Anika Therapeutics, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS   Anika Therapeutics, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except per share data) (unaudited)       September 30,     December 31,   ASSETS   2021     2020   Current assets:                 Cash and cash equivalents   $ 90,976     $ 95,817   Investments           2,501   Accounts receivable, net of reserves of $1,358 and $1,523 at September 30, 2021 and December 31, 2020, respectively     32,352       24,102   Inventories, net     35,019       46,209   Prepaid expenses and other current assets     7,433       8,754   Total current assets     165,780       177,383   Property and equipment, net     49,111       50,613   Right-of-use assets     21,397       22,619   Other long-term assets     23,671       15,420   Intangible assets, net     85,021       91,157   Goodwill     7,950       8,413   Total assets   $ 352,930     $ 365,605   LIABILITIES AND STOCKHOLDERS ’ EQUITY                 Current liabilities:                 Accounts payable   $ 7,942     $ 8,984   Accrued expenses and other current liabilities     17,339       14,793   Contingent consideration – current portion     3,490       13,090   Total current liabilities     28,771       36,867   Other long-term liabilities     1,489       1,244   Contingent consideration     -       22,320   Deferred tax liability     12,972       11,895   Lease liabilities     19,638       20,879   Commitments and contingencies (Note 9)                     Stockholders’ equity:                 Preferred stock, $0.01 par value; 1,250 shares authorized, no shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively     -       -   Common stock, $0.01 par value; 90,000 shares authorized, 14,436 and 14,329 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively     144       143   Additional paid-in-capital     63,864       55,355   Accumulated other comprehensive loss     ( 5,319 )     ( 4,542 ) Retained earnings     231,371       221,444   Total stockholders’ equity     290,060       272,400   Total liabilities and stockholders’ equity   $ 352,930     $ 365,605     The accompanying notes are an integral part of these unaudited consolidated financial statements.    3       Anika Therapeutics, Inc. and Subsidiaries Consolidated Statements of Operations and Comprehensive Income (in thousands, except per share data) (unaudited)         Three Months Ended September 30,     Nine Months Ended September 30,       2021     2020     2021     2020   Revenue   $ 39,536     $ 31,694     $ 111,973     $ 97,769   Cost of revenue     16,513       14,351       47,164       45,487   Gross Profit     23,023       17,343       64,809       52,282                                     Operating expenses:                                 Research and development     7,673       5,217       21,327       15,799   Selling, general and administrative     17,500       15,903       53,664       44,884   Goodwill impairment     -       -       -       18,144   Change in fair value of contingent consideration     ( 3,450 )     4,150       ( 21,920 )     ( 16,176 ) Total operating expenses     21,723       25,270       53,071       62,651   Income (loss) from operations     1,300       ( 7,927 )     11,738       ( 10,369 ) Interest and other expense, net     ( 48 )     ( 228 )     ( 141 )     ( 118 ) Income (loss) before income taxes     1,252       ( 8,155 )     11,597       ( 10,487 ) Provision for (benefit from) income taxes     694       ( 1,744 )     1,670       ( 2,161 ) Net income (loss)   $ 558     $ ( 6,411 )   $ 9,927     $ ( 8,326 )                                   Net income (loss) per share:                                 Basic   $ 0.04     $ ( 0.45 )   $ 0.69     $ ( 0.59 ) Diluted   $ 0.04     $ ( 0.45 )   $ 0.68     $ ( 0.59 ) Weighted average common shares outstanding:                                 Basic     14,429       14,205       14,389       14,202   Diluted     14,647       14,205       14,588       14,202                                     Net income (loss)   $ 558     $ ( 6,411 )   $ 9,927     $ ( 8,326 ) Foreign currency translation adjustment     ( 467 )     522       ( 777 )     602   Comprehensive income (loss)   $ 91     $ ( 5,889 )   $ 9,150     $ ( 7,724 )   The accompanying notes are an integral part of these unaudited consolidated financial statements.   4       Anika Therapeutics, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (in thousands) (unaudited)       Nine Months Ended September 30, 2021                                       Accumulated               Common Stock             Other     Total       Number of     $.01 Par     Additional Paid     Retained     Comprehensive     Stockholders'       Shares     Value     in Capital     Earnings     Loss     Equity   Balance, January 1, 2021     14,329     $ 143     $ 55,355     $ 221,444     $ ( 4,542 )   $ 272,400   Issuance of common stock for equity awards     -       -       1       -       -       1   Vesting of restricted stock units     46       1       ( 1 )     -       -       -   Stock-based compensation expense     -       -       2,259       -       -       2,259   Retirement of common stock for minimum tax withholdings     ( 9 )     -       ( 333 )     -       -       ( 333 ) Net income     -       -       -       2,838       -       2,838   Other comprehensive income     -       -       -       -       ( 509 )     ( 509 ) Balance, March 31, 2021     14,366     $ 144     $ 57,281     $ 224,282     $ ( 5,051 )   $ 276,656   Issuance of common stock for equity awards     18       -       640       -       -       640   Vesting of restricted stock units     35       -       -       -       -       -   Stock-based compensation expense     -       -       2,797       -       -       2,797   Retirement of common stock for minimum tax withholdings     ( 1 )     -       ( 19 )     -       -       ( 19 ) Net income     -       -       -       6,531       -       6,531   Other comprehensive income     -       -       -       -       199       199   Balance, June 30, 2021     14,418       144       60,699       230,813       ( 4,852 )     286,804   Issuance of common stock for equity awards     10       -       373       -       -       373   Vesting of restricted stock units     9       -       -       -       -       -   Stock-based compensation expense     -       -       2,863       -       -       2,863   Retirement of common stock for minimum tax withholdings     ( 1 )     -       ( 71 )     -       -       ( 71 ) Net income     -       -       -       558       -       558   Other comprehensive income     -       -       -       -       ( 467 )     ( 467 ) Balance, September 30, 2021     14,436       144       63,864       231,371       ( 5,319 )     290,060         Nine Months Ended September 30, 2020                                       Accumulated               Common Stock             Other     Total       Number of     $.01 Par     Additional Paid     Retained     Comprehensive     Stockholders'       Shares     Value     in Capital     Earnings     Loss     Equity   Balance, January 1, 2020     14,308     $ 143     $ 48,707     $ 245,426     $ ( 5,898 )   $ 288,378   Vesting of restricted stock units     42       -       -       -       -       -   Forfeiture of restricted stock awards     ( 9 )     -       -       -       -       -   Stock-based compensation expense     -       -       ( 207 )     -       -       ( 207 ) Retirement of common stock for minimum tax withholdings     ( 4 )     -       ( 141 )     -       -       ( 141 ) Repurchase of common stock     ( 139 )     ( 1 )     1       -       -       -   Net income     -       -       -       5,793       -       5,793   Other comprehensive loss     -       -       -       -       ( 129 )     ( 129 ) Balance, March 31, 2020     14,198     $ 142     $ 48,360     $ 251,219     $ ( 6,027 )   $ 293,694   Issuance of common stock for equity awards     2       -       68       -       -       68   Vesting of restricted stock units     7       -       -       -       -       -   Stock-based compensation expense     -       -       2,240       -       -       2,240   Retirement of common stock for minimum tax withholdings     ( 3 )     -       ( 59 )     -       -       ( 59 ) Net loss     -       -       -       ( 7,708 )     -       ( 7,708 ) Other comprehensive income     -       -       -       -       209       209   Balance, June 30, 2020     14,204     $ 142     $ 50,609     $ 243,511     $ ( 5,818 )   $ 288,444   Vesting of restricted stock units     4       -       -       -       -       -   Stock-based compensation expense     -       -       1,920       -       -       1,920   Retirement of common stock for minimum tax withholdings     -       -       ( 24 )     -       -       ( 24 ) Net loss     -       -       -       ( 6,411 )     -       ( 6,411 ) Other comprehensive income     -       -       -       -       522       522   Balance, September 30, 2020     14,208     $ 142     $ 52,505     $ 237,100     $ ( 5,296 )   $ 284,451     The accompanying notes are an integral part of these unaudited consolidated financial statements.   