019.

The results of operations for the three - and nine -month periods ended September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020.

The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s annual financial statements filed with its Annual Report on Form 

10 -K for the year ended December 31, 2020.

The results of operations for the three -month period ended March 31, 2021 are not indicative of the results to be expected for the year ending December 

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.

Based on the criteria established by Accounting Standards Codification (“ASC”) 280, Segment Reportin g, the Company has one operating and reportable segment.

The Company’s chief operating decision maker is its President and Chief Executive Officer as of March 31, 2021.

Based on the criteria established by Accounting Standards Codification (“ASC”) 280,  

Segment Reportin g, the Company has one operating and reportable segment.

Recent Accounting Adoptions

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No.

2018 - 15, Intangibles –

Goodwill and Other –

Internal-Use Software (Subtopic 350 - 40 ) , which amends ASU No.

2015 - 05, Customers Accounting for Fees in a Cloud Computing Agreement , to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license.

The most significant change aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license.

Accordingly, the amendments in ASU 2018 - 15 require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350 - 40 to determine which implementation costs to capitalize as assets related to the service contract and which costs to expense.

ASU 2018 - 15 is effective for fiscal years and interim periods beginning after December 15, 2019.

The Company adopted ASU 2018 - 15 using the prospective method as of January 1, 2020.

The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No.

2016 - 13, Financial Instruments - Credit Losses .

The standard, including subsequently issued amendments, requires a financial asset measured at amortized cost basis, such as accounts receivable and certain other financial assets, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

ASU 2016 - 13 is effective for fiscal years and interim periods beginning after December 15, 2019 and requires the modified retrospective approach.

In December 2019, the 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 GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

ASU 2019 - 12 is 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 primarily impacted its trade receivables.

The Company assesses its customer's ability to pay by conducting a credit review which includes an assessment of the customer's creditworthiness.

The Company monitors the credit exposure through active review of customer balances.

The Company's expected loss methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' account balances.

Concentrations of credit risks are limited due to the large number of customers and their dispersion across a number of geographic areas.

The historical credit losses have not been significant due to this dispersion and the financial stability of its customers.

The Company considers credit losses immaterial to its business and, therefore, has not provided all the disclosures otherwise required by the standard.

The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures.

Business Combinations

Parcus Medical, LLC

On January 24, 2020, Anika Therapeutics, Inc.

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.

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.

2 unchanged sentences

Under ASC 805, assets acquired and liabilities assumed in a business combination must be recorded at their fair value as of the acquisition date.

Recorded fair valuation of assets acquired and liabilities assumed related to the acquisition of Parcus Medical is preliminary and will be completed as soon as practicable, but no later than one year after the consummation of the transaction.

Anika’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, which consists of:

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

2 unchanged sentences

Estimated total purchase consideration

Contingent consideration represents additional payments that the Company may be required to make in the future, which totals up to $ 60.0 million depending on the level of net sales generated in 2020 through 2022.

The fair value of contingent consideration related to net sales 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.

Deferred consideration is related to certain purchase price holdbacks which will be resolved within one year of the acquisition date and were recorded in accounts payable as of September 30, 2020.

Deferred consideration is related to certain purchase price holdbacks, which was resolved within one year of the acquisition date in accordance with the Parcus Merger Agreement and was recorded in accounts payable as of December 31, 2020.

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.

See Note 4, Fair Value Measurements , for additional discussion of contingent consideration as of March 31, 2021 and December 31, 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.

1 unchanged sentence

The transaction costs subsequent to March 31, 2020 were immaterial.

The transaction costs are included in selling, general and administrative expenses in the consolidated statements of operations.

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 preliminary estimate of fair value required the use of significant assumptions and estimates.

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 assessment of fair value is preliminary and is based on information that was available to management at the time the consolidated financial statements were prepared.

Those estimates and assumptions are subject to change as the Company obtains additional information related to those estimates during the applicable measurement periods (up to one year from the acquisition date).

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

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:

10 unchanged sentences

Estimated total purchase consideration

During the three -month period ended September 30, 2020, the Company completed the identification and confirmation of Parcus Medical inventory in the possession of its direct and distributor sales force, which resulted in an increase to the fair value of inventory of $ 1.9 million as of the January 24, 2020 acquisition date.

As a result, the Company recorded this addition to inventory with a corresponding reduction to goodwill as a measurement period adjustment.

The impact to the consolidated statement of operations for the three and nine months ended September 30, 2020 related to this adjustment is not material.

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.

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

Intangible assets acquired consist of:

Subsequent to the acquisition date, during the three -month period ended September 30, 2020, the Company completed the identification and confirmation of Parcus Medical inventory in the possession of its direct and distributor sales force, which resulted in an increase to the fair value of inventory of $ 1.9 million as of the January 24, 2020 acquisition date.

As a result, the Company recorded this addition to inventory with a corresponding reduction to goodwill as a measurement period adjustment which was reflected to the Goodwill amount included in the table above.

The impact to the consolidated statement of operations related to this adjustment was not material.

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

Developed technology

Customer relationships

Total intangible assets

The preliminary 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 preliminary 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 preliminary 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.

Total acquired intangible assets

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 final fair value determination of the identified intangible assets may differ from this preliminary determination, and such differences could be material.

Based on the preliminary valuation, approximately $ 44.0 million represents the fair value of identifiable intangible assets.

Approximately $ 41.1 million represents the fair value of developed technology that will be amortized over a useful life of 15 years, $ 1.1 million represents the fair value of customer relationships that will be amortized over a useful life of 10 years, and $ 1.8 million represents the fair value of the trade name that will be amortized over a useful life of 5 years.

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 7, Goodwill , for further discussion.

Revenue and Net Loss

The Company recorded revenue from Parcus Medical of $ 3.3 million and a net loss of $ 1.6 million in the three -month period ended September 30, 2020.

The Company recorded revenue from Parcus Medical of $ 7.9 million and a net loss of $ 4.5 million in the period from January 24 through September 30, 2020.

The Company recorded revenue from Parcus Medical of $ 3.9 million and a net loss of ($ 1.4 ) million in the three -month period ended March 31, 2021.

The Company recorded revenue from Parcus Medical of $ 2.6 million and a net loss of ($ 0.9 ) million in the period from January 24, 2020 through March 31, 2020, excluding the goodwill impairment.

Arthrosurface, Inc.

On February 3, 2020, Anika Therapeutics, Inc.

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.

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.

2 unchanged sentences

Under ASC 805, assets acquired and liabilities assumed in a business combination must be recorded at their fair values as of the acquisition date.

The final valuation of assets acquired and liabilities assumed related to the acquisition of Arthrosurface is expected to be completed as soon as practicable, but no later than one year after the consummation of the transaction.

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, which consists of:

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

1 unchanged sentence

Estimated total purchase consideration

The Company may 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 generated in 2020 through 2021.

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 in 2020 through 2021.

In October 2020, based upon the achievement of a regulatory milestone, the Company paid $ 5.0 million.

The fair value of contingent consideration related to regulatory milestones 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 certain net sales levels from 2020 through 2021 was determined based upon a Monte Carlo simulation approach in an option pricing framework at acquisition date, whereby a range of possible scenarios were simulated.

The fair value of contingent consideration related to net sales was determined based upon a Monte Carlo simulation approach at acquisition date, whereby a range of possible scenarios were simulated.

The liability for contingent 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.

See Note 4, Fair Value Measurements , for additional discussion of contingent consideration as of March 31, 2021 and December 31, 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.

1 unchanged sentence

The transaction costs subsequent to March 31, 2020 were immaterial.

The transaction costs are included in selling, general and administrative expenses in the consolidated statements of operations.

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 preliminary estimate of fair value required the use of significant assumptions and estimates.

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.

1 unchanged sentence

However, actual results may differ from these estimates.

The assessment of fair value is preliminary and is based on information that was available to management at the time the consolidated financial statements were prepared.

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

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:

Recognized identifiable assets acquired and liabilities assumed:

9 unchanged sentences

Estimated total purchase consideration

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.

Intangible assets acquired consist of:

1 unchanged sentence

Customer relationships

Total intangible assets

Total acquired intangible assets

The final fair value determination of the identified intangible assets may differ from this preliminary determination, and such differences could be material.

Based on the preliminary valuation, approximately $ 48.9 million represents the fair value of identifiable intangible assets.

Approximately $ 37.0 million represents the fair value of developed technology that will be amortized over an estimated useful life of 15 years, $ 7.9 million represents the fair value of customer relationships that will be amortized over an estimated useful life of 10 years, and $ 3.4 million represents the fair value of trade names that will be amortized over an estimated useful life of 5 years.

A total of $ 0.6 million represents the fair value of in-process research and development (“IPR&D”) with an indefinite useful life that will be evaluated for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

The fair value of developed technology 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 that will be evaluated for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

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 7, Goodwill , for further discussion.

Revenue and Net Loss

The Company recorded revenue from Arthrosurface of $ 7.2  million and a net loss of $ 1.6 million in the three -month period ended September 30, 2020.

The Company recorded revenue from Arthrosurface of $ 15.6  million and a net loss of $ 8.4 million in the period from February 3 through September 30, 2020.

The Company recorded revenue from Arthrosurface of $ 6.6  million and a net loss of ($ 2.8 ) million in the three -month period ending March 31, 2021.

The Company recorded revenue from Arthrosurface of $ 4.2  million and a net loss of ($ 4.0 ) million in the period from February 3, 2020 through March 31, 2020, excluding the goodwill impairment.

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 Orthopedic Joint Preservation and Restoration product family as discussed in Note 11, serving orthopedic surgeons, ambulatory surgical centers and hospitals.

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 three - and nine -month periods ended September 30, 2020 and 2019 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 Therapeutics, Inc., Parcus Medical and Arthrosurface as if the acquisitions had occurred on January 1, 2019 after giving effect to certain pro forma adjustments.

The unaudited pro forma information for the three months ended March 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.

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 product revenue based on the preliminary fair value inventory adjustment 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 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.

(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 rate presented in this unaudited pro forma combined financial information.

4 unchanged sentences

The following table presents unaudited supplemental pro forma information:

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

Total revenue

$ 31,694  

$ 39,912  

$ 101,722  

$ 115,045  

Net income (loss)

( 6,411 )  

( 7,328 )  

Fair Value Measurements

The Company held U.S.

treasury bills of $ 15.0 million and certificates of deposit of $ 5.5 million at September 30, 2020.

The Company held U.S.

treasury bills of $ 2.5 million at December 31, 2020.