5       Anika Therapeutics, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) (unaudited)       Nine Months Ended September 30,       2021     2020   Cash flows from operating activities:                 Net income (loss)   $ 9,927     $ ( 8,326 ) Adjustments to reconcile net income to net cash provided by operating activities:                 Depreciation      4,702       4,545   Amortization of acquisition related intangible assets     5,885       5,418   Amortization of acquisition related inventory step-up     6,244       7,396   Non-cash operating lease cost     1,312       1,136   Goodwill impairment     -       18,144   Change in fair value of contingent consideration     ( 21,920 )     ( 16,176 ) Loss on disposal of fixed assets     831       287   Loss on impairment of intangible asset     -       1,025   Stock-based compensation expense     7,919       3,953   Deferred income taxes     1,018       ( 3,302 ) Recovery for doubtful accounts     ( 60 )     ( 482 ) Provision for inventory     3,702       4,205   Other     ( 13 )     ( 19 ) Changes in operating assets and liabilities:                 Accounts receivable     ( 8,321 )     7,811   Inventories     ( 7,117 )     ( 8,840 ) Prepaid expenses, other current and long-term assets     1,864       ( 989 ) Accounts payable     ( 702 )     ( 1,904 ) Operating lease liabilities     ( 1,247 )     ( 1,286 ) Accrued expenses, other current and long-term liabilities     3,104       ( 2,340 ) Contingent consideration     ( 2,780 )     -   Income taxes     ( 423 )     222   Net cash provided by operating activities     3,925       10,478                     Cash flows from investing activities:                 Acquisition of Parcus Medical and Arthrosurface, net of cash acquired     ( 363 )     ( 93,859 ) Proceeds from maturities of investments     2,501       27,000   Purchases of investments     -       ( 20,035 ) Purchases of property and equipment     ( 4,016 )     ( 1,179 ) Net cash used in investing activities     ( 1,878 )     ( 88,073 )                   Cash flows from financing activities:                 Payments made on finance leases     ( 210 )     ( 155 ) Repayments of long term debt     -       ( 25,351 ) Proceeds from long term debt     -       50,000   Cash paid for contingent consideration     ( 7,220 )     -   Cash paid for tax withheld on vested restricted stock awards     ( 423 )     ( 224 ) Proceeds from exercises of equity awards     1,014       68   Net cash (used in) provided by financing activities     ( 6,839 )     24,338                     Exchange rate impact on cash and cash equivalents     ( 49 )     10                     Decrease in cash and cash equivalents     ( 4,841 )     ( 53,247 ) Cash and cash equivalents at beginning of period     95,817       157,463   Cash and cash equivalents at end of period   $ 90,976     $ 104,216   Supplemental disclosure of cash flow information:                 Non-cash Investing Activities:                 Purchases of property and equipment included in accounts payable and accrued expenses   $ 195     $ 44   Right of use assets   $ 220     $ -   Consideration for acquisitions included in accounts payable and accrued expenses   $ -     $ 1,209   Acquisition related contingent consideration   $ -     $ 69,076   Non-cash Financing Activities:                 Operating lease liabilities   $ 220     $ -     The accompanying notes are an integral part of these unaudited consolidated financial statements.   6     ANIKA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except share and per share amounts or as otherwise noted) ( unaudited )     1. Nature of Business   Anika Therapeutics, Inc. ( the “Company”) is a global joint preservation company that creates and delivers meaningful advancements in early intervention orthopedic care, including in the areas of osteoarthritis (“OA”) pain management, regenerative solutions, soft tissue repair and bone preserving joint technologies.   In early 2020, the Company expanded its overall technology platform through its strategic acquisitions of Parcus Medical, LLC (“Parcus Medical”), a sports medicine implant and instrumentation solutions provider focused on sports medicine and soft tissue repair, and Arthrosurface, Inc. (“Arthrosurface”), a company specializing in less invasive, bone preserving partial and total joint replacement solutions. These acquisitions broadened the Company’s product portfolio, developed over its 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 life sciences industry including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, commercialization of existing and new products, and compliance with U.S. Food and Drug Administration (“FDA”) and foreign regulations and approval requirements, as well as the ability to grow the Company’s business through appropriate commercial strategies.   There continue to be uncertainties regarding the pandemic of the novel coronavirus (“COVID- 19” ), and the Company is closely monitoring the impact of COVID- 19 on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, and business partners. The Company is unable to predict the specific impact that COVID- 19 may have on its financial position and operations moving forward due to the numerous uncertainties. Any estimates made herein may change as new events occur and additional information is obtained, and actual results could differ materially from any estimates made herein under different assumptions or conditions. The Company will continue to assess the evolving impact of COVID- 19.     2. 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 United States Securities and Exchange Commission (“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. and its subsidiaries. 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 condensed or omitted from this report 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, 2020. The results of operations for the three - and nine -month periods ended September 30, 2021 are not indicative of the results to be expected for the year ending December  31, 2021.   Segment Information   Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its President and Chief Executive Officer as of September 30, 2021. Based on the criteria established by Accounting Standards Codification (“ASC”) 280,   Segment Reportin g, the Company has one operating and reportable segment.     7     Recent Accounting Adoptions   In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019 - 12, Income Taxes (Topic 740 ) – Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify US GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019 - 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 of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures.       3. Business Combinations   Parcus Medical, LLC   On January 24, 2020, the Company completed the acquisition of Parcus Medical pursuant to the terms of the Agreement and Plan of Merger, dated as of January 4, 2020 ( the “Parcus Medical Merger Agreement”), by and among the Company, Parcus Medical, the Unitholder Representative, and Sunshine Merger Sub LLC, a Wisconsin limited liability company and a wholly owned subsidiary of the Company. At the closing date, Parcus Medical became a wholly owned subsidiary of the Company. Parcus Medical is a sports medicine implant and instrumentation solutions provider focused on surgical repair and reconstruction of soft tissue.   The acquisition of Parcus Medical has been accounted for as a business combination under ASC 805. Under ASC 805, Business Combinations, the assets acquired and liabilities assumed in a business combination must be recorded at their fair value as of the acquisition date. The Company’s consolidated financial statements include results of operations for Parcus Medical from the January 24, 2020 acquisition date.   Consideration Transferred   Pursuant to the Parcus Medical Merger Agreement, the Company acquired all outstanding equity of Parcus Medical for estimated total purchase consideration of $ 75.1 million, as of January 24, 2020, which consisted of:   Cash consideration   $ 32,794   Deferred consideration     1,642   Estimated fair value of contingent consideration     40,700   Estimated total purchase consideration   $ 75,136     Contingent consideration represents additional payments that the Company may be required to make in the future, which could total up to $ 60.0 million depending on the level of net sales of Parcus Medical products generated in 2020 through 2022. The fair value of contingent consideration related to net sales as of January 24, 2020 was determined based on a Monte Carlo simulation model in an option pricing framework at the acquisition date, whereby a range of possible scenarios were simulated. There also was deferred consideration related to certain purchase price holdbacks, which was resolved within one year of the acquisition date in accordance with the Parcus Merger Agreement and was recorded in accounts payable as of December 31, 2020. There was no deferred consideration as of September 30, 2021. 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 September 30, 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. The Company incurred approximately $ 1.9 million in transaction costs related to the Parcus Medical acquisition during the three -month period ending March 31, 2020. The transaction costs subsequent to March 31, 2020 were immaterial. The transaction costs have been included in selling, general and administrative expenses in the consolidated statements of operations.   Fair Value of Net Assets Acquired   The estimate of fair value as of the acquisition date required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable, however, actual results may differ from these estimates.   8     The allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on estimates of fair value as of January 24, 2020, and is as follows:   Recognized identifiable assets acquired and liabilities assumed:         Cash and cash equivalents   $ 196   Accounts receivable     2,029   Inventories     10,968   Prepaid expenses and other current assets     364   Property and equipment, net     1,099   Right-of-use assets     944   Intangible assets     44,000   Accounts payable, accrued expenses and other current liabilities     ( 2,763 ) Other long-term liabilities     ( 594 ) Lease liabilities     ( 735 ) Net assets acquired     55,508   Goodwill     19,628   Estimated total purchase consideration   $ 75,136     The acquired intangible assets based on estimates of fair value as of January 24, 2020 are as follows:   Developed technology   $ 41,100   Trade name     1,800   Customer relationships     1,100   Total acquired intangible assets   $ 44,000     The fair value of the developed technology intangible assets has been estimated using the multi-period excess earnings method, which is based on the principle that the value of an intangible asset is equal to the present value of the incremental after-tax cash flow attributable to the asset, after charges for other assets employed by the business. The fair value of the customer relationships has been estimated using the avoided costs/lost profits method, which is based on the principle that the value of an intangible asset is based on consideration of the total costs that would be avoided by having this asset in place. The fair value of the trade name has been estimated using the relief from royalty method of the income approach, which is based on the principle that the value of an intangible asset is equal to the present value of the after-tax royalty savings attributable to owning the intangible asset. Key estimates and assumptions used in these models are projected revenues and expenses related to the asset, estimated contributory asset charges, estimated costs to recreate the asset, and a risk-adjusted discount rate used to calculate the present value of the future expected cash inflows or cash outflows avoided from the asset.   The fair value of developed technology 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.   Arthrosurface, Inc.   On February 3, 2020, the Company completed the acquisition of Arthrosurface, pursuant to the terms of the Agreement and Plan of Merger, dated as of January 4, 2020 ( the “Arthrosurface Merger Agreement”), by and among the Company, Arthrosurface, the Stockholder Representative, and Button Merger Sub, a Delaware corporation and a wholly owned subsidiary of the Company. At the closing date, Arthrosurface became a wholly owned subsidiary of the Company. Arthrosurface is a joint preservation technology company specializing in less invasive, bone-preserving partial and total joint replacement solutions.   9     The acquisition of Arthrosurface has been accounted for as a business combination under ASC 805. Under ASC 805, assets acquired and liabilities assumed in a business combination must be recorded at their fair values as of the acquisition date. The Company’s consolidated financial statements include results of operations for Arthrosurface from the February 3, 2020 acquisition date.    Consideration Transferred   Pursuant to the Arthrosurface Merger Agreement, the Company acquired all outstanding equity of Arthrosurface for estimated total purchase consideration of $ 90.3 million, as of February 3, 2020, which consisted of:   Cash consideration   $ 61,909   Estimated fair value of contingent consideration     28,376   Estimated total purchase consideration   $ 90,285     Pursuant to the Arthrosurface Merger Agreement, the Company could be required to make future payments 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. The fair value of contingent consideration related to regulatory milestones as of February 3, 2020 was determined through a scenario-based discounted cash flow analysis using scenario probabilities and regulatory milestone dates. The fair value of contingent consideration related to net sales achievement as of February 3, 2020 was determined based upon a Monte Carlo simulation approach at acquisition date, whereby a range of possible scenarios were simulated. In October 2020 and July 2021, based upon the achievement of two distinct regulatory milestones, the Company paid $ 5.0 million and $ 10.0 million, respectively. 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 September 30, 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. The Company incurred approximately $ 2.2 million in transaction costs related to the Arthrosurface acquisition during the three -month period ending March 31, 2020. The transaction costs subsequent to March 31, 2020 were immaterial. The transaction costs have been included in selling, general and administrative expenses in the consolidated statements of operations.   Fair Value of Net Assets Acquired   The estimate of fair value required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable. However, actual results may differ from these estimates.   The allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on estimates of fair value as of February 3, 2020, as follows:   Recognized identifiable assets acquired and liabilities assumed:         Cash and cash equivalents   $ 1,072   Accounts receivable     5,368   Inventories     15,652   Prepaid expenses and other current assets     535   Property, plant and equipment     3,394   Other long-term assets     7,548   Intangible assets     48,900   Accounts payable, accrued expenses and other liabilities     ( 3,929 ) Deferred tax liabilities     ( 11,147 ) Net assets acquired     67,393   Goodwill     22,892   Estimated total purchase consideration   $ 90,285     Intangible assets acquired consist of:         Developed technology   $ 37,000   Trade name     3,400   Customer relationships     7,900   IPR&D     600   Total acquired intangible assets   $ 48,900     10     The fair value of the developed technology intangible assets has been estimated using the multi-period excess earnings method, which is based on the principle that the value of an intangible asset is equal to the present value of the incremental after-tax cash flow attributable to the asset, after charges for other assets employed by the business. The fair value of the customer relationships has been estimated using the avoided costs/lost profits method, which is based on the principle that the value of an intangible asset is based on consideration of the total costs that would be avoided by having this asset in place. The fair value of the trade name has been estimated using the relief from royalty method of the income approach, which is based on the principle that the value of an intangible asset is equal to the present value of the after-tax royalty savings attributable to owning the intangible asset. Key estimates and assumptions used in these models are projected revenues and expenses related to the asset, estimated contributory asset charges, estimated costs to recreate the asset, and a risk-adjusted discount rate used to calculate the present value of the future expected cash inflows or cash outflows avoided from the asset.   The fair value of developed technology 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 the trade name 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.   Pro Forma Information   The Parcus Medical and Arthrosurface acquisitions were both completed in the first quarter of 2020. Both acquired companies have similar businesses with all of their products in the Joint Preservation and Restoration product family, serving orthopedic surgeons, ambulatory surgical centers and hospitals. The Company has combined legacy Anika, Parcus Medical and Arthrosurface pro forma supplemental information as follows.   The unaudited pro forma information for the nine -month periods ended September 30, 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 revenue based on the preliminary inventory step-up and the anticipated inventory turnover, (iii) a net decrease in interest expense as a result of eliminating interest expense and interest income related to borrowings that were settled in accordance with the respective Parcus Medical Merger Agreement and Arthrosurface Merger Agreement, (iv) an adjustment to record the acquisition-related transaction costs in the period required, and (v) the tax effect of the pro forma adjustments using the anticipated effective tax rate. The effective tax rate of the combined company could be materially different from the effective rate presented in this unaudited pro forma combined financial information. As a result of the transaction, the combined company may be subject to annual limitations on its ability to utilize pre-acquisition net operating loss carryforwards to offset future taxable income. The amount of the annual limitation is determined based on the value of Anika immediately prior to the acquisition. As further information becomes available, any such adjustment described above could be material to the amounts presented in the unaudited pro forma combined financial statements. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred at the beginning of each period presented, or of future results of the consolidated entities.   The following table presents unaudited supplemental pro forma information:       Nine Months Ended September 30, 2020             Total revenue   $ 101,722   Net loss     ( 7,328 )     11       4. Fair Value Measurements   The Company held investments in U.S. treasury bills of $ 2.5 million as available-for-sale securities at December 31, 2020. Unrealized losses and the associated tax impact on the Company’s available-for-sale securities were insignificant at December 31, 2020. There were no available-for-sale securities as of September 30, 2021.   The Company’s investments are all classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets. For cash, current receivables, accounts payable, and interest accrual, the carrying amounts approximate fair value, because of the short maturity of these instruments, and therefore fair value information is not included in the table below. Contingent consideration related to the previously described business combinations are classified within Level 3 of the fair value hierarchy as the determination of fair value uses considerable judgement and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability.   The classification of the Company’s cash equivalents and investments within the fair value hierarchy is as follows:               Active Markets     Significant Other     Significant                       for Identical Assets     Observable Inputs     Unobservable Inputs               September 30, 2021     (Level 1)     (Level 2)     (Level 3)     Amortized Cost   Cash equivalents:                                         Money Market Funds   $ 67,042     $ 67,042     $ -     $ -     $ 67,042                                             Other current and long-term liabilities:                                         Contingent Consideration - Short Term   $ 3,490     $ -     $ -     $ 3,490     $ -                 Active Markets     Significant Other     Significant                       for Identical Assets     Observable Inputs     Unobservable Inputs               December 31, 2020     (Level 1)     (Level 2)     (Level 3)     Amortized Cost   Cash equivalents:                                         Money Market Funds   $ 74,522     $ 74,522     $ -     $ -     $ 74,522                                             Investments:                                         U.S. Treasury Bills   $ 2,501     $ 2,501     $ -     $ -     $ 2,524                                             Other current and long-term liabilities:                                         Contingent Consideration - Short Term   $ 13,090     $ -     $ -     $ 13,090     $ -   Contingent Consideration - Long Term     22,320       -       -       22,320       -   Total other current and long-term liabilities   $ 35,410     $ -     $ -     $ 35,410     $ -     12     Contingent Consideration   The following table provides a rollforward of the contingent consideration related to business acquisitions discussed in Note 3, Business Combinations .       