Unrealized losses and the associated tax impact on the Company’s available-for-sale securities were insignificant as of September 30, 2020 and December 31, 2019, respectively.

The Company’s investments are all classified within Levels 1 and 2 of the fair value hierarchy.

The Company’s investments classified within Level 1 of the fair value hierarchy are valued based on quoted prices in active markets.

Level 2 investments are based on matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk.

For cash, current receivables, accounts payable, long-term debt 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.

Unrealized losses and the associated tax impact on the Company’s available-for-sale securities were insignificant as December 31, 2020.

There were no available-for-sale securities as of March 31, 2021.

The Company’s investments are all classified within Level 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 fair value hierarchy of the Company's cash equivalents, investments and liabilities at fair value was as follows:

Fair Value Measurements at Reporting Date Using

Quoted Prices in

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

Active Markets

3 unchanged sentences

Unobservable Inputs

September 30, 2020

March 31, 2021

Amortized Cost

1 unchanged sentence

Money Market Funds

$ 56,431  

Bank Certificates of Deposit

$ 5,503  

$ 5,516  

Treasury Bills

15,039  

15,130  

Total Investments

$ 20,542  

$ 15,039  

$ 5,503  

$ 20,646  

Other current and long-term liabilities:

Contingent Consideration - Short Term

$ 11,855  

Contingent Consideration - Long Term

41,045  

Total other current and long-term liabilities

$ 52,900  

Fair Value Measurements at Reporting Date Using

Quoted Prices in

Active Markets

7 unchanged sentences

Money Market Funds

$ 48,971  

Treasury Bills

$ 27,480  

$ 27,479  

There were no transfers between fair value levels during the nine -month period ended September 30, 2020 or in 2019.

Other current and long-term liabilities:

Contingent Consideration - Short Term

Contingent Consideration - Long Term

Total other current and long-term liabilities

There were no transfers between fair value levels during the three -month period ended March 31, 2021 or in 2020.

Contingent Consideration

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

Nine Months Ended

September 30, 2020

Balance, beginning January 1, 2020

69,076  

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

Three Months Ended

March 31, 2021

Balance, beginning

Change in fair value

Balance, ending September 30, 2020

$ 52,900  

Balance, ending

Under the Parcus Medical Merger Agreement and Arthrosurface Merger Agreement, there are earn-out milestones totaling $ 100 million payable from 2020 to 2022.

1 unchanged sentence

Projected contingent payment amounts are 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 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 and regulatory earn-out milestones ranged from 2.0 % - 2.5 %.

The probability of successful achievement of the regulatory earn-out milestones range from 60 %- 90 % for Arthrosurface, which remained unchanged from the acquisition date to September 30, 2020.

The key variables that led to a decrease in contingent consideration versus the acquisition date are the decrease in near term revenues due to the COVID- 19 pandemic and an increase in the weighted average cost of capital from 11.5 % to 13.0 % for Arthrosurface and 14.5 % to 15.0 % for Parcus Medical.

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 milestones ranged from 2.6 % - 2.8 %, and for the regulatory earn-out milestones the discount rate was 3.6 %.

As of March 31, 2021, the probability of successful achievement of the Arthrosurface regulatory earn-out milestones range from 0 %- 70 %, as compared to a range of 60 %- 75 % at the acquisition date.

The weighted average cost of capital for Arthrosurface increased from 11.5 % on the acquisition date to 12.1 % as of March 31, 2021, and for Parcus Medical decreased from 14.5 % at the acquisition date to 12.1 % as of March 31, 2021.

Increases or decreases in any of the probabilities of success in which milestones are expected to be achieved would result in a higher or lower fair value measurement, respectively.

Increases or decreases in the discount rate would result in a lower or higher fair value measurement, respectively.

The fair value of contingent consideration is assessed on a quarterly basis.

The fair value of contingent consideration increased by $ 4.2 million for the three - month period ended September 30, 2020 due primarily to the passage of time, higher than forecasted revenues during the third quarter, and a reduction in market-based borrowing rates. The fair value of the contingent consideration increased by $ 16.2 million for the nine -month period ended September 30, 2020 due to a decrease in the revenue due to the COVID- 19 pandemic.

On October 15, 2020, the Company received regulatory clearance for its WRISTMOTION Total Arthroplasty System, triggering a $ 5 million regulatory-based milestone payment pursuant to the terms of the Arthrosurface Merger Agreement.

In October 2020, the Company made a regulatory-based milestone payment of $ 5 million pursuant to the terms of the Arthrosurface Merger Agreement as a result of regulatory clearance for the WristMotion Total Arthroplasty System.

The fair value of remaining contingent consideration is assessed on a quarterly basis.

The fair value of the contingent consideration decreased by $ 4.8 million during the three -month period ended March 31, 2021 due primarily to the decrease in the likelihood that certain contingent milestones would be achieved and result in payment.

Inventories consist of the following:

September 30,

Raw materials

$ 12,973  

$ 12,058  

Work-in-process

12,372  

Finished goods

35,259  

$ 60,604  

$ 29,165  

$ 47,882  

$ 21,995  

Other long-term assets

12,722  

The increase in inventories for the nine months ended September 30, 2020 is due to the acquisitions of Parcus Medical and Arthrosurface in January and February 2020, as discussed in Note 3.

The Company recorded an inventory reserve of $ 1.9 million during the three -month period ended June 30, 2020 as the Company determined it would not pursue CE mark renewals for certain legacy products, primarily for certain advanced wound care products, as a result of the Company's product rationalization efforts.

The additional inventory reserve represents excess inventory which will not be sold prior to expiration of the applicable CE mark based on current projections.

Intangible Assets

Intangible assets as of September 30, 2020 and December 31, 2019 consisted of the following:

Nine Months Ended September 30, 2020

Intangible assets as of March 31, 2021 and December 31, 2020 consisted of the following:

Three Months Ended March 31, 2021

Currency Translation

Current Period

Impairment Charge

Net Book Value

Average Useful

Developed technology

$ 93,953  

$ ( 2,766 )  

$ ( 1,025 )  

$ ( 12,919 )  

$ 77,243  

In-process research & development

( 1,120 )  

Customer relationships

( 568 )  

Distributor relationships

( 415 )  

( 4,285 )  

( 167 )  

( 602 )  

( 701 )  

$ 118,859  

$ ( 4,468 )  

$ ( 1,025 )  

$ ( 19,075 )  

$ 94,291  

Year Ended December 31, 2019

Currency Translation

Current Period

Impairment Charge

Net Book Value

Average Useful

Developed technology

$ 17,100  

$ ( 2,934 )  

$ ( 389 )  

$ ( 9,657 )  

$ 4,120  

In-process research & development

( 1,234 )  

Distributor relationships

( 415 )  

( 4,285 )  

( 176 )  

( 531 )  

Elevess Tradename

( 1,000 )  

$ 28,206  

$ ( 4,759 )  

$ ( 389 )  

$ ( 15,473 )  

$ 7,585  

The aggregate amortization expense related to intangible assets was $ 1.9 million and $ 0.3 million for the three -month periods ended September 30, 2020 and 2019, respectively, and $ 5.4 million and $ 0.8 million for the nine -month periods ended September 30, 2020 and 2019, respectively.

In the first quarter of 2020, the Company acquired Parcus Medical and Arthrosurface as discussed in Note 3, which resulted in an increase of $ 92.9 million of gross value in intangible assets.

During the six -month period ended June 30, 2020, the Company determined that it would not pursue CE Mark renewals for certain of its legacy products, which resulted in an impairment of $ 1.0 million.

The impairments are included in the selling, general and administrative expenses on the Company's consolidated statements of operations.

For the quarter ended September 30, 2020, the Company did not identify any impairment triggers. 

The aggregate amortization expense related to intangible assets was $ 1.9 million and $ 1.3 million for the three -month periods ended March 31, 2021 and 2020, respectively.

The Company assesses goodwill for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment on each reporting unit.

In connection with the evaluation of goodwill for impairment, the Company may first consider qualitative factors to assess whether there are any indicators to suggest it is more likely than not that the fair value of a reporting unit may not exceed its carrying amount.

If after assessing such factors or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then a quantitative assessment is not required.

If the Company chooses to bypass the qualitative assessment, or if it chooses to perform a qualitative assessment but is unable to qualitatively conclude that no impairment has occurred, then the Company will perform a quantitative assessment.

If the estimated fair value of a reporting unit is less than its carrying value, an impairment charge is recognized for the excess of the reporting unit’s carrying value over its fair value.

As of December 31, 2019, the Company concluded that it operated as a single reporting unit and performed the 2019 goodwill impairment test using a single reporting unit.

Nine Months Ended

September 30, 2020

December 31, 2019

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 joint preservation and restoration reporting unit established in 2020 upon the acquisitions of Parcus Medical and Arthrosurface.

Changes in the carrying value of goodwill for the three months ended March 31, 2021 and year ended December 31, 2020 were as follows:

Three Months Ended

March 31, 2021

Balance, beginning

$ 7,694  

$ 7,851  

Effect of foreign currency adjustments

42,520  

( 18,144 )  

Impairment loss

Balance, ending

$ 32,419  

$ 7,694  

The increase in goodwill for the nine months ended September 30, 2020 is related to the acquisitions of Parcus Medical and Arthrosurface in January and February 2020 as further discussed in Note 3.

As a result of the acquisitions, the Company now has 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 tools, 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.

The widespread economic volatility resulting from the COVID- 19 pandemic 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.

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.

Through September 30, 2020, there have been no events or changes in circumstances that indicate that the carrying value of goodwill may not be recoverable.

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, the Company performed a quantitative assessment of goodwill impairment related to the Parcus Medical and Arthrosurface reporting unit as of March 31, 2020.

The Company then estimated the fair value of the Parcus Medical and Arthrosurface reporting unit 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 unit for the purpose of performing the interim 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 March 31, 2020.

In developing its assumptions, the Company also considered observed trends of its industry participants.

The results of the interim impairment test indicated that the estimated fair value of the Parcus and Arthrosurface 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 which directly impact the Parcus and Arthrosurface reporting unit.

Consequently, a non-cash goodwill impairment charge was recorded as reflected in the table above as of March 31, 2020.

For the quarter ended September 30, 2020, there have been no events or changes in circumstances that indicate that the carrying value of goodwill as determined on March 31, 2020 may not be recoverable.

If the pandemic's economic impact is more severe, or if the economic recovery takes longer to materialize or does not materialize as strongly as anticipated, this could result in further goodwill impairment charges.