Three Months Ended September 30, 2021     Nine Months Ended September 30, 2021   Balance, beginning   $ 16,940     $ 35,410   Additions     -       -   Payments     ( 10,000 )     ( 10,000 ) Change in fair value     ( 3,450 )     ( 21,920 ) Balance, ending   $ 3,490     $ 3,490     Under the Parcus Medical Merger Agreement and Arthrosurface Merger Agreement, 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 annually 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. 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 3.2 % - 3.3 %. The weighted average cost of capital for Parcus increased from 11.4 % as of December 31, 2020 to 11.6 % as of September 30, 2021. Increases or decreases in the discount rate would result in a lower or higher fair value measurement, respectively. As of December 31, 2020, the probability of successful achievement of the regulatory earn-out milestones was determined to be in a range of 60 %- 75 %. The Company achieved a regulatory milestone in June 2021. The probability of successful achievement of the remaining regulatory milestone was determined to be 0 % as of September 30, 2021.   The overall fair value of the contingent consideration decreased by $ 3.5 million and $ 21.9 million during the three - and nine -month periods ended September 30, 2021, respectively, due primarily to the decrease in the likelihood that certain contingent milestones would be achieved. The fair value of remaining contingent consideration is assessed on a quarterly basis.   In October 2020, the Company made a regulatory-based milestone payment of $ 5.0 million pursuant to the terms of the Arthrosurface Merger Agreement as a result of regulatory clearance for the WristMotion Total Arthroplasty System. In June 2021, the Company received regulatory clearance for a reverse shoulder implant system, which triggered a $ 10.0 million regulatory milestone payment per the terms of the Arthrosurface Merger Agreement. This amount was paid in July 2021.     5. Inventories   Inventories consist of the following:       September 30,     December 31,       2021     2020   Raw materials   $ 16,084     $ 14,852   Work-in-process     12,795       12,811   Finished goods     28,935       33,347   Total   $ 57,814     $ 61,010                     Inventories   $ 35,019     $ 46,209   Other long-term assets     22,795       14,801     13       6. Intangible Assets   Intangible assets as of September 30, 2021 and December 31, 2020 consisted of the following:               Nine Months Ended September 30, 2021     December 31, 2020               Gross Value     Less: Accumulated Currency Translation Adjustment     Less: Accumulated Amortization     Net Book Value     Net Book Value     Weighted Average Useful Life   Developed technology   $ 89,580     $ ( 1,562 )   $ ( 16,435 )   $ 71,583     $ 75,899       15   IPR&D     3,256       ( 969 )     -       2,287       2,587     Indefinite   Customer relationships     9,000       -       ( 1,502 )     7,498       8,173       10   Distributor relationships     4,700       ( 415 )     ( 4,285 )     -       -       5   Patents     1,000       ( 185 )     ( 620 )     195       259       16   Tradenames     5,200       -       ( 1,742 )     3,458       4,239       5   Total   $ 112,736     $ ( 3,131 )   $ ( 24,584 )   $ 85,021     $ 91,157       13     The aggregate amortization expense related to intangible assets was $ 2.0 million and $ 1.9 million for the three -month periods ended September 30, 2021 and 2020, respectively, and $ 5.9 million and $ 5.4 million for the nine -month periods ended September 30, 2021 and 2020, respectively.      7. Goodwill   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.   Changes in the carrying value of goodwill for the nine months ended September 30, 2021 were as follows:       Nine Months Ended September 30, 2021   Balance, beginning January 1, 2021   $ 8,413   Effect of foreign currency adjustments     ( 463 ) Balance, ending September 30, 2021   $ 7,950       8. Accrued Expenses and Other Liabilities   Accrued expenses and other liabilities consist of the following:       September 30, 2021     December 31, 2020                     Compensation and related expenses   $ 8,794     $ 7,345   Professional fees     2,046       3,438   Operating lease liability - current     1,542       1,437   Clinical trial costs     2,463       1,429   Other     2,494       1,144   Total   $ 17,339     $ 14,793     14       9. Commitments and Contingencies   In certain of its contracts, the Company warrants to its customers that the products it manufactures conform to the product specifications as in effect at the time of delivery of the specific product. The Company may also warrant that the products it manufactures do not infringe, violate, or breach any U.S. or international patent or intellectual property right, trade secret, or other proprietary information of any third party. On occasion, the Company contractually indemnifies its customers against any and all losses arising out of, or in any way connected with, any claim or claims of breach of its warranties or any actual or alleged defect in any product caused by the negligent acts or omissions of the Company. The Company maintains a products liability insurance policy that limits its exposure to these risks. Based on the Company’s historical activity, in combination with its liability insurance coverage, the Company believes the estimated fair value of these indemnification agreements is immaterial. The Company had no accrued warranties as of September 30, 2021 and 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 flows.   On October 21, 2021, the Company received notice that the former unitholders of Parcus Medical had filed a request for arbitration regarding the earnout provisions agreed to in the Parcus Medical Merger Agreement. The Company is unable to estimate the potential liability with respect to this matter at this time. There are numerous factors that make it difficult to estimate reasonably possible loss or range of loss at this stage of the matter, including the significant number of legal and factual issues still to be resolved in the arbitration process. The Company intends to vigorously defend against the claims and believes it has strong defenses to the claims asserted.   10. Revenue   Revenue by product family was as follows:        Three Months Ended September 30,     Nine Months Ended September 30,       2021     2020     2021     2020                                     Joint Pain Management   $ 26,153     $ 18,439     $ 69,790     $ 66,168   Joint Preservation and Restoration     11,193       11,715       35,296       26,233   Other     2,190       1,540       6,887       5,368       $ 39,536     $ 31,694     $ 111,973     $ 97,769     Revenue from the Company’s sole significant customer, DePuy Synthes Mitek Sports Medicine (“Mitek”), part of the Johnson & Johnson Medical Companies, as a percentage of the Company’s total revenue was 51 % and 48 % for the three months ended September 30, 2021 and 2020, respectively, and 46 % and 52 % for the nine months ended September 30, 2021 and 2020, respectively.   We receive payments from our customers based on billing schedules established in each contract. Up-front payments 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 September 30, 2021 and December 31, 2020, respectively.   Total revenue by geographic location was as follows:       Three Months Ended September 30,       2021     2020       Total     Percentage of     Total     Percentage of       Revenue     Revenue     Revenue     Revenue   Geographic Location:                                 United States   $ 30,910       78 %   $ 26,409       84 % Europe     4,238       11 %     2,954       9 % Other     4,388       11 %     2,331       7 % Total   $ 39,536       100 %   $ 31,694       100 %       Nine Months Ended September 30,       2021     2020       Total     Percentage of     Total     Percentage of       Revenue     Revenue     Revenue     Revenue   Geographic Location:                                 United States   $ 85,984       77 %   $ 77,848       80 % Europe     14,808       13 %     11,140       11 % Other     11,181       10 %     8,781       9 % Total   $ 111,973       100 %   $ 97,769       100 %   15       11. Equity Incentive Plan   The Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan (the “2017 Plan”) was approved by the Company’s stockholders on June 13, 2017 and amended on June 16, 2020 and June 16, 2021 and provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), performance restricted stock units (“PSUs”), restricted stock units (“RSUs”), total shareholder return options (“TSRs”) and performance options that may be settled in cash, stock, or other property. In accordance with the 2017 Plan approved by the Company’s stockholders, including the amendments thereto, each share award other than stock options or SAR’s will reduce the number of total shares available for grant by two  shares. Subject to adjustment for specified types of changes in the Company’s capitalization, no more than 4.6 million shares of common stock may be issued under the 2017 Plan. There are 1.9 million shares available for future grant at September  30, 2021.   The Company may satisfy the awards upon exercise, or upon fulfillment of the vesting requirements for other equity-based awards, with either newly issued shares or shares reacquired by the Company. Stock-based awards are granted with an exercise price equal to the market price of the Company’s stock on the date of grant. Awards contain service conditions or service and performance conditions, and they generally become exercisable ratably over one to four years with a maximum contractual term of ten years.   