The components of lease expense and other information are as follows:

For the Three Months Ended

For the Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Amortization of right-of-use assets

Interest on finance lease liabilities

Finance lease expense

Operating lease expense

Short-term lease expense

Variable lease expense

Total lease expense

$ 2,121  

$ 1,729  

For the Three Months Ended

For the Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Weighted Average Remaining Lease Term (in years)

Operating leases

Financing leases

Weighted Average Discount Rate

Operating leases

Financing leases

Other information

Operating cash flows from operating leases

$ 1,739  

$ 1,482  

Operating cash flows from financing leases

Future commitments due under these lease agreements as of September 30, 2020 are as follows:

Years ended December 31,

Operating Leases

Financing Leases

2020 (Remaining 3 months)

19,450  

Present value adjustment

( 8,103 )  

( 44 )  

Present value of lease payments

22,595  

23,150  

Less current portion included in accrued expenses and other current liabilities

( 1,463 )  

( 164 )  

Total lease liabilities

$ 21,132  

$ 21,523  

The increase in goodwill in 2020 is related to the acquisitions of Parcus Medical and Arthrosurface Inc.

in January and February 2020, as further discussed in Note 3, Business Combinations .

The Company performed an interim quantitative assessment of goodwill impairment as March 31, 2020, in addition to its annual impairment testing as of November 30, 2020, with respect to the joint preservation and restoration reporting unit.

The results of the impairment tests 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 which directly impact the reporting unit.

Consequently, a non-cash goodwill impairment charge was recorded in the amount of $ 42.5 million during 2020.

The Company did not record any goodwill impairment charge with respect to legacy Anika reporting unit in 2020.

Accrued Expenses

Accrued expenses consist of the following:

September 30,

Compensation and related expenses

$ 6,559  

$ 5,830  

Professional fees

1 unchanged sentence

Clinical trial costs

Current portion of acquisition-related contingent consideration (Note 4)

11,855  

Finance lease liability - current

$ 24,339  

$ 12,445  

Financing lease liability - current

Commitments and Contingencies

5 unchanged sentences

Based on the Company’s historical activity, in combination with its liability insurance coverage, the Company believes the estimated fair value of these indemnification agreements is immaterial.

The Company had no accrued warranties as of September 30, 2020 or December 31, 2019 and has no history of claims paid.

The Company had no accrued warranties as of March 31, 2021 or December 31, 2020 and has no history of claims paid.

The Company is also involved from time-to-time in various legal proceedings arising in the normal course of business.

Although the outcomes of these legal proceedings are inherently difficult to predict, the Company does not expect the resolution of these occasional legal proceedings to have a material adverse effect on its financial position, results of operations, or cash flow.

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 the Company’s right to consideration is unconditional.

As of September 30, 2020, deferred revenue was immaterial.

The Company has agreements with DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopaedics, Inc.

(“Mitek”) that include the grant of certain licenses, performance of development services, and supply of product.

Revenues from the agreements with Mitek represent 48 % and 52 % of total Company revenues for the three - and nine -month periods ended September 30, 2020, respectively.

Revenues from the agreements with Mitek represented 71 % and 70 % of total Company revenues for the three - and nine -month periods ended September 30, 2019, respectively. The Company has agreements with other customers that may include the delivery of a license and supply of product.

Revenue Recognition Associated with Acquired Businesses:

Pursuant to ASC 606, the Company recognizes revenue from Arthrosurface and Parcus Medical product sales when a customer obtains control of promised goods.

The amount of revenue that is recorded reflects the consideration that is expected to be received in exchange for those goods.

Arthrosurface and Parcus Medical products are sold through two principal channels:

(i) direct to hospitals and surgery centers, referred to as direct channel accounts and (ii) through stocking distributors.

In direct channel accounts, inventory is generally consigned to sales agents 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 recognized as of the date of surgical implantation of the product.

With sales to stocking distributors revenue is generally recognized when control of Arthrosurface and Parcus Medical product passes to the customer, which is typically upon shipment of the product.

It is our accounting policy to account for shipping and handling activities as a fulfillment cost rather than as an additional promised service.

The payment terms with respect to sales through both channels are consistent with prevailing practice in the respective markets in which the Company does business.

Payment terms align with 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.

Product and Total Revenue

Historically, the Company categorized its product offerings into four product families:

Orthobiologics, Dermal, Surgical, and Other, which included its ophthalmic and veterinary products.

As a result of the Company’s acquisitions of Parcus Medical and Arthrosurface during the first quarter of 2020, the Company now divides the product portfolio into three product families:

Joint Pain Management, Orthopedic Joint Preservation and Restoration, and Other.

Anika’s consolidated financial statements include results of operations for Parcus Medical from the January 24, 2020 acquisition date and Arthrosurface from the February 3, 2020 acquisition date.

Product revenue by product family was as follows:

Three Months Ended

September 30,

Nine Months Ended

September 30,

Revenue by product family was as follows: 

Three Months Ended March 31,

Joint Pain Management

$ 18,439  

$ 27,581  

$ 66,168  

$ 77,063  

Orthopedic Joint Preservation and Restoration

11,715  

26,233  

$ 31,694  

$ 29,615  

$ 97,769  

$ 84,745  

Total revenue by geographic location was as follows:

Three Months Ended September 30,

Percentage of

Geographic Location:

United States

$ 26,409  

$ 23,512  

$ 31,694  

$ 29,697  

Nine Months Ended September 30,

Joint Preservation and Restoration

Revenue from the Company’s sole significant customer, DePuy Synthes Mitek Sports Medicine, part of the Johnson & Johnson Medical Companies (Mitek), as a percentage of the Company’s total revenue was 41 % and 54 % for the three months ended March 31, 2021 and 2020, respectively.

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 $ 0.9 million and $ 0.2 million as of March 31, 2021 and December 31, 2020, respectively.

Revenue by geographic location was as follows:

Three Months Ended March 31,

Percentage of

2 unchanged sentences

United States

$ 77,848  

$ 66,538  

11,140  

11,396  

$ 97,769  

$ 84,838  

Equity Incentive Plan

The Company estimates the fair value of stock options and stock appreciation rights (“SARs”) using the Black-Scholes valuation model, and estimates the fair value of the total shareholder return options (“TSRs”) using a Monte-Carlo simulation model as of the grant date.

The Company estimates the fair value of stock options using the Black-Scholes valuation model.

Fair value of total shareholder return options (“TSR”) is measured by using a Monte-Carlo simulation model.

Fair value of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) is measured by the grant-date price of the Company’s shares.

Fair value of performance restricted stock units (“PSUs”) is measured by the grant-date price of the Company’s shares with corresponding compensation cost recognized over the requisite service period.

Compensation cost of PSUs is recognized based on the estimated probabilities of achieving the performance goals.

Compensation cost is recognized based on the estimated probabilities of achieving the performance goals.

Changes to the probability assessment and the estimated shares expected to vest will result in adjustments to the related compensation cost 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.

Compensation cost of the TSRs is recognized on a straight-line basis over the vesting period, regardless of whether the market condition for vesting is ultimately achieved.

The fair value of each stock option award during the nine -month periods ended September 30, 2020 and 2019 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

Nine months ended

September 30,

If the performance targets are not achieved, no compensation cost is recognized, and any previously recognized compensation cost is reversed. 

The expected volatility assumption is evaluated against the historical volatility of the Company’s common stock over a 4 -year average, except for TSRs which is evaluated over 6.3 years, and it is adjusted if there are material changes in historical volatility.

The risk-free interest rate assumption is based on U.S.

Treasury interest rates at the time of grant.

The fair value of each stock option award during the three -month periods ended March 31, 2021 and 2020 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

Three Months Ended

Risk free interest rate

0.21 % - 1.59 %  

1.41 % - 2.54 %

Expected volatility

46.48 % - 52.99 %  

44.27 % - 46.21 %

Expected life (years)

4.0 - 6.3  

Expected dividend yield

0.00 %  

The Company presents the expenses related to stock-based compensation awards in the same expense line items as cash compensation paid to each of its employees as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Cost of product revenue

Research & development

Selling, general & administrative

Three Months Ended

Cost of revenue

Research and development

Selling, general and administrative

Total stock-based compensation expense

$ 2,259  

$ 1,311  

$ 3,954  

$ 4,140  

The Company’s former President and Chief Executive Officer, Joseph Darling, passed unexpectedly in January 2020.

On January 29, 2020, the Company announced the unexpected death of its former President and Chief Executive Officer, Joseph Darling.

According to the terms of Mr.

Darling’s equity award grants and the Anika Therapeutics, Inc.

2017 Omnibus Incentive Plan (the “2017 Plan”), the unvested portion of his stock-based compensation was forfeited upon his death, resulting in a one -time benefit of $ 1.8 million that was fully recognized during the three -month period ended March 31, 2020 within selling, general and administrative expenses.

The following table sets forth share information for stock-based compensation awards granted and exercised during the three - and nine -month periods ended September 30, 2020 and 2019:

Three Months Ended September 30,

Nine Months Ended September 30,

The following table sets forth share information for stock-based compensation awards granted and exercised during the three -month periods ended March 31, 2021 and 2020:

Three Months Ended

Stock options

85,345  

87,250  

402,558  

218,867  

34,697  

218,804  

185,507  

16,077  

162,297  

123,500  

104,638  

Stock options

488,586  

511,486  

Stock options  

32,629  

42,566  

86,732  

81,638  

12,533  

17,937  

90,103  

19,100  

19,000  

90,000  

13,500  

Stock options

25,697  

44,829  

During the three - and nine -month periods ended September 30, 2020, the Company granted stock-based compensation awards in the form of stock options, PSUs, TSRs, and RSUs to employees and RSUs to non-employee directors, the majority of which become exercisable or vest ratably over a three -year period.

The PSUs granted to employees contained performance conditions with business and financial targets.

The business target, amounting to 40 % of the total performance conditions, will be measured based on achievement in the 2020 - 2022 fiscal years, while the financial targets, amounting to 60 % of the total performance conditions, will ultimately be measured with respect to the Company’s operating results in the 2020 - 2022 fiscal years.

The Company recorded $ 0.2 million and less than $ 0.1 million of stock-based compensation expense associated with PSUs for the three - and nine -month periods ended September 30, 2020.

During the second quarter of 2020, the initial equity grants to the Company’s current President and Chief Executive Officer contained a TSR option award at 104,638 targeted options, with market and service conditions.

The actual number of options that may be earned ranges from 0 % to 150 % of the target number, depending on the total shareholder return of the Company relative to the peer group over the vesting period of 2.7 years.

The grant-date fair value of the TSRs is recorded as stock- based compensation expense on a straight-line basis over the period from the date of grant to the settlement date.

The Company recorded $ 0.2 million and $ 0.4 million of stock-based compensation expense associated with TSRs for the three and nine -month periods ended September 30, 2020, respectively.

Earnings Per Share (“EPS”)

Basic EPS is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period.

Stock options

During the three -month period ended March 31, 2021, the Company granted stock-based compensation awards in the form of stock options, and RSUs to employees and RSUs to non-employee directors, the majority of which become exercisable or vest ratably over a three -year period.

Of the 421,463 stock options granted during the first quarter of 2021, 301,845 shares were premium-priced options which were granted with an exercise price at 110% of the market price of the Company’s stock on the date of grant.

The Company recorded an income tax benefit of $ 1.6 million for the three -month period ended March 31, 2021, resulting in an effective tax rate of ( 133.6 %). The provision for income taxes was $ 1.6 million for the three -month period ended March 31, 2020, based on an effective tax rate of 21.4 %.

The net decrease in the effective tax rate for the three -month period ended March 31, 2021, as compared to the same period in 2020, was primarily due to the $ 1.7 million tax benefit on the decrease in the fair value of the contingent consideration, recognized as a discrete benefit in the first quarter of 2021.

The Company files income tax returns in the United States on a federal basis, in certain U.S.

states, and in certain foreign jurisdictions. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate.

In connection with the preparation of the financial statements, the Company assessed whether it is more likely than not that it will be able to utilize, in future periods, the deferred income taxes to offset future taxable income.

The Company has concluded that it is more likely than not that the majority of its deferred tax assets will be realized through consideration of both the positive and negative evidence.

At December 31, 2020, the Company recorded a valuation allowance in the amount of $ 0.9 million related to net operating loss carryforwards at its Italian subsidiary due to the uncertainty regarding their realization.

The Company did not record an additional valuation allowance at March 31, 2021.

Earnings Per Share ( “

Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period.

Unvested restricted shares, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic earnings per share.

Diluted EPS is calculated by dividing net income (loss) by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding share-based payment awards using the treasury stock method.

The following table provides share information used in the calculation of the Company's basic and diluted earnings (loss) per share:

Three Months Ended September 30,

Nine Months Ended September 30,

Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options (including TSRs), SARs, RSAs, RSUs, and PSUs using the treasury stock method.

The following table provides share information used in the calculation of the Company's basic and diluted earnings per share (in thousands):

Three Months Ended March 31,

Shares used in the calculation of basic earnings per share

14,205  

14,070  

14,202  

14,065  

Effect of dilutive securities:

Share-based payment awards

Stock options, RSAs, PSUs and RSUs

Diluted shares used in the calculation of earnings per share

14,205  

14,387  

14,202  

14,266  

For the three - and nine -month periods ended September 30, 2020, the net loss available to common shareholders is divided by the weighted average number of common shares outstanding during the period to calculate basic earnings per share.

The assumed exercise of stock options would have been anti-dilutive.

Stock options of 1.0 million shares and 0.4 million shares were outstanding for the three -month periods ended September 30, 2020 and 2019 and were not included in the computation of diluted EPS because the awards’

impact on EPS would have been anti-dilutive.

Stock options of 0.8 million and 0.7 million shares were outstanding for the nine -month periods ended September 30, 2020 and 2019 and were not included in the computation of diluted EPS because the awards’

impact on EPS would have been anti-dilutive.

Accelerated Share Repurchase

In May 2019, the Company’s Board of Directors authorized a repurchase program of up to $ 50.0 million shares of the Company’s common stock with $ 30.0 million to be repurchased through an accelerated share repurchase program and up to $ 20.0 million to be potentially repurchased on the open market from time-to-time.

On May 7, 2019, the Company entered into an accelerated share repurchase agreement with Morgan Stanley & Co.

LLC (“Morgan Stanley”) pursuant to a Fixed Dollar Accelerated Share Repurchase Transaction (“ASR Agreement") to purchase $ 30.0 million of shares of its common stock.

Pursuant to the terms of the ASR Agreement from May 2019 to January 2020, the Company repurchased 0.6 million shares under the ASR Agreement at an average repurchase price of $ 50.78 per share.

The ASR Agreement settled on January 14, 2020.

Through September 30, 2020, no open market repurchases had been executed.

In response to the COVID- 19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020.

The CARES Act includes several provisions that provide economic relief for individuals and businesses.

The Company will continue to evaluate the impact of the CARES Act, but does not expect it to result in a material impact.

The benefit from income taxes was $ 1.7 million and $ 2.2 million for the three - and nine -month periods ended September 30, 2020, based on effective tax rates of 21.4 % and 20.6 %, respectively.

The provision for income taxes was $ 3.3 million and $ 7.8 million for the three - and nine -month periods ended September 30, 2019, based on effective tax rates of 26.6 % and 25.3 %, respectively.

The net decrease in the effective tax rate for the three - and nine -month periods ended September 30, 2020, as compared to the same periods in 2019, was primarily due to the $ 1.9 million tax expense on the impairment of non-tax deductible goodwill offset by the $ 1.5 million tax benefit on the decrease in the fair value of the contingent consideration.

The Company recognized a net deferred tax liability of $ 11.2 million primarily due to intangible assets and inventory step up offset by net operating losses and research and development tax credits associated with the Arthrosurface acquisition discussed in Note 3.

The Company files income tax returns in the United States on a federal basis, in certain U.S.

states, and in Italy.

The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate.

In connection with the preparation of the financial statements, the Company assesses whether it was more likely than not that it would be able to utilize, in future periods, the net deferred tax assets associated with its net operating loss carry-forward.

As of September 30, 2020, the Company has recorded a valuation allowance in the amount of $ 0.5 million against the portion of the deferred tax asset balance for which it is “more likely than not”

that a tax benefit will not be realized.

Revolving Credit Agreement

On April 8, 2020, the Company submitted a loan notice to draw down the $ 50.0 million available under its existing credit facility, with an initial applicable interest of 2.08 %.

Interest expense for the three - and nine -month period ended September 30, 2020 was $ 0.3 million and $ 0.5 million, respectively, associated with Credit Agreement, as defined below.

During the three -months ended September 30, 2020, the Company repaid $ 25.0 million of the outstanding balance.

Consequently, as of September 30, 2020, the Company had outstanding borrowings of $ 25.0 million under the credit facility.

The credit facility will mature in October 2022, and the Company may prepay the credit facility at any time without penalty.

Proceeds from the borrowing may be used for purposes permitted under the Credit Agreement, as defined below, including for working capital and general corporate purposes.

The existing credit facility was entered into on October 24, 2017.

The Company, as borrower, entered into a new five -year agreement with Bank of America, N.A., as administrative agent, swingline lender and issuer of letters of credit, for a $ 50.0 million senior revolving line of credit (the “Credit Agreement”).

Subject to certain conditions, the Company may request up to an additional $ 50.0 million in commitments for a maximum aggregate commitment of $ 100.0 million, which requests must be approved by the Revolving Lenders (as defined in the Credit Agreement).

Loans under the Credit Agreement generally bear interest equal to, at the Company’s option, either:

(i) LIBOR plus the Applicable Margin, as defined below, or the (ii) Base Rate, defined as the highest of:

(a) the Federal Funds Rate plus 0.50 %, (b) Bank of America, N.A.’s prime rate and (c) the one month LIBOR adjusted daily plus 1.0 %, plus the Applicable Margin.

The Applicable Margin ranges from 0.25 % to 1.75 % based on the Company’s consolidated leverage ratios at the time of the borrowings under the Credit Agreement.

The Company has agreed to pay a commitment fee in an amount that is equal to 0.25 % per annum on the actual daily unused amount of the credit facility and that is due and payable quarterly in arrears.

Loan origination costs are included in Other long-term assets and are being amortized over the five -year term of the Credit Agreement.

As of December 31, 2019 and 2018, there were no outstanding borrowings under the Credit Agreement and the Company was in compliance with the terms of the Credit Agreement.

The Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including financial covenants, events of default, and indemnification provisions in favor of the Lenders.

These include restrictive covenants that require the Company not to exceed certain maximum leverage and interest coverage ratios, limit its incurrence of liens and indebtedness, and its entry into certain merger and acquisition transactions or dispositions and place additional restrictions on other matters, all subject to certain exceptions.

The Lender has been granted a first priority lien and security interest in substantially all of the Company’s assets, except for certain intangible assets.

Subsequent Events

On October 15, 2020, the Company received FDA clearance for its WRISTMOTION Total Arthroplasty System, triggering a $ 5 million regulatory-based milestone payment per the Arthrosurface Merger Agreement.

The milestone payment was paid shortly thereafter.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our financial statements and related notes appearing elsewhere in this report.

In addition to historical information, this report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning our business, consolidated financial condition, and results of operations.

The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking statements so that investors can better understand a company’s prospects and make informed investment decisions.

Stock options of 1.2 million and 0.6 million shares were outstanding for the three -month periods ended March 31, 2021 and 2020, respectively, and were not included in the computation of diluted EPS because the awards’

impact on EPS would have been anti-dilutive. 

MANAGEMENT ’

S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our financial statements and related notes appearing elsewhere in this report and our audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2020, or our 2020 Form 10-K.

In addition to historical information, this report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning our business, consolidated financial condition, and results of operations.

The Securities and Exchange Commission, or the SEC, encourages companies to disclose forward-looking statements so that investors can better understand a company’s prospects and make informed investment decisions.

Forward-looking statements are subject to risks and uncertainties, many of which are outside our control, which could cause actual results to differ materially from these statements.

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Risk Factors”

of our Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II, Item 1A “Risk Factors”

of this report and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 for important factors that we believe could cause actual results to differ materially from those in our forward-looking statements.

of our 2020 Form 10-K for the year ended December 31, 2020 and in Part II, Item 1A “Risk Factors”

of this report for important factors that we believe could cause actual results to differ materially from those in our forward-looking statements.

Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made.

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We are a global joint preservation company that creates and delivers meaningful advancements in early intervention orthopedic care.

We partner with physicians to understand what they need most to treat their patients, and 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 pain management, regenerative solutions, soft tissue repair and bone preserving joint technologies.

As we look towards the future, our business is uniquely positioned to capture value within our target market.

Our success is driven by our focus on our talent and culture, investment in innovative research and development programs to feed our product pipeline, expanding our commercial footprint domestically and internationally, and pursuing strategic inorganic growth opportunities.

We intend to continue to accelerate our commercial capabilities as we transform into a customer-centric company dedicated to advancing the orthopedic early intervention continuum of care.