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 (in thousands):       Three Months Ended September 30,     Nine Months Ended September 30,       2021     2020     2021     2020   Cost of revenue   $ 142     $ 202     $ 485     $ 564   Research and development     360       206       1,003       558   Selling, general and administrative     2,361       1,512       6,431       2,832   Total stock-based compensation expense   $ 2,863     $ 1,920     $ 7,919     $ 3,954     Stock Options   Stock options are granted to purchase common shares at prices that are equal to the fair market value of the shares on the date the options are granted. Options generally vest in equal annual installments over a period of three to four years and expire 10 years after the date of grant. The grant-date fair value of options is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.   The following summarizes the activity under the Company’s stock option plans:       Number of Options     Weighted Average Exercise Price     Weighted Average Remaining Contractual Term (in years)     Aggregate Intrinsic Value (in thousands)   Outstanding as of December 31, 2020     896,819     $ 41.50                   Granted     493,628     $ 37.67                   Exercised     ( 27,851 )   $ 34.62             $ 234   Forfeited and canceled     ( 177,604 )   $ 44.32                   Outstanding as of September 30, 2021     1,184,992     $ 39.65       8.5     $ 4,654   Vested, September 30, 2021     304,172     $ 44.01       7.3     $ 812   Vested and expected to vest, September 30, 2021     1,184,992     $ 39.65       8.5     $ 4,654     Of the 493,628 stock options granted during the nine -month period ended September 30, 2021, 314,541 shares were premium-priced options which were granted with an exercise price at 110 % of the market price of the Company’s common stock on the date of grant.   The Company uses the Black-Scholes pricing model to determine the fair value of options granted. The calculation of the fair value of stock options is affected by the stock price on the grant date, the expected volatility of the Company’s common stock over the expected term of the award, the expected life of the award, the risk-free interest rate and the dividend yield. The Company estimates the fair value of TSRs using Monte-Carlo simulation model. The actual number of TSR 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.   16     The assumptions used in the Black-Scholes pricing model for options granted during the nine months ended September 30, 2021 and 2020, along with the weighted-average grant-date fair values, were as follows:       Nine Months Ended  September 30,       2021     2020   Risk-free interest rate     0.30% – 0.68%       0.21% – 1.59%   Expected life of options (in years)     4.0 – 6.3       4.0 – 6.3   Dividend yield     -%       -%   Expected stock price volatility     54.80% –56.06%       46.48% –52.99%     As of September 30, 2021, there was $ 10.0 million of unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted average period of 1.9 years.   Restricted Stock Units   RSUs generally vest in equal annual installments over a three or four year periods. The grant-date fair value of RSUs is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. The Company determines the fair value of restricted stock units based on the closing price of its common stock on the date of grant.   RSU activity is as follows:       Number of Shares     Weighted Average Fair Value   Outstanding as of December 31, 2020     233,239     $ 37.50   Granted     308,243       35.42   Vested     ( 90,013 )     37.63   Forfeited and cancelled     ( 48,624 )     35.69   Outstanding as of September 30, 2021     402,845     $ 36.10     As of September 30, 2021, there was $ 11.3 million of unrecognized compensation cost related to time-based RSUs, which is expected to be recognized over a weighted-average period of 2.1 years.   Performance Stock Units   PSUs generally vest over a three or four year periods from the grant date and include both a service and performance component. 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.   PSU activity is as follows:       Number of Shares     Weighted Average Fair Value   Outstanding as of December 31, 2020     178,297     $ 35.93   Granted     -       -   Vested     -       -   Forfeited and cancelled     ( 18,500 )     37.02   Outstanding as of September 30, 2021     159,797     $ 35.80     As of September 30, 2021, there was $ 0.1 million of unrecognized compensation cost related to PSUs, which is expected to be recognized over a weighted-average period of 0.4 years.   On November 4, 2021, the Anika Therapeutics, Inc. 2021 Inducement Plan (the “Inducement Plan”) was adopted by the Company’s board of directors. The Inducement Plan reserves 125,000 shares of common stock for issuance pursuant to equity-based awards granted under the Inducement Plan. Such awards may be granted only to an individual who was not previously the Company’s employee or director, or who is returning to employment following a bona fide period of non-employment with the Company, in each case as an inducement material to the individual’s entry into employment with the Company within the meaning of Rule  5635 (c)( 4 ) of the Nasdaq Listing Rules. The Inducement Plan provides for the grant of awards under terms substantially similar to the 2017 Plan (as amended).   17       12. Income Taxes   For the three - and nine -month periods ended September 30, 2021, the Company recorded an income tax provision of $ 0.7 million and $ 1.7 million, resulting in effective tax rates of 55.4 % and 14.4 %, respectively. For the three - and nine -month periods ended September 30, 2020, due to losses in those periods, the Company incurred benefits from income taxes of $ 1.7 million and $ 2.2 million, resulting in effective tax rates of 21.4 % and 20.6 %, respectively. The net increase in the effective tax rate for the three -month period ended September 30, 2021, as compared to the same period in 2020, was primarily due to stock option activity and an adjustment to the Foreign Derived Intangible Income (“FDII”) deduction expected for 2021. The year-to-date net tax benefit on the change in the fair value of the contingent consideration, in the amount of $ 1.1 million in 2021, resulted in a net decrease in the effective tax rate for the nine -month period ended September 30, 2021, as compared to the same period in 2020.     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.   13. Earnings Per Share ( “ EPS ” )   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 EPS. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding share-based awards using the treasury stock method.   The following table provides share information used in the calculation of the Company's basic and diluted EPS (in thousands):       Three Months Ended September 30,     Nine Months Ended September 30,       2021     2020     2021     2020   Shares used in the calculation of basic EPS     14,429       14,205       14,389       14,202   Effect of dilutive securities:                                 Share based awards     218       -       199       -   Diluted shares used in the calculation of EPS     14,647       14,205       14,588       14,202     Stock options of 1.0 million shares were outstanding for each of the three -month periods ended September 30, 2021 and 2020 and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive. Stock options of 1.1 million and 0.8 million shares were outstanding for the nine -month periods ended September 30, 2021 and 2020 and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive.    18       ITEM 2. 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. Therefore, you should not rely on any of these forward-looking statements. Forward-looking statements can be identified by such words as "will," "likely," "may," "believe," "expect," "anticipate," "intend," "seek," "designed," "develop," "would," "future," "can," "could," “estimate,” “potential,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters. All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, operations, costs, plans, and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements regarding the effect of COVID-19 and related impacts on our business, operations, and financial results, expected future operating results, expectations regarding the timing and receipt of regulatory results, anticipated levels of capital expenditures, and expectations of the effect on our financial condition of claims, litigation, and governmental and regulatory proceedings.   Please also refer to those factors described in “Part I, Item 1A. Risk Factors” of our 2020 Form 10-K 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. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.   Management Overview   We are a global joint preservation company that creates and delivers meaningful advancements in early intervention orthopedic care. Based on our collaborations with clinicians to understand what they need most to treat their patients, we develop minimally invasive products that restore active living for people around the world. We are committed to leading in high opportunity spaces within orthopedics, including osteoarthritis, or OA, pain management, regenerative solutions, soft tissue repair and bone preserving joint technologies.   We have over 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 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 seasoned leadership 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 pipeline of regenerative solutions, bone preserving implants and soft tissue solutions;         ● Leveraging global commercial expertise to drive growth across the portfolio;         ● Opportunity to pursue strategic inorganic growth opportunities, including potential partnerships and tuck-in acquisitions, leveraging our strong financial foundation and operational capabilities; and         ● Energized and experienced team focused on strong values, talent, and culture.   19       Key Developments during the Three Months Ended September 30, 2021       ● We completed the launch activities for WristMotion Total Wrist Arthroplasty System. The product is a modular joint preservation system that replaces both the radial and carpal sides of the wrist joint for patients suffering from rheumatoid arthritis, osteoarthritis, or post-traumatic arthritis.         ● We received 510(k) clearance for Tactoset Injectable Bone Substitute for hardware augmentation. This product is indicated for filling bone voids or defects of the skeletal system (i.e. extremities and pelvis) that are not intrinsic to the stability of bony structure.   COVID-19 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. 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 early parts of second quarter of 2020 due to the easing of COVID-19 related restrictions in certain jurisdictions, areas of the United States and other countries have recently seen, and continue to see, fluctuating infection rates increasing as the result of emerging variants of COVID-19.Continuing fluctuations in infection rates in the United States and other countries make future results difficult to predict despite recent advances in the vaccination rates of certain parts of the population. 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. While increasing vaccination rates and the loosening of restrictions, especially in the United States, have resulted in a return to a more normalized business environment, the pandemic continues to have an impact on our business in certain jurisdictions and a resurgence of COVID-19 as a result of emerging variants or other factors, as is currently occurring in certain jurisdictions, could result in additional government lockdowns, quarantine requirements, or other restrictions that could impact our business and operations. We may also have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities. To date, we do not anticipate disruption to our ability to supply products to our customers. Our commercial day-to-day operations have been impacted due to the worldwide cancellations and/or delays 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 in certain jurisdictions. The impact of these restrictions on our operations, if implemented, is currently unknown, but could be significant.    Products   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 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 undergoing clinical trial and is not available for commercial sale.     ● 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., 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 as well as knee and hip 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 the patients to retain an active lifestyle, when early surgical intervention becomes preferable. We commercialize these products in the United States by selling to hospitals and surgery centers through an independent network of sales representatives and distributors, and utilize our distributor network for sales in certain international markets.   20       ● 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 by selling to hospitals and surgery centers through an independent network of sales representatives and distributors, and utilize our distributor network for sales in over 60 international markets.     ● Regenerative Solutions. Our portfolio of orthopedic regenerative solutions based on our proprietary technologies based on HA and Hyaff, which is a solid form of HA. These products include Tactoset Injectable Bone Substitute, an HA-enhanced injectable bone repair therapy designed to treat insufficiency fractures and for augmenting suture anchor fixation 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 trial and is not available for commercial sale.   Other   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.                             21     Results of Operations   Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months Ended September 30, 2020.       Three Months Ended September 30,     Nine Months Ended September 30,       2021     2020     $ Change     % Change     2021     2020     $ Change     % Change       (in thousands, except percentages)     (in thousands, except percentages)   Revenue   $ 39,536     $ 31,694     $ 7,842       25 %   $ 111,973     $ 97,769     $ 14,204       15 % Cost of revenue     16,513       14,351       2,162       15 %     47,164       45,487       1,677       4 % Gross profit     23,023       17,343       5,680       33 %     64,809       52,282       12,527       24 % Gross margin     58 %     55 %                     58 %     53 %                 Operating expenses:                                                                 Research and development     7,673       5,217       2,456       47 %     21,327       15,799       5,528       35 % Selling, general and administrative     17,500       15,903       1,597       10 %     53,664       44,884       8,780       20 % Goodwill impairment     -       -                       -       18,144       (18,144 )     (100% ) Change in fair value of contingent consideration     (3,450 )     4,150       (7,600 )     (183 %)     (21,920 )     (16,176 )     (5,744 )     36 % Total operating expenses     21,723       25,270       (3,547 )     (14 %)     53,071       62,651       (9,580 )     (15% ) Income (loss) from operations     1,300       (7,927 )     9,227       116 %     11,738       (10,369 )     22,107       213 % Interest and other expense, net     (48 )     (228 )     (180 )     (79 %)     (141 )     (118 )     23       19 % Income (loss) before income taxes     1,252       (8,155 )     9,407       115 %     11,597       (10,487 )     22,084       211 % Provision for (benefit from) income taxes     694       (1,744 )     2,438       140 %     1,670       (2,161 )     3,831       177 % Net income (loss)   $ 558     $ (6,411 )   $ 6,969       109 %   $ 9,927     $ (8,326 )   $ 18,253       219 %   Revenue   Revenue for the three-month period ended September 30, 2021 was $39.5 million, an increase of $7.9 million as compared to $31.7 million for the three-month period ended September 30, 2020. Revenue for the nine-month period ended September 30, 2021 was $112.0 million, an increase of $14.2 million as compared to $97.8 million for the nine-month period ended September 30, 2020. For the three- and nine-month periods ended September 30, 2021, the increases in revenue were primarily driven by partial recovery from the initial impact of the COVID-19 pandemic on sales volumes and related strategic partner ordering patterns. The increase for the nine-month period ended September 30, 2021, was also in part due to inclusion of full first quarter results of Parcus Medical and Arthrosurface, which we acquired on January 24, 2020 and February 3, 2020, respectively.    The following tables present product revenue by product family:       Three Months Ended September 30,       2021     2020     $ change     % change       (in thousands, except percentages)   Joint Pain Management   $ 26,153     $ 18,439     $ 7,714       42 % Joint Preservation and Restoration     11,193       11,715       (522 )     (4% ) Other     2,190       1,540       650       42 %     $ 39,536     $ 31,694     $ 7,842       25 %       Nine Months Ended September 30,       2021     2020     $ change     % change       (in thousands, except percentages)   Joint Pain Management   $ 69,790     $ 66,168     $ 3,622       6 % Joint Preservation and Restoration     35,296       26,233       9,063       35 % Other     6,887       5,368       1,519       28 %     $ 111,973     $ 97,769     $ 14,204       15 %   Revenue from our Joint Pain Management product family increased 42% and 6% for the three- and nine-month periods ended September 30, 2021, respectively, as compared to the same periods in 2020 due primarily to partial recovery from the initial impact of the COVID-19 pandemic on sales volumes and related strategic partner ordering patterns. In 2020, customer ordering patterns delayed a portion of the initial impact of the COVID-19 pandemic on this product family from the second quarter into the second half of 2020.   Revenue from our Joint Preservation and Restoration product family decreased 4% for the three-month period ended September 30, 2021 as compared to the same period in 2020, due primarily to the impact of the COVID-19 pandemic, including rolling suspensions of elective procedures by hospitals in certain regions as well as the limitations on access to customers during the period. For the nine-month period ended September 30, 2021, revenue from our Joint Preservation and Restoration product family increased 35% as compared to the same period in 2020 due primarily to organic growth as the initial impact of the COVID-19 pandemic on elective procedures begins to lift in various worldwide jurisdictions, especially in the United States during the first half of 2021, as well as due to the inclusion of full quarter results from Parcus Medical and Arthrosurface in the first quarter.   Revenue from our Other product family increased 42% for the three-month period ended September 30, 2021, as compared to the same period in 2020 primarily due to timing of distributor sales. For the nine-month period ended September 30, 2021 revenue increased 28% as compared to the same period in 2020 primarily due to timing of distributor sales as well as due to the sell through of legacy wound care products during the first quarter.   Gross Profit and Margin   Gross profit for the three- and nine-month periods ended September 30, 2021 increased $5.7 million and $12.5 million to $23.0 million and $64.8 million, respectively, representing 58% of revenue for each of the periods. Gross profit for the three- and nine-month periods ended September 30, 2020 was $17.3 million and $52.3 million, respectively, or 55% and 53% of revenue for the periods, respectively. The increase in gross profit for the three- and nine-month periods ended September 30, 2021, primarily resulted from increased revenue. The increase for the nine-month period ended September 30, 2021 was partially offset by product rationalization charges in the second quarter of 2021. Gross margins include the impact of inventory step-up associated with the Arthrosurface and Parcus Medical acquisitions, as well as acquisition-related amortization expenses. These expenses together increased cost of revenue by $3.0 million, or 8 points of gross margin, and $10.9 million, or 10 points of gross margin, for the three- and nine-month periods ended September 30, 2021, respectively, as compared to increased cost of revenue of $4.8 million, or 15 points of gross margin, and $11.7 million, or 12 points of gross margin, respectively, for the same periods in 2020.   Research and Development   Research and development expenses for the three- and nine-month periods ended September 30, 2021 were $7.7 million and $21.3 million, representing an increase of $2.5 million and $5.5 million, respectively, as compared to the same periods in 2020. The increase in research and development expense for the three- and nine-month periods ended September 30, 2021 was primarily due to product development activities associated with the development of new product candidates in our research and development pipeline, execution of the CINGAL Pilot study and certain European post-market clinical studies. Research and development activities were curtailed in the three- and nine-months ended September 30, 2020 due to cost optimization in the light of the early stages of the COVID-19 pandemic.   Selling, General and Administrative   Selling, general and administrative, or SG&A expenses, for the three- and nine-month periods ended September 30, 2021 were $17.5 million and $53.7 million, an increase of $1.6 million and $8.8 million, respectively, as compared to the same periods in 2020. The increase in SG&A expenses for the three-month period ended September 30, 2021 was primarily related to an increase in share-based compensation expense due largely to forfeitures of unvested shares during the comparable period and higher sales and marketing activities and events during 2021 which had been suspended in 2020 due to the impact of the COVID-19 pandemic.    The increase in SG&A expenses for the nine-month period ended September 30, 2021 was primarily related to full period expenses from Parcus Medical and Arthrosurface, increased spending to support our commercial capability in the United States and expanded marketing activities, and a non-cash loss on disposal of fixed assets, partially offset by the absence of transaction costs incurred in 2020 related to acquisitions of Parcus and Arthrosurface. Certain activities were curtailed in the three- and nine-months ended September 30, 2020 due to cost optimization in light of the early stages of the COVID-19 pandemic.   Goodwill Impairment Charge   We assess goodwill for impairment annually, as of end of November, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. U.S. and other country 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 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 three-month period ended March 31, 2020. The decline in fair value was primarily due to a decrease in immediate term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures, which directly impacted the Parcus and Arthrosurface reporting units. There were no goodwill impairment charges during the three- and nine-month period ended September 30, 2021.    22     Contingent Consideration Fair Value Change   We recorded a $3.5 million and $21.9 million net benefit related to changes in the fair value of contingent consideration for the three- and nine-month periods ended September 30, 2021, respectively. We recorded a $4.2 million net expense and $16.2 million net benefit related to changes in the fair value of contingent consideration for the three- and nine-month periods ended September 30, 2020, respectively. The increase in net benefit in the three- and nine-month periods ended September 30, 2021 compared to the same period in 2020 is due primarily to the decrease in the likelihood that certain contingent milestones would be achieved.   Income Taxes   For the three- and nine-month periods ended September 30, 2021, the provision for income taxes was $0.7 million and $1.7 million, resulting in effective tax rates of 55.1% and 14.3%, respectively. For the three- and nine-month periods ended September 30, 2020, due to losses in those periods, we incurred benefits from income taxes of $1.7 million and $2.2 million, resulting in effective tax rates of 21.4% and 20.6%, respectively. The net increase in the effective tax rate for the three-month period ended September 30, 2021, as compared to the same period in 2020, was primarily due to stock option activity and an adjustment to the Foreign Derived Intangible Income (FDII) deduction expected for 2021. The year-to-date net tax benefit on the change in the fair value of the contingent consideration, in the amount of $1.1 million in 2021, resulted in a net decrease in the effective tax rate for the nine-month period ended September 30, 2021, as compared to the same period in 2020.   Non-GAAP Financial Measures   We present certain information with respect to adjusted gross profit and adjusted gross margin, adjusted Earnings Before Interest, Tax, Depreciation and Amortization, or (EBITDA), adjusted net income, adjusted diluted earnings per share or adjusted EPS, which are financial measures not based on any standardized methodology prescribed by accounting principles generally accepted in the United States, or GAAP, and is not necessarily comparable to similarly titled measures presented by other companies.   We have presented adjusted gross profit and adjusted gross margin, adjusted EBITDA, adjusted net income, adjusted EPS, because they are key measures used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business. We believe these financial measures help identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. In particular, we believe that the exclusion of these items in calculating these measures can provide a useful tool for period-to-period comparisons of our core operating performance. Accordingly, we believe that these measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making.   Adjusted Gross Profit and Adjusted Gross Margin   We define adjusted gross profit as our gross profit excluding amortization of certain acquired assets, the impact of inventory fair-value step up associated with our recent acquisitions and product rationalization charges. 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 fair value of certain identified assets acquired in acquisitions, including developed technology and acquired tradenames. We define adjusted gross margin as adjusted gross profit divided by total revenue.   The following is a reconciliation of adjusted gross profit to gross profit for the three- and nine-month periods ended September 30, 2021 and 2020, respectively:       Three Months Ended September 30,     Nine Months Ended September 30,       2021     2020     2021     2020   Gross profit   $ 23,023     $ 17,343     $ 64,809     $ 52,282   Product rationalization charges     -       -       2,063       1,920   Acquisition related intangible asset amortization     1,562       1,562       4,686       4,283   Acquisition related inventory step up     1,458       3,273       6,244       7,396   Adjusted gross profit   $ 26,043     $ 22,178     $ 77,802     $ 65,881                                     Adjusted gross margin     66 %     70 %     69 %     67 %   Adjusted gross profit for the three- and nine-month periods ended September 30, 2021 increased $3.9 million and $11.9 million to $26.0 million and $77.8 million, respectively, representing 66% and 69% of revenue. Adjusted gross profit for the three- and nine-month periods ended September 30, 2020 was $22.2 million and $65.9 million, respectively, or 70% and 67% of revenue for the periods, respectively. This increase in adjusted gross profit for the three-month period ended September 30, 2021 as compared with the same period in 2020, primarily resulted from organic growth of Joint Pain Management revenue as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially in the United States. The decrease in adjusted gross margin for the three-month period ended September 30, 2021 as compared with the same period in 2020, is due primarily to unfavorable revenue mix and lower production volumes based on timing related to the COVID-19 pandemic.   23     This increase in adjusted gross profit and adjusted gross margin for the nine-month period ended September 30, 2021 as compared with the same period in 2020, primarily resulted from higher revenue due to the inclusion of full period results from Parcus Medical and Arthrosurface in 2021 as we acquired these businesses in early 2020 and organic growth of Joint Pain Management revenue as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially in the United States.     Adjusted EBITDA   We present information below with respect to adjusted EBITDA, which we define as our net income (loss) excluding interest and other income, net, income tax benefit (expense), depreciation and amortization, stock-based compensation, product rationalization, and acquisition related expenses. 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.   Adjusted EBITDA is not prepared in accordance with US GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with US GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest US GAAP equivalent. Some of these limitations are:     ● adjusted EBITDA excludes depreciation and amortization, and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future, the cash requirements for which are not reflected in adjusted EBITDA;     ● 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 employee 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 likely would be higher, which would affect our cash position;     ● we exclude acquisition related expenses, including transaction costs and other related expenses, amortization and depreciation of acquired assets in recent acquisitions, and the impact of inventory fair-value step up on cost of revenue;     ● we exclude certain impairment charges, including certain product rationalization charges 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;     ● the expenses and other items that we exclude in our calculation of adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from adjusted EBITDA when they report their operating results;     ● 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; and     ● adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments.   24     The following is a reconciliation of adjusted EBITDA to net income (loss) for the three- and nine-month periods ended September 30, 2021 and 2020, respectively:       Three Months Ended September 30,     Nine Months Ended September 30,       2021     2020     2021     2020       (in thousands)   Net income (loss)   $ 558     $ (6,411 )   $ 9,927     $ (8,326 ) Interest and other expense, net     48       228       141       118   Provision for (benefit) from income taxes     694       (1,744 )     1,670       (2,161 ) Depreciation and amortization     1,789       1,718       5,226       5,132   Stock-based compensation     2,863       1,920       7,919       3,953   Product rationalization charges     -       -       2,063       2,892   Acquisition related expenses     -       -       -       4,157   Acquisition related intangible asset amortization     1,787       1,760       5,361       4,831   Acquisition related inventory step up     1,458       3,273       6,244       7,396   Goodwill impairment     -       -       -       18,144   Change in fair value of contingent consideration     (3,450 )     4,150       (21,920 )     (16,176 ) Adjusted EBITDA   $ 5,747     $ 4,894     $ 16,631     $ 19,960     Adjusted EBITDA for the three-month period ended September 30, 2021, increased $0.9 million as compared with the same periods in 2020. The increase in adjusted EBITDA for the period was primarily due to higher revenues as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially in the United States, partially offset by an increase in operating expenses primarily attributable to the increase in clinical trial activity. In 2020, customer ordering patterns delayed a portion of the initial impact of the COVID-19 pandemic on this product family from the second quarter into the second half of 2020.   Adjusted EBITDA for the nine-month period ended September 30, 2021, decreased $3.3 million as compared with the same period in 2020. The decrease in adjusted EBITDA for the period was primarily due to an increase in operating expenses primarily attributable to expansion of our commercial capability in the United States, increase in clinical trial activity, as well as a non-cash impairment charge related to fixed assets during the first quarter of 2021, partially offset by an increase in revenue.   Adjusted Net Income and Adjusted EPS   We present information below with respect to adjusted net income and 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 product rationalization charges, on a tax effected basis. Acquisition related expenses are those that we would not have incurred except as a direct result of acquisition transactions. Acquisition related expenses consist of investment banking, legal, accounting, and other professional and related expenses. The amortized assets contribute to revenue generation, and the amortization of such assets will recur in future periods until such assets are fully amortized. These assets include the estimated fair value of certain identified assets acquired in acquisitions, including in-process research and development, developed technology, customer relationships and acquired tradenames. We define adjusted EPS as US GAAP diluted earnings (loss) 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 (loss) for the three- and nine-month periods ended September 30, 2021 and 2020, respectively:       Three Months Ended September 30,     Nine Months Ended September 30,       2021     2020     2021     2020       (in thousands)   Net income (loss)   $ 558     $ (6,411 )   $ 9,927     $ (8,326 ) Product rationalization charges, tax effected     -       -       1,590       2,377   Acquisition related expenses, tax effected     -       -       -       3,174   Acquisition related intangible asset amortization, tax effected     1,146       1,340       3,898       3,688   Acquisition related inventory step up, tax effected     935       2,492       4,626       5,646   Goodwill impairment, tax effected     -       -       -       15,773   Change in fair value of contingent consideration, tax effected     (1,865 )     3,336       (17,152 )     (13,873 ) Adjusted net income   $ 774     $ 757     $ 2,889     $ 8,459     25     The following is a reconciliation of adjusted EPS to diluted earnings (loss) per share for the three- and nine-month periods ended September 30, 2021 and 2020:       Three Months Ended September 30,     Nine Months Ended September 30,       2021     2020     2021     2020   Diluted earnings (loss) per share   $ 0.04     $ (0.45 )   $ 0.68     $ (0.59 ) Product rationalization charges, tax effected     -       -       0.11       0.17   Acquisition related expenses per share, tax effected     -       -       -       0.22   Acquisition related intangible asset amortization, tax effected     0.08       0.09       0.27       0.26   Acquisition related inventory step up, tax effected     0.06       0.18       0.32       0.40   Goodwill impairment, tax effected     -       -       -       1.11   Change in fair of value contingent consideration, tax effected     (0.13 )     0.23       (1.18 )     (0.98 ) Adjusted EPS   $ 0.05     $ 0.05     $ 0.20     $ 0.59     Adjusted net income in the three- month period ended September 30, 2021 was unchanged from the same period in 2020 as the increase in gross profit was offset by an increase in operating expenses due to higher research and development expenses and increased marketing efforts. Adjusted net income for the period increased in 2021 due to higher revenues as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially in the United States. This was offset by an increase in operating expenses primarily attributable to an increase in research and development expenses, sales and marketing expenses and share based compensation expenses.   Adjusted net income in the nine-month period ended September 30, 2021, decreased $5.6 million as compared with the same period in 2020. The decrease in adjusted net income for the period was primarily due to an increase in selling and marketing expenses primarily attributable to increased cost to support our commercial capability in the United States, an increase in research and development expenses, an increase in share-based compensation expense due to forfeitures of unvested shares during the comparable period, a non-cash impairment charge related to fixed assets in the first quarter of 2021 and an increase in tax expenses.   Liquidity and Capital Resources   We require cash to fund our operating expenses and to make capital expenditures and other investments in the business. We expect that our requirements for cash to fund these uses will increase as our operations expand. Historically we have generated positive cash flow from operations, which, together with our available cash, cash equivalents, investments, and debt, have met our cash requirements. Cash, cash equivalents, and investments aggregated $91.0 million and $98.3 million, and working capital totaled $137.0 million and $140.5 million as of September 30, 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 provided by operating activities was $3.9 million for the nine-month period ended September 30, 2021, as compared to cash provided by operating activities of $10.5 million for the same period in 2020. The change was primarily attributable to timing of collections, timing of certain state tax payments and change in contingent consideration and a decrease in cash outflows related to acquisition related expenses for the nine-month period ended September 30, 2021. In July 2021, the Company paid contingent consideration in the amount of $10.0 million, $2.8 million of which was classified within operating activities and the remaining $7.2 million was classified within financing activities.   Cash used in investing activities was $1.9 million for the nine-month period ended September 30, 2021, as compared to cash used in investing activities of $88.1 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 nine-month period ended September 30, 2020.   Cash used in financing activities was $6.8 million for the nine-month period ended September 30, 2021, as compared to cash provided by financing activities of $24.3 million for the same period in 2020. The change was primarily due to a drawdown of $50.0 million from our existing credit facility in the nine-month period ended September 30, 2020 and the portion of the contingent consideration payment related to financing activities, as described above, in the nine-month period ended September 30, 2021.   Critical Accounting Policies and Estimates   The preparation of our consolidated financial statements in conformity with US 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. 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.     26     Recent Accounting Pronouncements   A discussion of Recent Accounting Pronouncements is included in our 2020 Form 10-K and is updated in the Notes to the consolidated financial statements included in this report.   Contractual Obligations and Other Commercial Commitments   Our contractual obligations and other commercial commitments are summarized in the section captioned “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations and Other Commercial Commitments” in our 2020 Form 10-K. There were no material changes to our contractual obligations reported in our 2020 Form 10-K during the nine months ended September 30, 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. No assurance can be given that any additional financing will be made available to us or will be available on acceptable terms should such a need arise.   Off-Balance Sheet Arrangements   We do not use special purpose entities or other off-balance sheet financing techniques that we believe have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, or capital resources.