We believe that this commitment, along with our financial resources and operating history, have positioned us well to deliver sustained value to our shareholders.

In early 2020, we expanded our overall technology platform through our strategic acquisitions of Parcus Medical, LLC, or Parcus Medical, a sports medicine implant and instrumentation solutions provider focused on surgical repair and reconstruction of ligaments and tendons, and Arthrosurface, Inc., or Arthrosurface, a joint preservation technology company specializing in less invasive, bone preserving partial and total joint replacement solutions.

These acquisitions:

Broadened our product portfolio further into the sports medicine joint preservation and restoration space;

Added higher-growth potential revenue streams;

Expanded our commercial capabilities;

Diversified our revenue base;

Expanded our product pipeline and research and development expertise.

In addition, we believe that our historical hyaluronic acid (“HA”) and regenerative medicine expertise will be highly complementary to the soft tissue repair and instrumentation expertise of Parcus Medical and the partial and total joint replacement expertise of Arthrosurface.

We believe that the combination of these three businesses positions us to provide innovative solutions along the early-intervention orthopedic continuum of care and build significant value for patients, physicians, and key healthcare system stakeholders.

From our inception in 1992 through mid-2019, we utilized a commercial partnership model for the distribution of our products to end-users.

Our strong, worldwide network of distributors has historically provided, and continues to provide, a solid foundation for our revenue growth and territorial expansion.

In 2019, we implemented a hybrid commercial approach that comprises a small direct model with a network of independent distributor partners in the U.S.

market, and we utilized this hybrid approach for the launch of TACTOSET in the second half of 2019.

The acquisitions of Arthrosurface and Parcus Medical each added to our commercial infrastructure, especially in the United States.

In total, we have over 30 direct sales representatives working with over 150 independent distributors to focus on each of our target markets.

For products in our Orthopedic Joint Preservation and Restoration family, including those currently in research and development or those not yet developed, we intend to leverage the expanded hybrid-direct sales infrastructure of the consolidated entity.

This framework pairs an internal direct sales team with external sales agent partners to maximize territorial coverage and sales generation.

Generally, products within this family are sold into surgical environments, such as hospitals or ambulatory surgery centers, and we believe that we have a strong infrastructure now in place to service these customers.

We completed the integration of our U.S.

commercial organization including cross-training the sales staffs to sell the consolidated product portfolio.

We assessed each selling territory to maximize our coverage and reach as many customers and patients as possible.

For longer-term future products in the U.S.

market within our Joint Pain Management or Other families, we intend to evaluate our commercial model and possible alternatives or augmentations in each instance on a case-by-case basis, based on market dynamics and other factors.

These models could include direct sales, distribution partnerships, or a hybrid of those forms.

For current products in the U.S.

market, we intend to retain our current distribution relationships, including with DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopaedics, or Mitek, as they continue to provide meaningful revenue and growth opportunities.

Please see the section captioned “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations-Management Overview”

in our Annual Report on Form 10-K for the year ended December 31, 2019, for a description of each of the above therapeutic areas, including the individual products.

Key Developments during the Quarter Ended September 30, 2020

We further strengthened our leadership team and board of directors with industry veterans.

We completed the launch activities for six sports medicine surgical devices and instruments.

The new products enable procedures ranging from rotator cuff repair to arthroscopic knee repairs and treating arthritis damage in the hand and wrist.

The products were commercialized through our recently expanded sales and marketing team during the third quarter of 2020. 

We restarted our CINGAL Pilot Study as planned in September 2020, and the first patient has been enrolled in the study.

There are currently nine active sites.

We restarted patient enrollment in our HYALOFAST Phase III trial.

We have activated two sites in Indonesia and intend to activate sites in the Philippines and Mexico by early 2021.

We prepaid $25.0 million of the $50.0 million that we initially drew down from our credit facility in April 2020.

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, soft tissue repair and bone preserving joint technologies.

We have nearly 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 the platform for our regenerative solutions portfolio.

In early 2020, we expanded our overall technology platform and significantly enhanced our commercial infrastructure, especially in the United States, through our strategic acquisitions of Parcus Medical, LLC, or Parcus Medical, a sports medicine implant and instrumentation solutions provider focused on sports medicine and soft tissue repair, and Arthrosurface, Inc., or Arthrosurface, a company specializing in less invasive, 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 joint preservation market (which includes the faster growing sports medicine and extremities segments), improved our commercial capabilities, 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:

Decades of experience in HA-based regenerative solutions and early intervention orthopedics combined under new, common management with a strong financial foundation for future investment in meaningful solutions for our customers;

Robust network of stakeholders in our target markets to identify evolving unmet patient treatment needs;

Prioritized investment in differentiated research and development programs;

Expansion of our commercial capabilities globally within joint preservation;

Opportunity to pursue strategic inorganic growth opportunities, including potential partnerships and acquisitions, leveraging our strong financial foundation and operational capabilities;

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

COVID-19 Pandemic

In March 2020, the World Health Organization declared the spread of the COVID-19 virus a pandemic.

In March 2020, the World Health Organization declared the spread of the COVID-19 virus a global pandemic.

This pandemic has caused an economic downturn on a global scale, as well as significant volatility in the financial markets.

We cannot at this time predict the impact that the COVID-19 pandemic will have on our full year financial condition and operations, although we are continuing to monitor our operations for COVID-19 pandemic related changes.

In the second and third quarters of 2020, we experienced product demand above our initial expectations determined in light of COVID-19, as elective procedure volume had a limited recovery in the second half of the second quarter and through the third quarter due to the easing of COVID-19 related restrictions in certain jurisdictions.

However, certain areas of the United States and certain other countries have recently seen and continue to see increasing infection rates, which makes future results difficult to predict.

Please see the section captioned “Part II, Item 1A.

Risk Factors”

of this report and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 for additional information with respect to the risks faced by our business in light of the COVID-19 pandemic.

In this time of uncertainty as a result of the COVID-19 pandemic, we are focused on serving our customers while taking every precaution to provide a safe work environment for our employees and customers.

We have established and implemented a work from home policy where possible.

There has been significant volatility in our results on a quarterly basis due to the worldwide cancellation or delay of elective procedures, 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 first and 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, which makes future results difficult to predict despite recent advances in vaccinations for certain parts of the population.

In this time of uncertainty 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.

We may 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.

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Our commercial day-to-day operations have been impacted due to the worldwide cancellation or delay of elective procedures, 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.

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 in certain jurisdictions.

The impact of these restrictions on our operations, if implemented, is currently unknown, but could be significant.

Research and Development

Our research and development efforts primarily consist of the development of new medical applications for our technology platform, the development of intellectual property with respect to our technology platform, the management of clinical trials for certain product candidates, the preparation and processing of applications for regulatory approvals, and process development and scale-up manufacturing activities for our existing and new products.

Our development efforts focus on products in four large and growing orthopedic markets to drive long-term growth:

osteoarthritis pain management, regenerative solutions, soft tissue repair and bone preserving joint technologies.

We routinely interact with key external stakeholders to leverage customer and patient insights in our development process to ensure that we bring needed therapies to the market.

We anticipate that we will continue to commit significant resources in the near future to research and development activities, including in relation to preclinical activities and clinical trials.

These activities are aimed at the delivery of a steady cascade of new product development and launches over the next several years.

The COVID-19 pandemic, however, has resulted in a significant decline in elective procedures worldwide.

This decline has impacted our ability to enroll patients in our clinical trials.

Given the uncertainty around the scale and duration of the COVID-19 pandemic, it is difficult to predict the precise impact on our clinical activities.

Our third-generation, single-injection osteoarthritis product under development in the United States, CINGAL, is an osteoarthritis pain management therapy composed of our proprietary cross-linked HA material combined with an approved steroid, is designed to provide both short- and long-term pain relief to patients, and is a main pipeline product and a component of our growth strategy.

In pursuing a U.S.

regulatory pathway for CINGAL, we have conducted two Phase III clinical trials and two follow-up studies, and the United States Food and Drug Administration, or FDA, has indicated an additional Phase III trial is necessary to support U.S.

We are currently working to initiate a pilot study to confirm our trial design, increase our probability of success in a Phase III trial and generate data that ultimately will be needed to support FDA approval.

Several trial sites were activated during the third quarter of 2020, and the first patient was enrolled in the pilot study in September 2020.

However, as a result of the COVID-19 pandemic, we continue to face uncertainty related to the ultimate timing of this CINGAL pilot study.

Given the evolving environment, we will continue update product development and clinical trial timelines after we have more visibility with respect to the length and regional impacts of the COVID- 19 pandemic.

We have several research and development programs underway for new products, including for HYALOFAST (in the United States), an innovative product for cartilage tissue repair, and other early stage regenerative solutions development programs.

We commenced patient enrollment in a Phase III clinical trial in December 2015 and advanced site initiations and patient enrollment activities.

Given the changing medical landscape with respect to the randomization arm for this trial, the microfracture procedure, we are also actively pursuing other alternative strategies to accelerate patient enrollment, including initiating sites in Indonesia, Mexico, and the Philippines.

After delays due to the COVID-19 pandemic, we were able to resume enrollment in the third quarter of 2020.

We also have several other research and development programs underway focused on expanding product portfolio across all four development focus areas previously mentioned.

Joint Pain Management

Our Joint Pain Management product family consists of:

Monovisc and Orthovisc, our single- and multi-injection, HA-based viscosupplement offerings indicated to provide pain relief from OA conditions.

Our Joint Pain Management products are generally administered to patients in an office setting.

In the United States, Monovisc and Orthovisc are marketed exclusively by DePuy Synthes Mitek Sports Medicine, part of the Johnson & Johnson Medical Companies, or Mitek, and have been the market leaders, based on combined overall revenue in the viscosupplement market, since 2018.

Internationally, we market our Joint Pain Management products through a robust and growing worldwide network of commercial distributors.

Cingal, our novel, third-generation, single-injection OA product consisting of our proprietary cross-linked HA material combined with a steroid, is designed to provide both short- and long-term pain relief.

Cingal is CE Mark approved and has been sold outside the United States in over 35 countries through our network of distributors for several years.

In the United States, Cingal is a pipeline product under clinical development.

Hyvisc, our high molecular weight injectable HA veterinary product for the treatment of joint dysfunction in horses due to non-infectious synovitis associated with equine OA.

Hyvisc is distributed by Boehringer Ingelheim Vetmedica, Inc., or Boehringer, in the United States.

Joint Preservation and Restoration

Our Joint Preservation and Restoration product family consists of: 

Bone Preserving Joint Technologies.

Our portfolio of more than 150 bone preserving joint technologies, including partial joint replacement, joint resurfacing, and minimally invasive and bone sparing implants, is designed to treat upper and lower extremity orthopedic conditions caused by trauma, injury and arthritic disease.

These products span multiple joints including the shoulder, foot/ankle, wrist, knee and hip and are generally intended to mimic a patient’s natural anatomy to the extent feasible.

These products are often used to treat patients with OA progression beyond where our Joint Pain Management products can allow them to retain an active lifestyle and early surgical intervention becomes preferable.

We commercialize these products in the United States and utilize our distributor network for sales in certain international markets.

Soft Tissue Repair.

Our line of soft tissue repair solutions is used by surgeons to repair and reconstruct damaged ligaments and tendons resulting from sports injuries, trauma and disease.

These more traditional sports medicine solutions include screws, sutures, suture anchors, and other surgical systems that facilitate surgical procedures on the shoulder, knee, hip, upper and lower extremities, and other soft tissues.

We commercialize these products in the United States and utilize our distributor network for sales in over 60 international markets.

Regenerative Solutions.

Our portfolio of orthopedic regenerative solutions based on our proprietary HA and Hyaff technologies, which is a solid form of HA.

These products include Tactoset, an HA-enhanced injectable bone repair therapy designed to treat insufficiency fractures that we commercialize only in the United States, and Hyalofast, a biodegradable support for human bone marrow mesenchymal stem cells used for cartilage regeneration and as an adjunct for microfracture surgery.

Hyalofast is CE Mark approved and currently available in Europe, South America, Asia, and certain other international markets.

In the United States, Hyalofast is a pipeline product under clinical development.

Our Other product family consists of legacy HA-based products that do not fit into one of our other primary product categories.

These products include Hyalobarrier, an anti-adhesion barrier indicated for use after abdomino-pelvic surgeries, and Hyalomatrix, which is used for the treatment of complex wounds such as burns and ulcers, products used in connection with the treatment of ears, nose and throat disorders, and ophthalmic products, including injectable, high molecular weight HA products used as viscoelastic agents in ophthalmic surgical procedures such as cataract extraction and intraocular lens implantation.

Results of Operations

Three and Nine Months Ended September 30, 2020 Compared to Three and Nine Months Ended September 30, 2019

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands, except percentages)

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Three Months Ended March 31,

(in thousands, except percentages)

Product revenue

Licensing, milestone and contract revenue

Total revenue

Cost of revenue

Operating expenses:

Cost of product revenue

Research & development

Selling, general & administrative

Research and development

Selling, general and administrative

Goodwill impairment

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Total operating expenses

Income (loss) from operations

Interest and other income (expense), net

Income (loss) before income taxes

Provision for (benefit from) income taxes

Net income (loss)

Product gross profit

Product gross margin

Anika’s consolidated financial statements include results of operations for Parcus Medical from the January 24, 2020 acquisition date and Arthrosurface from the February 3, 2020 acquisition date.

Product Revenue

Product revenue for the three-month period ended September 30, 2020 was $31.7 million, an increase of $2.1 million as compared to $29.6 million for the three-month period ended September 30, 2019.

Product revenue for the nine-month period ended September 30, 2020 was $97.8 million, an increase of $13.0 million as compared to $84.7 million for the nine-month period ended September 30, 2019.

For the three- and nine-month periods ended September 30, 2020, the increase in product revenue was primarily driven by growth in our Orthopedic Joint Preservation and Restoration product family, as a result of the early 2020 acquisitions of Parcus Medical and Arthrosurface, offset by a decrease in revenue from our Joint Pain Management product family due to the COVID-19 pandemic.

Historically, we categorized our product offerings into four product families:

Orthobiologics, Dermal, Surgical, and Other, which included our ophthalmic and veterinary products.

As a result of our acquisitions of Parcus Medical and Arthrosurface in early 2020, we now divide our product portfolio into three product families:

Joint Pain Management, Orthopedic Joint Preservation and Restoration, and Other.

The following tables present product revenue by product group (dollars in thousands):

Three Months Ended September 30,

Joint Pain Management

Orthopedic Joint Preservation and Restoration

Nine Months Ended September 30,

Income from operations

Interest and other (expense) / income, net

Income (before income taxes

(Benefit from) provision for income taxes

Revenue for the three-month period ended March 31, 2021 was $34.3 million, a decrease of $1.1 million as compared to $35.4 million for the three-month period ended March 31, 2020, primarily as a result of the impact of COVID-19 on procedure volumes and Mitek’s related ordering patterns, offset by the inclusion of full quarter results of Parcus Medical and Arthrosurface, which we acquired on January 24, 2020 and February 3, 2020, respectively.

Our consolidated financial statements include the results of operations for these acquired businesses from their respective acquisition dates.

Three Months Ended March 31,

(in thousands, except percentages)

Joint Pain Management

Orthopedic Joint Preservation and Restoration

Our Joint Pain Management product family consists of injectable viscosupplement products that provide pain relief from osteoarthritis, or OA, conditions.

These products include MONOVISC, ORTHOVISC, and CINGAL, all widely-used, HA-based viscosupplements utilized to treat OA pain in humans, as well as HYVISC, an HA-based treatment for equine osteoarthritis pain.

Overall, revenue from joint pain management therapies decreased 33% and 14% for the three- and nine-month periods ended September 30, 2020, respectively, as compared to the same periods in 2019, due to the impact of COVID-19 and customer ordering patterns that delayed a portion of the impact of the COVID-19 pandemic on this product family from the second quarter to the third quarter of 2020.

Our Orthopedic Joint Preservation and Restoration product family consists of the following key products:

Arthrosurface’s catalogue of over 150 partial and total joint surface implants and preservation solutions for the knee, shoulder, hip, ankle, wrist and toe that are designed to treat upper and lower extremity orthopedic conditions caused by trauma, injury and arthritic disease.

These products are designed to be less invasive and more bone preserving than conventional joint replacements.

These products are available in the United States and over 25 international markets.

Parcus Medical’s line of surgical implant and instrumentation solutions are used by surgeons to repair and reconstruct damaged ligaments and tendons due to sports injuries, trauma and disease.

These solutions include screws, sutures, anchors, and other surgical systems that facilitate surgical procedures on the shoulder, knee, hip, distal extremities, and soft tissue.

They are typically utilized by surgeons in ambulatory surgical center, or ASC, and hospital environments.

These products are commercialized in the United States and over 60 international markets.

HYALOFAST, a biodegradable hyaluronic acid-based scaffold support for human bone marrow mesenchymal stem cells used for cartilage regeneration and as an adjunct for microfracture surgery.

This product is currently available in Europe, South America, Asia, and certain other international markets.

TACTOSET, an HA-enhanced bone repair therapy designed to treat insufficiency fractures.

TACTOSET is available in the United States, and we expect to leverage the commercial infrastructure of our recent acquisitions to increase market access to sell TACTOSET.

For the three-month period ended September 30, 2020, Orthopedic Joint Preservation and Restoration product revenue increased by $11.2 million to $11.7 million as compared to the same period in 2019, resulting primarily from the additions of the Arthrosurface and Parcus Medical product portfolios.

For the nine-month period ended September 30, 2020, Orthopedic Joint Preservation and Restoration product revenue increased by $24.7 million to $26.2 million as compared to the same period in 2019, resulting primarily from the additions of the Arthrosurface and Parcus Medical product portfolios.

Our Other product family consists of legacy HA-based products that do not fit into one of our other primary product categories.

These products include:

Advanced wound care products based on our biodegradable hyaluronic acid-based polymer (“HYAFF”) technology which are used to treat skin wounds, ranging from burns to diabetic ulcers.

The lead product is HYALOMATRIX, a bi-layered, sterile and flexible advanced wound care device ideally suited for a range of wounds that include pressure ulcers, diabetic foot ulcers and deep second-degree burns.

Products used in connection with the treatment of ENT (ears, nose and throat) disorders.

The lead product is MEROGEL, a HYAFF-based woven fleece nasal packing.

We have partnered with Medtronic XoMed, Inc., or Medtronic, for worldwide distribution of these ENT products.

Ophthalmic products, including injectable, high molecular weight HA products used as viscoelastic agents in ophthalmic surgical procedures such as cataract extraction and intraocular lens implantation.

Other product revenue remained consistent for the three-month period ended September 30, 2020 as compared to the corresponding period in 2019.

Other product revenue decreased for the nine-month period ended September 30, 2020 by $0.8 million or 13%, as compared to the corresponding period in 2019, due to the impact of COVID-19.

Product Gross Profit and Margin

Product gross profit for the three- and nine-month periods ended September 30, 2020 decreased $6.3 million and $12.4 million to $17.3 million and $52.3 million, respectively, representing 55% and 53% of product revenue.

Product gross profit for the three- and nine-month periods ended September 30, 2019 was $23.7 million and $64.7 million, respectively, or 80% and 76% of product revenue for the periods, respectively.

The decrease in product gross margin for the three- and nine-month periods ended September 30, 2020, as compared to the same periods in 2019, was primarily due to fair valuation of inventory purchased associated with the two newly acquired companies and acquisition-related amortization expenses.

The inventory fair-value markup and amortization of acquired intangible assets resulted in an increase of cost of goods sold of approximately $4.8 million and $11.7 million for the three- and nine-month period ended September 30, 2020, respectively.

During the nine-month period ended September 30, 2020, we determined we will not pursue CE Mark renewals for certain of our products primarily in the wound care product family, resulting in an inventory impairment charge of $1.9 million, all of which was recorded in the three-months ended June 30, 2020.

Joint Preservation and Restoration

Revenue from our Joint Pain Management product family decreased, primarily due to the worldwide impact of the COVID-19 pandemic on elective procedure volumes and associated ordering patterns from Mitek.

Revenue from our Joint Preservation and Restoration product family increased primarily due to the inclusion of full quarter results from Parcus Medical and Arthrosurface, as well as organic growth.

Revenue from our Other product family increased due to the sell through of legacy wound care products.

Gross Profit and Margin

Gross profit for the three-month period ended March 31, 2021 decreased $0.2 million to $21.0 million, representing a 61% gross margin, for the period.

The decrease in gross profit for the three-month period ended March 31, 2021, as compared to the same period in 2020, was primarily a result of the impact of COVID-19 on volumes offset by full quarter results of acquired businesses. The gross margin included the impact of 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 $4.1 million, or 12 points of gross margin, for the three-month period ended March 31, 2021, as compared to increased cost of revenue of $3.0 million, or 9 points of gross margin, for the same period in 2020.

Research and Development

Research and development expenses for the three- and nine-month periods ended September 30, 2020 were $5.2 million and $15.8 million, representing an increase of $1.1 and $3.2 million, respectively, as compared to the same periods in 2019.

The increase in research and development expense for the three- and nine-month periods ended September 30, 2020 was primarily due to preparation activities for the CINGAL Pilot study, certain European post-market clinical studies, and activities associated with the development of product candidates in our research and development pipeline across all of our businesses.

Research and development expenses for the three-month period ended March 31, 2021 were $6.4 million, an increase of $0.3 million as compared to the same period in 2020.

This increase was primarily due to full quarter results from Parcus Medical and Arthrosurface.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses for the three- and nine-month periods ended September 30, 2020 were $15.9 million and $44.9 million, an increase of $8.4 million and $22.2 million, respectively, as compared to the same periods in 2019.

The increase in SG&A expenses for the three- and nine-month periods ended September 30, 2020 was primarily related to incentive compensation, our sales infrastructure and expenses resulting from the acquisitions of Parcus Medical and Arthrosurface in early 2020, partially offset by a decrease in stock compensation expense in the nine-month period ended September 30, 2020 due to the forfeiture of unvested equity awards.

Selling, general and administrative expenses for the three-month period ended March 31, 2021 were $18.2 million, an increase of $3.7 million, as compared to the same period in 2020.

This increase for the three-month period ended March 31, 2021 was due to full quarter results from Parcus Medical and Arthrosurface, increased spending to support our commercial capability in the United States, an increase in incentive-based compensation, an increase in share based compensation expense due to the forfeiture of unvested shares during the comparable period, and a non-cash impairment charge related to fixed assets, partially offset by the absence of transaction costs related to acquisition of Parcus and Arthrosurface.

Goodwill Impairment Charge

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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 and Arthrosurface reporting unit as of March 31, 2020.

As a result of these events, during the three-month period ended March 31, 2020, we performed a quantitative assessment of goodwill impairment related to the Parcus 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.

Consequently, a non-cash goodwill impairment charge of $18.1 million was recorded in the three-month period 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 and Arthrosurface reporting unit.

There were no indicators of goodwill impairment and therefore no goodwill impairment charges were recorded during the three-month period ended March 31, 2021.

Contingent Consideration Fair Value Change

In the three- and nine-month periods ended September 30, 2020, we recorded a $4.2 million expense and a $16.2 million net benefit, respectively, 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 January and February of 2020.

In the quarter ended March 31, 2021, we recorded a net benefit of $4.8 million 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 January and February of 2020, respectively.

The liability for contingent consideration is remeasured at each reporting period until the contingency is resolved.

The $4.2 million increase in fair value of the contingent consideration for the three- month period ended September 30, 2020 was primarily due to the passage of time, higher than forecasted revenues during the third quarter, and a reduction in market-based borrowing rates.

The $16.2 million decrease in fair value of the contingent consideration for the nine-month period ended September 30, 2020 was due to a decrease in the near term projections of revenue due to the COVID-19 pandemic.

On October 15, 2020, the Company received FDA clearance for its WristMotion Total Arthroplasty System, triggering a $5 million regulatory-based milestone payment per the Arthrosurface Merger Agreement.

The benefit from income taxes was $1.7 million and $2.2 million for the three- and nine-month periods ended September 30, 2020, based on effective tax rates of 21.4% and 20.6%, respectively.

The provision for income taxes was $3.3 million and $7.8 million for the three- and nine-month periods ended September 30, 2019, based on effective tax rates of 26.6% and 25.3%, respectively.

The net decrease in the effective tax rate for the three- and nine-month periods ended September 30, 2020, as compared to the same periods in 2019, was primarily due to the $1.9 million tax expense on the impairment of non-tax deductible goodwill offset by the $1.5 million tax benefit on the decrease in the fair value of the contingent consideration.

The Company recognized a net deferred tax liability of $11.2 million primarily due to intangible assets and inventory step up offset by net operating losses and research and development tax credits associated with the Arthrosurface acquisition discussed in Note 3.

The net decrease in fair value of the contingent consideration as of March 31, 2021 is due primarily to the decrease in the likelihood that certain contingent milestones would be achieved and result in payment.

The benefit from income taxes was $1.6 million for the three-month period ended March 31, 2021, resulting in an effective tax rate of (133.6%). The provision for income taxes was $1.6 million for the three-month period ended March 31, 2020, based on effective tax rates of 21.4%.

The net decrease in the effective tax rate for the three-month period ended March 31, 2021, as compared to the same period in 2020, was primarily due to the $1.7 million tax benefit on the decrease in the fair value of the contingent consideration, recognized as a discrete benefit in the first quarter of 2021.

Non-GAAP Financial Measures

We present certain information with respect to adjusted EBITDA, adjusted net income, and adjusted earnings per share, 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 EBITDA, adjusted net income (loss), and adjusted earnings per share 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 the expenses eliminated 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 its financial and operational decision-making.

Adjusted EBITDA

We present information below with respect to adjusted EBITDA, which we define as our net income excluding interest and other income, net, income tax benefit (expense), depreciation and amortization, stock-based compensation, product rationalization and acquisition-related expenses.

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.

In light of the COVID-19 pandemic, 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.

This financial measure is not based on any standardized methodology prescribed by accounting principles generally accepted in the United States (“GAAP”) and are not necessarily comparable to similarly titled measures presented by other companies.

We have presented adjusted EBITDA because it is a key measure 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 this financial measure helps 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 the expenses eliminated in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core operating performance.

Accordingly, we believe that adjusted EBITDA provides 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 its financial and operational decision-making.

Adjusted EBITDA is not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP.

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we exclude stock-based compensation expense from adjusted EBITDA although (a) it has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses would be higher, which would affect our cash position;

we exclude acquisition-related expenses, including impacts of purchase price accounting, such as the impact of inventory fair-value step up on cost of goods sold, amortization and depreciation of acquired assets, transactions costs, and other related expenses;

we exclude certain product rationalization charges related to non-core legacy assets as result of managing our financial position in light of our recent acquisitions, the impact of COVID-19 and changing regulatory requirements;

we exclude acquisition related expenses, including transaction costs and other related expenses, amortization and depreciation of acquired assets, and the impact of inventory fair-value step up on cost of revenue;

we exclude certain impairment charges, including certain product rationalization charges related to non-core legacy assets as a result of managing our financial position in light of our recent acquisitions, the impact of COVID-19 and changing regulatory requirements;

we exclude goodwill impairment charges and changes in the fair value of contingent consideration;

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adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs;

adjusted EBITDA does not reflect provision for (benefit from) income taxes or the cash requirements to pay taxes;

adjusted EBITDA does not reflect provision for (benefit from) income taxes or the cash requirements to pay taxes; and

adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments.

The following is a reconciliation of net income (loss) to adjusted EBITDA for the three- and nine-month periods ended September 30, 2020 and 2019, respectively (dollars in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Net income (loss)

Interest and other income (expense), net

The following is a reconciliation of net income (loss) to adjusted EBITDA for the three-month periods ended March 31, 2021 and 2020, respectively:

Three Months Ended March 31,

(in thousands)

Interest and other income, net

(Benefit from) provision for income taxes

Depreciation and amortization

Stock-based compensation

Product rationalization charges

Share-based compensation

Acquisition related expenses

Acquisition related intangible asset amortization

Acquisition related inventory step up

Goodwill impairment

Change in fair value of contingent consideration (benefit)

Change in fair value of contingent consideration

Adjusted EBITDA

Adjusted EBITDA in the three- and nine-month periods ended September 30, 2020, decreased $10.0 million and $18.1 million, respectively, as compared with the comparable periods in 2019.

The decrease in adjusted EBITDA for the periods was primarily due to the unfavorable impact of the COVID-19 pandemic on our revenues, unfavorable revenue mix and higher expenses following our acquisitions in early 2020 to support future growth.

Adjusted EBITDA in the three-month period ended March 31, 2021 decreased $4.7 million as compared with the same period in 2020.

The decrease in adjusted EBITDA for the period was primarily due to lower revenues as a result of the impact of the COVID-19 pandemic, an increase in selling and marketing expenses primarily attributable to increased cost to support our direct sales force for the Joint Preservation and Restoration product family, as well as a non-cash impairment charge related to fixed assets.

Adjusted Net Income and Adjusted EPS

We present information below with respect to adjusted net income and adjusted diluted earnings per share (“adjusted EPS”).

We define adjusted net income as our net income excluding acquisition-related expenses and the impacts of goodwill impairment charges and changes in the fair value of contingent consideration, as well as non-cash product rationalization charges associated with certain non-core legacy products, 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 and the impact of purchase accounting associated with acquisition transactions, such as amortization of inventory step up and the amortization of intangible assets recorded as part of purchase accounting.

We present information below with respect to adjusted net income and adjusted diluted earnings per share, which we refer to as adjusted EPS.

We define adjusted net income as our net income 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 non-cash product rationalization charges associated with certain non-core legacy products, on a tax effected basis.

Acquisition related expenses are those that the 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 trade name.

We define adjusted EPS as GAAP diluted earnings per share excluding the above adjustments to net income used in calculating adjusted net income, each on per share and a tax effected basis.

This financial measure is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similarly titled measures presented by other companies.

We have presented adjusted net income and 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 the expenses eliminated in calculating adjusted net income and adjusted EPS can provide useful measures for period-to-period comparisons of our core operating performance.

Accordingly, we believe that adjusted net income and adjusted EPS 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 its financial and operational decision-making.

The following is a reconciliation of net income (loss) to adjusted net income for the three- and nine-month period ended September 30, 2020 and 2019, respectively (dollars in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Net income (loss)

Product rationalization charges, tax effected

We define adjusted EPS as GAAP diluted earnings per share excluding the above adjustments to net income used in calculating adjusted net income, each on a per share and tax effected basis.

The following is a reconciliation of adjusted net income to net income for the three-month periods ended March 31, 2021 and 2020, respectively:

Three Months Ended March 31,

(in thousands)

Acquisition related expenses, tax effected

Acquisition related intangible asset amortization, tax effected

Acquisition related inventory step up, tax effected

Goodwill impairment, tax effected

Change in fair value contingent consideration, tax effected

Adjusted net income (loss)

The following is a reconciliation of diluted EPS to adjusted diluted EPS for the three- and nine-month periods ended September 30, 2020 and 2019:

Three Months Ended September 30,

Nine Months Ended September 30,

Diluted earnings (loss) per share

Product rationalization charges, tax effected

Adjusted net income

The following is a reconciliation of adjusted diluted EPS to diluted EPS for the three-month periods ended March 31, 2021 and 2020, respectively:

Three Months Ended March 31,

Diluted earnings per share (EPS)

Acquisition related expenses per share, tax effected

Goodwill impairment, tax effected

Change in fair value contingent consideration, tax effected

Acquisition related intangible asset amortization, tax effected

Acquisition related inventory step up

Goodwill impairment per share, tax effected

Change in fair value contingent consideration per share, tax effected

Adjusted diluted EPS

Adjusted net income and adjusted diluted EPS for the three-month period ended September 30, 2020 decreased $8.5 million and $0.59, respectively, as compared with the comparable period in 2019.

Adjusted net income and adjusted diluted EPS for the nine-month period ended September 30, 2020 decreased $14.7 million and $1.03, respectively, as compared with the comparable period in 2019.

The decrease for the three- and nine-month periods was primarily due to the unfavorable impact of the COVID-19 pandemic on our revenues, an unfavorable revenue mix impact on profitability, as well as higher expenses following our acquisitions in early 2020 to support future growth.

Adjusted net income and adjusted diluted EPS in the three-month period ended March 31, 2021 decreased $5.7 million and $0.39, respectively, as compared with the same period in 2020.

The decrease for the period was primarily due to lower revenues as a result of the impact of the COVID-19 pandemic, an increase in selling and marketing expenses primarily attributable to increased costs to support our direct sales force for the Joint Preservation and Restoration product family, increase in share based compensation expense due to the forfeiture of unvested shares during the comparable period and a non-cash impairment charge related to fixed assets.

Liquidity and Capital Resources

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Historically we have generated positive cash flow from operations, which, together with our available cash, investments, and debt, have met our cash requirements.

Cash, cash equivalents, and investments aggregated $124.8 million and $184.9 million, and working capital totaled $170.7 million and $218.0 million as of September 30, 2020 and December 31, 2019, respectively.

We are closely monitoring our liquidity and capital resources for any potential impact that the COVID-19 pandemic may have on our operations.

As a precautionary measure, we executed a drawdown of $50.0 million from our existing credit facility with Bank of America on April 8, 2020, of which we repaid $25.0 million during the three-months ended September 30, 2020.

Beyond the existing facility, our credit facility has an additional $50.0 million accordion feature that we could potentially access in the future.

In addition, we are exploring other sources of funding aimed at further supporting our liquidity profile, as well as maintaining business and organizational continuity through the pandemic.

In parallel, we have implemented a number of internal short-term expense controls and are prioritizing business initiatives to conserve cash flow.

Cash provided by operating activities was $10.5 million for the nine-month period ended September 30, 2020, as compared to cash provided by operating activities of $24.0 million for the same period in 2019.

The decrease in cash provided by operating activities was primarily attributable to the unfavorable impact of the COVID-19 pandemic on our revenues, impact of unfavorable revenue mix on profitability, higher spending on commercial infrastructure following our acquisitions of Parcus Medical and Arthrosurface in early 2020, payment of accrued expenses and the increase in inventory for the nine-month period ended September 30, 2020.

Cash used in investing activities was $88.1 million for the nine-month period ended September 30, 2020, as compared to cash used in investing activities of $1.3 million for the same period in 2019.

The change was primarily due to the consideration paid for the acquisitions of Parcus Medical and Arthrosurface in the nine-month period ended September 30, 2020.

Cash provided by financing activities was $24.3 million for the nine-month period ended September 30, 2020, as compared to cash used by financing activities of $8.4 million for the same period in 2019.

The change was primarily due to net borrowings of $25.0 million on our credit facility during the nine-months ended September 30, 2020 as a precautionary measure associated with the potential impact of the COVID-19 pandemic on our operations.

Cash, cash equivalents, and investments aggregated $94.6 million and $98.3 million, and working capital totaled $126.5 million and $140.5 million as of March 31, 2021 and December 31, 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.

Cash used in operating activities was $2.4 million for the three-month period ended March 31, 2021, as compared to cash provided by operating activities of $1.0 million for the same period in 2020. The change was primarily attributable to lower sales due to the COVID-19 pandemic, an increase in accounts receivable due to timing of collections, increase in inventories and timing of certain state tax payments, partially off-set by a decrease in cash outflows related to acquisition related expenses for the three-month period ended March 31, 2021.

Cash provided by investing activities was $1.7 million for the three-month period ended March 31, 2021, as compared to cash used in investing activities of $92.5 million for the same period in 2020.

The change was primarily due to the consideration paid for the acquisitions of Parcus Medical and Arthrosurface in the three-month period ended March 31, 2020.

Cash used in financing activities was $0.5 million for the three-month period ended March 31, 2021, as compared to cash used in financing activities of $0.1 million for the same period in 2020.

In both periods, the cash used in financing activities was primarily attributable to utilization of cash for employee tax withholding in exchange for shares surrendered by equity award holders.

Critical Accounting Policies and Estimates

There were no other significant changes in our critical accounting policies or estimates during the three months ended September 30, 2020 to augment the critical accounting estimates disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, other than those described below.

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.

We use the comparative sales method to determine the fair value of work-in-process 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, management updates these estimates and the related fair value of contingent consideration at each reporting period based on the estimated probability of achieving the earnout targets and applying a discount rate that captures the risk associated with the expected contingent payments.

Under the Parcus Medical and Arthrosurface merger agreements, there are earn-out milestones totaling $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 in 2020 and 2021.

Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model or a Monte Carlo simulation approach.

To the extent our estimates change in the future regarding the likelihood of achieving these targets we may need to record material adjustments to our accrued contingent consideration.

Changes in the fair value of contingent consideration are recorded in our consolidated statements of comprehensive income.

We assess goodwill for impairment on November 30 of each year, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment.

In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether further impairment testing is necessary, such as macroeconomic conditions, changes in our industry and the markets in which we operate, and our market capitalization, and our reporting units' historical and expected future financial performance.

If we conclude that it is more likely than not that a reporting unit's fair value is less than it’s carrying value or we bypass the optional qualitative assessment, recoverability is assessed by comparing the fair value of the reporting unit with its carrying amount.

If a reporting unit's carrying value exceeds its fair value, we will measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

For quantitative tests, we estimate the fair value of the reporting units using an income approach.

Under the income approach, the fair value of the reporting unit is estimated based on the discounted present value of the projected future cash flows.

Rates used to discount cash flows are dependent upon interest rates and the cost of capital based on our industry and capital structure, adjusted for equity and size risk premiums based on market capitalization, as well as other financial inputs from a selection of comparable publicly-traded companies with product offerings similar to those of the reporting unit.

Estimates of future cash flows are dependent on our knowledge and experience about past and current events, and as well as significant judgments and assumptions about conditions we expect to exist, including revenue growth rates, margins, and the discount rate.

Our estimates of cash flows are also based on historical and future operating performance, economic conditions and actions we expect to take.

These assumptions are based on a number of factors, including future operating performance, economic conditions, actions we expect to take, and present value techniques.

There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment.

It is possible that assumptions underlying the impairment analysis will change in a manner that impairment in value may occur in the future.

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, we assessed goodwill for each of our reporting units.

As of March 31, 2020, there was $7.5 million of goodwill on the balance sheet related to the legacy Anika reporting unit.

We assessed that our legacy reporting unit’s fair value was greater than its carrying value using the qualitative assessment.

Upon their acquisition, we recorded $44.4 million of goodwill on the balance sheet related to the combined Parcus Medical and Arthrosurface reporting unit.

We performed a quantitative assessment of goodwill impairment related to the Parcus Medical and Arthrosurface reporting unit.

The temporary suspension of domestic elective procedures directly impacted the Parcus Medical and Arthrosurface reporting unit, resulting in an immediate term revenue decline.

We further applied an increase in discount rate due to the increased overall uncertainty.

These key changes, together with estimates on operating expenses, capital requirements, tax benefits, and other cash flow projections indicated that the estimated fair value of this reporting unit was less than its carrying value.

Consequently, a goodwill impairment charge of $18.1 million was recorded in the quarter ended March 31, 2020.

There were no events since March 31, 2020 that indicated any further impairments to the Parcus Medical and Arthrosurface reporting unit.

In the event the financial performance of our reporting units do not meet our expectations in the future, we experience future prolonged market downturns, negative trends from the COVID-19 pandemic continue, or there are other negative revisions to key assumptions, we may be required to perform additional impairment analyses and could be required to recognize a goodwill impairment charge.

The preparation of our consolidated financial statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.

We believe that our accounting policies for revenue recognition, accounts receivable and allowance for credit losses, goodwill, acquired in-process research and development, inventory and contingencies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties.

There have been no significant changes to the above critical accounting policies or in the underlying accounting assumptions and estimates used in such policies from those disclosed in our annual consolidated financial statements and accompanying notes included in our 2020 Form 10-K for the year ended December 31, 2020, except for adoption of Accounting Standards Update, or ASU, 2019-12, Income Taxes (Topic 740) –

Simplifying the Accounting for Income Taxes, as described in Note 2 to the consolidated financial statements in this report.

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.

Recent Accounting Pronouncements

A discussion of Recent Accounting Pronouncements is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and is updated in the Notes to the consolidated financial statements included in this report.

A discussion of Recent Accounting Pronouncements is included in our 2020 Form 10-K for the fiscal year ended December 31, 2020 and is updated in the Notes to the consolidated financial statements included in this report.

Contractual Obligations and Other Commercial Commitments

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Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations and Other Commercial Commitments”

in our Annual Report on Form 10-K for the year ended December 31, 2019.

Material contractual obligations incurred in the quarter included those described in Note 16, “Revolving Credit Agreement.”

There were otherwise no material changes to our contractual obligations reported in our 2019 Annual Report on Form 10-K or our Quarterly Report on Form 10-Q during the nine-month period ended September 30, 2020.

For additional discussion, see Note 10, “Commitments and Contingencies,”

to the consolidated financial statements included in this report.

in our 2020 Form 10-K for the year ended December 31, 2020.

There were no material changes to our contractual obligations reported in our 2020 Form 10-K during the three months ended March 31, 2021.

For additional discussion, see Note 9 to the consolidated financial statements included in this report.

To the extent that funds generated from our operations, together with our existing capital resources, are insufficient to meet future requirements, we will be required to obtain additional funds through equity or debt financings, strategic alliances with corporate partners and others, or through other sources.

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements