What changed in this filing

/stocks — the workspaceLOADING

Item 5. Market for Registrant’s Common Equity

2022-03-11 compared with 2021-03-05 · 272 added, 280 removed, 242 unchanged (70% of the section changed)

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET FOR REGISTRANT ’

S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock Information

11 unchanged sentences

NASDAQ Biotechnology Index

Issuer Purchases and Withholding of Equity Securities

Under our equity compensation plans, and subject to the specific approval of the Compensation Committee of our Board of Directors, grantees have the option of electing to satisfy tax withholding obligations at the time of vesting or exercise by allowing us to withhold shares of stock otherwise issuable to the grantee.

During the three-month period ended December 31, 2020, we withheld 1,058 shares to satisfy grantee tax withholding obligations on restricted stock award vesting events.

Following is a summary of stock repurchases for the three-month period ended December 31, 2020 (in thousands, except share data):

Total Number of

Shares Withheld

Price per Share

Total Number of

Shares Purchased as

Part of Publicly

Announced Plans

Maximum Number (or

Approximate Dollar

Value) of Shares that

May Yet be Purchased

Under the Plans or

October 1 to 31, 2020

November 1 to 30, 2020

December 1 to 31, 2020

Through December 31, 2020, we have made no open market repurchases.  On May 7, 2019, we entered into a previously-announced accelerated share repurchase agreement, or the ASR Agreement, to repurchase an aggregate of $30.0 million of common stock.

During the second quarter of 2019, 451,694 shares were delivered to us, constituting the initial delivery of shares and representing 60% of the then estimated total number of shares expected to be repurchased under the ASR Agreement.

On January 14, 2020, pursuant to the terms of the ASR Agreement, Morgan Stanley accelerated the final settlement date from February 2020, and the final number of shares and the average purchase price was determined.

Based on the volume-weighted average price from the effective date of the ASR Agreement through January 14, 2020, less the applicable contractual discount, Morgan Stanley delivered 139,057 additional shares to us on January 17, 2020. 

In total, 590,751 shares were repurchased under the ASR Agreement at an average repurchase price of approximately $50.78.

All shares were repurchased in accordance with the publicly announced program.

Issuer Purchases of Equity Securities

On May 2, 2019, we announced that our Board of Directors approved a $50.0 million share repurchase program with $30.0 million to be utilized for an accelerated share repurchase program, which was completed in January 2020, and $20.0 million reserved for open market repurchases which represents the maximum value of shares that may yet be purchased.

No open market repurchases were made during the year ended December 31, 2021.

Please see Note 16, Accelerated Share Repurchases to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Securities Authorized for Issuance Under Equity Compensation Plans

For information regarding securities authorized for issuance under our employee stock-based compensation plans, see Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .

For information regarding securities authorized for issuance under our employee stock-based compensation plans, see Part III.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .

SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and the section captioned “

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

included elsewhere in this Annual Report on Form 10-K.

The Balance Sheet Data at December 31, 2020 and 2019 and the Statement of Operations Data for each of the three years ended December 31, 2020, 2019, and 2018 have been derived from the audited Consolidated Financial Statements for such years, included elsewhere in this Annual Report on Form 10-K.

The Balance Sheet Data at December 31, 2018, 2017, and 2016, and the Statement of Operations Data for each of the two years in the period ended December 31, 2017 and 2016 have been derived from audited consolidated financial statements for such years not included in this Annual Report on Form 10-K.

Years ended December 31,

Statements of Operations Data*:

(in thousands, except per share data)

Product revenue

Licensing, milestone and contract revenue

Total revenue

Cost of revenue

Total operating expenses

Net income (loss)

Diluted net income (loss) per common share

Diluted common shares outstanding

Years ended December 31,

Balance Sheet Data*:

(in thousands)

Cash, cash equivalents and investments

Working capital**

Long-term liabilities

Retained earnings

Stockholders' equity

* Effective January 1, 2018 we adopted the guidance in the FASB’s Accounting Standards Codification (“ASC”) Revenue from Contracts with Customers (ASC 606) using the modified retrospective method.

Revenues for all periods prior to January 1, 2018 were recognized under ASC 605, Revenue Recognition .

Effective January 1, 2019 we adopted the guidance in the FASB’s ASC Leases (ASC 842) using the modified retrospective method.

Lease accounting for all periods prior to January 1, 2019 were recognized under ASC 840, Leases .

Effective January 1, 2020 we adopted the guidance in the FASB’s ASC Credit Losses (ASC 326) using the modified retrospective method.

Credit loss accounting for all periods prior to January 1, 2020 were recognized under ASC 310.

** Working capital is the difference between current assets and current liabilities.

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

Consistent with the amendments to Regulation S-K, information previously required by this item is no longer required.

For our historic financial data not included in this Annual Report on Form 10-K, please refer to the “SEC Filings”

section of our website located at http://www.anika.com.

MANAGEMENT ’

S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following section contains statements that are not statements of historical fact and are forward-looking statements within the meaning of the federal securities laws.

1 unchanged sentence

These statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties.

We discuss many of these risks and uncertainties at the beginning of this Annual Report on Form 10-K and under the sections captioned “Business”

and “Risk Factors.”

We discuss many of these risks and uncertainties at the beginning of this Annual Report on Form  

10-K and under the sections captioned “

Business ”

Risk Factors.

The following discussion should also be read in conjunction with the consolidated financial statements and the Notes thereto appearing elsewhere in this Annual Report on Form 10-K.

Management Overview

Founded in 1992, Anika Therapeutics, Inc.

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

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 (“OA”) pain management, regenerative solutions, soft tissue repair and bone preserving joint technologies.

We have nearly thirty years of global expertise developing, manufacturing and commercializing products based on our hyaluronic acid, or HA, technology platform.

We are committed to leading in high opportunity spaces within orthopedics, including osteoarthritis, or OA, pain management, regenerative solutions, sports medicine soft tissue repair and bone preserving joint technologies.

We have thirty years of global expertise developing, manufacturing and commercializing products based on our hyaluronic acid, or HA, technology platform.

HA is a naturally occurring polymer found throughout the body that is vital for proper joint health and tissue function.

Our proprietary technologies for modifying the HA molecule allow product properties to be tailored specifically to multiple uses, including enabling longer residence time to support OA pain management and creating a solid form of HA called Hyaff, which is the platform for our regenerative solutions portfolio.

In early 2020, we expanded our overall technology platform and significantly enhanced our commercial infrastructure, especially in the United States, through our strategic acquisitions of Parcus Medical, LLC, or Parcus Medical, a sports medicine implant and instrumentation solutions provider focused on sports medicine and soft tissue repair, and Arthrosurface, Inc., or Arthrosurface, a company specializing in less invasive, bone preserving partial and total joint replacement solutions.

Our proprietary technologies for modifying the HA molecule allow product properties to be tailored specifically to multiple uses, including enabling longer residence time to support OA pain management and creating a solid form of HA called Hyaff, which is a platform utilized in our regenerative solutions portfolio.

In early 2020, we expanded our overall technology platform, product portfolio, and significantly enhanced our commercial infrastructure, especially in the United States, through our strategic acquisitions of Parcus Medical, a sports medicine and instrumentation solutions provider focused on soft tissue repair, and Arthrosurface, a company specializing in bone preserving partial and total joint replacement solutions.

Through these acquisitions, we have transformed our company.

We have 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.

We expanded our addressable market from the over $1 billion global OA pain management market to the over $8 billion global joint preservation market (which includes the faster growing sports medicine soft tissue repair and extremities segments), advanced our commercial capabilities, instituted systems and process to support our transformation, and expanded our product pipeline and research and development expertise in our target markets.

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

We believe our success will be driven by our:

Decades of experience in HA-based regenerative solutions and early intervention orthopedics combined under new, common management in 2020 with a strong financial foundation for future investment in meaningful solutions for our customers;

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 and their patients;

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

Prioritized investment in differentiated research and development programs;

Expansion of our commercial capabilities globally within joint preservation;

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

Prioritized investment in differentiated pipeline of regenerative solutions, bone preserving implants and sports medicine soft tissue repair products;

Leveraging our global commercial expertise to drive growth across the portfolio, with an intentional site of care focus on ASCs in the United States;

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

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

2 unchanged sentences

of this Annual Report on Form 10-K.

Key Developments during the Y ear E nded December 31, 2020

We completed the acquisitions of Arthrosurface and Parcus Medical thereby substantially expanding our product portfolio, commercial capabilities, and addressable market.

We strengthened our executive team and our Board of Directors through the appointment of multiple industry veterans, including Cheryl R.

Blanchard, Ph.D.

as our President and Chief Executive Officer and Michael Levitz as our Executive Vice President, Chief Financial Officer, and Treasurer.

We dramatically enhanced our commercial infrastructure by adding over 30 direct sales representatives in the U.S.

market trained to sell our entire Joint Preservation and Restoration family of products and by augmenting our already-strong network of distributors.

We completed the launch activities for seven Joint Preservation and Restoration surgical devices and instruments.

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

We commenced our Cingal Pilot Study and enrolled the first patients in the study.

We continued patient enrollment in our Hyalofast clinical trial.

We managed the COVID-19 pandemic environment without interruption to supply to our customers.

As a precaution, we drew down $50 million from our credit facility in April 2020 and then repaid the entire $50 million prior to December 31, 2020 as we delivered positive cash flows during the year.

Key Developments during the Year Ended December 31, 2021

We completed enrollment of the U.S.

pilot clinical trial of Cingal, our combination viscosupplement / steroid product for OA pain management.

We completed market launch of Tactoset Injectable Bone Substitute for augmentation of suture anchor fixation.

This new indication allows surgeons to use Tactoset for hardware fixation due to insufficient bone quality, increasing pull-out strength of suture anchors.

We launched a focused effort to advance our ESG strategy by completing an in-depth “Materiality Assessment” validating key environmental, social and governance issues of greatest importance to stakeholders.

We completed market launch of WristMotion Total Wrist Arthroplasty (TWA) system focused on alleviating pain and restoring full range of motion for patients with arthritic wrist joints;

WristMotion TWA, along with WristMotion Hemiarthroplasty System, provide surgeons with multiple innovative and bone preserving treatment options for different stages and severities of wrist arthritis.

We received 510(k) clearance for a reverse shoulder implant system.

This clearance sets the stage for the development and expansion of our shoulder implant portfolio targeted for the ASC.

We rolled out Anika’s ERP system, SAP, to legacy Parcus and Arthrosurface operations, providing additional operational capabilities in support of our growth strategy.

COVID-19 Pandemic

As discussed more fully in the section captioned “Results of Operations –

Year ended December 31, 2020 compared to year ended December 31, 2019 ”

Year ended December  

31, 2021 compared to year ended December  

31, 2020 ”

below, the COVID-19 pandemic impacted our full year financial condition and operations.

1 unchanged sentence

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 first and early parts of second quarter of 2020 due to the easing of COVID-19 related restrictions in certain jurisdictions, areas of the United States and other countries have recently seen and continue to see fluctuating infection rates, which makes future results difficult to predict despite recent advances in vaccinations for certain parts of the population.

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

There has been significant volatility in our results on a quarterly basis due to the worldwide cancellation or delay of elective procedures, staffing shortages and supply chain disruptions, as well as the impact on timelines associated with certain clinical studies.

While elective procedure volume had a limited recovery after the initial pandemic impacts seen in the early parts of second quarter of 2020 due to the easing of COVID-19 related restrictions in certain jurisdictions, areas of the United States and other countries have recently seen, and continue to see, fluctuating infection rates increasing as the result of emerging variants of COVID-19.

Continuing fluctuations in infection rates in the United States and other countries make future results difficult to predict despite recent advances in the vaccination rates of certain parts of the population.

Please see the section captioned “Part I.

Risk Factors”

of this Annual Report on Form 10-K for additional information with respect to the risks faced by our business in light of the COVID-19 pandemic.

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 a work from home policy where possible.

We may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.

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 cancellation or delay of elective procedures, and timelines associated with certain clinical studies and research and development programs have been delayed.

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

Product Categories

Joint Pain Management

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

As a result of the COVID-19 pandemic, we have taken many precautions to provide a safe work environment for our employees and customers, including the establishment and implementation of a work from home policy, where possible.

Despite increasing vaccination rates and other efforts to return to a more normalized business environment, the pandemic continues to have an impact on our business in certain jurisdictions and a resurgence of COVID-19 as a result of emerging variants or other factors, as has occurred in certain jurisdictions, could result in additional government lockdowns or other restrictions, quarantine requirements, staffing shortages or supply chain disruptions that could impact our business and operations.

We may also have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.

We have had some disruption in our ability to supply products to our customers due to supply chain disruptions and staffing shortages which has caused back orders or delays in certain shipments to our customers.

Our commercial day-to-day operations have been impacted due to the worldwide cancellations and/or delays of elective procedures and restrictions on travel for both our employees and our clinician customers, and timelines associated with certain clinical studies and research and development programs have been delayed.

While the impact has been limited to these items to date, we caution that there continues to be a possibility for potential future implementation of certain additional restrictions or other challenges associated with infections, staffing shortages or supply chain disruptions due to COVID-19 and it current or new variants in certain jurisdictions.

The impact of these challenges are currently unknown, but could be significant.  

OA Pain Management

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

Joint Preservation and Restoration

1 unchanged sentence

(a) our portfolio of over 150 bone preserving joint technology products, including partial joint replacement, joint resurfacing, and minimally invasive and bone sparing implants, designed to treat upper and lower extremity orthopedic conditions caused by trauma, injury and arthritic disease;

(b) our line of soft tissue repair solutions used to repair and reconstruct damaged ligaments and tendons due to sports injuries, trauma and disease;

and (c) several orthopedic regenerative solutions products, including Hyalofast and Tactoset.

Our Other product family consists of legacy HA-based products that do not fit into one of our other primary product categories, including our adhesion barrier product, advanced wound care products, our ear, nose and throat products, and our ophthalmic products.

(b) our line of sports medicine soft tissue repair solutions used to repair and reconstruct damaged ligaments and tendons due to sports injuries, trauma and disease;

and (c) our orthopedic regenerative solutions products, including Hyalofast and Tactoset.

Non-Orthopedic

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

For additional information with respect to our products, including information related to how they are sold and new product development initiatives, please see the sections captioned “Products,”

5 unchanged sentences

Results of Operations

Year ended December 31, 2020 compared to year ended December 31, 2019

Year ended December  

31, 2021 compared to year ended December  

Statement of Operations Detail

1 unchanged sentence

(in thousands, except percentages)

Product revenue

Licensing, milestone and contract revenue

Total revenue

Cost of revenue

6 unchanged sentences

Income (loss) from operations

Interest and other income (expense), net

Interest and other expense, net

Income (loss) before income taxes

Provision for (benefit from) income taxes

Benefit from income taxes

Net income (loss)

Total and Product revenue

Total and Product revenue for the year ended December 31, 2020 was $130.5 million, an increase of $15.9 million, or 14%, compared to prior year.

This increase was primarily driven by growth in our Joint Preservation and Restoration product family, as a result of our acquisitions of Parcus Medical and Arthrosurface in early 2020, offset by a decrease in revenue from our Joint Pain Management products due to the impact of the COVID-19 pandemic on elective procedure volumes worldwide.

Revenue for the year ended December 31, 2021 was $147.8 million, an increase of $17.3 million, or 13%, compared to prior year.

The increase in revenue was primarily driven by partial recovery from the initial impact of the COVID-19 pandemic on sales volumes and related strategic partner ordering patterns as well as from growing commercial adoption of new products.

The increase for 2021 was also in part due to inclusion of full first quarter results of Parcus Medical and Arthrosurface, which we acquired on January 24, 2020 and February 3, 2020, respectively.

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

Years Ended December 31,

Joint Pain Management

OA Pain Management

Joint Preservation and Restoration

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

Revenue from our Joint Preservation and Restoration products increased primarily from the addition of revenue from the Arthrosurface and Parcus Medical product portfolios following their early 2020 acquisition by us, offset in part by the impact of the COVID-19 pandemic on elective surgery procedure volumes worldwide.

Revenue from our Other product family decreased due to the impact of the COVID-19 pandemic on procedure volumes worldwide.

Non-orthopedic

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

Revenue from our Joint Preservation and Restoration product family increased 23% for the year ended December 31, 2021, as compared to prior year, due primarily to organic growth as the initial impact of the COVID-19 pandemic on elective procedures begins to lift in various worldwide jurisdictions, especially in the United States during 2021.

We also saw rapidly growing commercial adoption of new regenerative, soft tissue and bone sparing joint products introduced in 2019, 2020 and 2021.

The increase was also due in part to the inclusion of full year results from Parcus Medical and Arthrosurface which were acquired in the first quarter of 2020.

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

Gross Profit and Margin

Gross profit for the year ended December 31, 2021 was $82.9 million, or gross margin of 56%, as compared with $69.0 million, or gross margin of 53%, for the year ended December 31, 2020.

The decrease in gross margin was primarily due to the inventory step-up associated with the Arthrosurface and Parcus Medical acquisitions, as well as acquisition-related amortization expenses, which together increased cost of revenue by $16.9 million, or 13 points of gross margin, for the year ended December 31, 2020.

Gross margin also decreased due to lower volumes as a result of the COVID-19 pandemic.

In addition, during the year ended December 31, 2020, gross profit decreased due to a non-cash inventory impairment charge of $1.9 million following our determination not to pursue CE Mark renewals for certain of our legacy HA-based products primarily in the Other product family. 

The increase in gross profit for the year ended December 31, 2021, primarily resulted from revenue growth and lower amortization of inventory step up costs related to the Arthrosurface and Parcus Medical acquisitions.

This increase was partially offset by higher product rationalization charges, as well as lower production levels and increased reserves caused in part by staffing and supply chain challenges resulting from the COVID-19 pandemic.

Gross margin includes the impact of inventory step-up associated with the Arthrosurface and Parcus Medical acquisitions, as well as acquisition-related amortization expenses.

These expenses together increased cost of revenue by $12.7 million, or 9 points of gross margin, for the year ended December 31, 2021 as compared to increased cost of revenue of $16.9 million, or 13 points of gross margin for the same periods in 2020.

Research and Development

Research 

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

For additional information on our research and development activities, please see the section captioned “Part I.

Research and D evelopment ”

Business—

Research and Development ”

in this Annual Report on Form 10-K.

1 unchanged sentence

Selling, general and administrative, or SG&A, expenses for the year ended December 31, 2021 were $74.1 million, an increase of $14.0 million, or 23%, as compared to the prior year.

The increase was primarily related to expenses associated with operating Parcus Medical and Arthrosurface following their acquisition in the first quarter of 2020, including incremental expenses to integrate our commercial infrastructure, as well as incentive compensation, partially offset by a decrease in stock compensation expense due to the forfeiture of unvested equity awards. 

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

Goodwill Impairment Charge

1 unchanged sentence

government policy responses to the COVID-19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of domestic elective surgical procedures.

As a result of these events during the first quarter of 2020, we performed a quantitative assessment of goodwill impairment related to the Parcus Medical and Arthrosurface reporting unit as of March 31, 2020.

The results of these interim impairment tests indicated that the estimated fair value of this reporting unit was less than its carrying value.

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

The decline in fair value was primarily due to decreases in immediate term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures which directly impact the Parcus Medical and Arthrosurface reporting unit.

We also performed our annual impairment testing related to the Parcus Medical and Arthrosurface reporting unit in the fourth quarter of 2020.

The results of the annual impairment test indicated that the estimated fair value of the reporting unit was less than its carrying value.

This was primarily due to a decline in projected net cash flows as a result of the continued impact of COVID-19 on revenue and related cash flows, the expectation that the economic recovery will take longer than expected to materialize, and additional projected investment to support future growth.

Consequently, a non-cash goodwill impairment charge was recorded in the amount of $24.4 million during the fourth quarter of 2020.

The total non-cash goodwill impairment charge with respect to the reporting unit amounted to $42.5 million for the year ended December 31, 2020.

As a result of these events during 2020, we experienced decreases in immediate term revenue and related cash flows which directly impacted the Parcus Medical and Arthrosurface reporting unit.

The results of the interim and annual 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 $42.5 million was recorded in 2020.

There were no goodwill impairment charges during 2021.

Contingent Consideration Fair Value Change

In the year ended December 31, 2020, we recorded a $28.7 million net benefit related to the change in fair value of our contingent consideration liabilities incurred as a result of the acquisition of Parcus Medical and Arthrosurface in the first quarter of 2020.

In the year ended December 31, 2021, we recorded a $21.1 million net benefit related to the change in fair value of our contingent consideration liabilities incurred associated with the acquisition of Parcus Medical and Arthrosurface in 2020.

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

The decrease in fair value of the contingent consideration was largely due to a decrease in revenue projections related primarily to the COVID-19 pandemic.

On October 15, 2020, we received FDA clearance for the WristMotion Total Arthroplasty System, triggering a $5 million regulatory-based milestone payment per the Arthrosurface merger agreement.

The benefit from income taxes was $4.6 million for the twelve-month period ended December 31, 2020, based on an effective tax rate of 16.2%.

The provision for income taxes was $8.9 million for the twelve-month period ended December 31, 2019, based on an effective tax rate of 24.7%.

The net decrease in the effective tax rate benefit for the year ended December 31, 2020, as compared to the prior year, was primarily due to the $4.8 million tax expense on the impairment of non-tax deductible goodwill, partially offset by the $1.9 million tax benefit on the decrease in the fair value of the contingent consideration.

The decrease in fair value of the contingent consideration was due primarily to the decrease in the likelihood that certain contingent milestones would be achieved or because certain contingent milestones were not achieved.

Also, in July 2021, we made a regulatory milestone payment in connection with the Arthrosurface acquisition in the amount of $10.0 million upon obtaining a regulatory clearance for a reverse shoulder implant system.

The benefit from income taxes was $1.7 million for the year ended December 31, 2021, resulting in an effective tax rate of (70.4%).

The benefit from income taxes was $4.6 million for the year ended December 31, 2020, resulting in an effective tax rate of 16.2%.

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

Net Income (Loss)

For the year ended December 31, 2020, net loss was $23.9 million, or $1.69 net loss per diluted share, compared to net income of $27.2 million, or $1.89 net income per diluted share, for the prior year.

The decrease in net income and diluted earnings per share was primarily a result of the increased expenses associated with acquisitions of Parcus Medical and Arthrosurface previously discussed, in addition to the unfavorable impact on sales and gross profit from the COVID-19 pandemic.

For the year ended December 31, 2021, net income was $4.1 million, or $0.28 per diluted share, compared to net loss of $24.0 million, or $1.69 per diluted share, for the prior year.

The increase in net income and diluted earnings per share was primarily due to increased revenue, reduction in the fair value of contingent consideration and the absence of goodwill impairment charges, partially offset by higher operating expenses primarily driven by increased spending to expand our commercial capability in the United States and development of new products and clinical trial activity.

Non-GAAP Financial Measures

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

We have presented adjusted EBITDA, adjusted net income (loss), and adjusted earnings per share because they are key measures used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business.

We 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 the expenses eliminated in calculating these measures can provide a useful tool for period-to-period comparisons of our core operating performance.

Accordingly, we believe that these measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making.

In particular, we believe that the exclusion of these items in calculating these measures can provide a useful tool for period-to-period comparisons of our core operating performance.

Accordingly, we believe that these measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects and allowing for greater transparency with respect to key financial metrics used by our management in their financial and operational decision-making. 

Adjusted Gross Profit and Adjusted Gross Margin

We define adjusted gross profit as our gross profit excluding amortization of certain acquired intangible assets, the impact of inventory fair-value step up associated with our recent acquisitions and certain product rationalization charges.

The amortized assets contribute to revenue generation, and the amortization of such assets will likely continue in future periods until such assets are fully amortized.

These assets include the fair value of certain identified assets acquired in acquisitions, including developed technology and acquired tradenames.

We define adjusted gross margin as adjusted gross profit divided by total revenue.

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

Years Ended December 31,

Product rationalization charges

Acquisition related intangible asset amortization

Acquisition related inventory step up

Adjusted gross profit

Adjusted gross margin

Adjusted gross profit for the year ended December 31, 2021 increased $10.2 million to $98.1 million representing 66% of revenue.

Adjusted gross profit for the year ended December 31, 2020 was $87.9 million, or 67% of revenue.

This increase in adjusted gross profit for the year ended December 31, 2021 as compared to 2020, primarily resulted from higher revenue due to organic growth of revenues as COVID-19 pandemic related restrictions started lifting in various worldwide jurisdictions, especially in the United States, as well as the inclusion of full period results from Parcus Medical and Arthrosurface in 2021 as we acquired these businesses in early 2020.

The decrease in adjusted gross margin for the year ended December 31, 2021 as compared to 2020, is due primarily to unfavorable production volumes and increased reserves caused partially by supply chain and staffing challenges, due largely to the impact of the COVID-19 pandemic.

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

There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest GAAP equivalent.

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 compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses would be higher, which would affect our cash position;

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

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

we exclude 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 and bonus 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 impairment related to In-Process Research and Development, or IPR&D, assets, 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;

1 unchanged sentence

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

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

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

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

The following is a reconciliation of net income (loss) to adjusted EBITDA for the years ended December 31, 2020 and 2019, respectively:

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

Years Ended December 31,

Net income (loss)

Interest and other expense (income) , net

(Benefit) provision for income taxes

Interest and other expense, net

Benefit from income taxes

Depreciation and amortization

8 unchanged sentences

Adjusted EBITDA

Adjusted EBITDA in the year ended December 31, 2020 decreased $25.2 million as compared with the prior year.

The decrease in adjusted EBITDA for the period was primarily due to the unfavorable impact of the COVID-19 pandemic on our revenues, unfavorable revenue mix and higher expenses following our acquisitions of Parcus Medical and Arthrosurface.

Adjusted EBITDA for year ended December 31, 2021, decreased $7.5 million as compared to 2020.

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

Adjusted Net Income (Loss) and Adjusted EPS

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

We define adjusted net income (loss) as our net income (loss) excluding acquisition-related expenses, amortization and depreciation of acquired assets, the impact of inventory fair-value step up on cost of revenue and the impacts of goodwill impairment charges and changes in the fair value of contingent consideration, as well as certain impairment charges, including impairment related to IPR&D assets and non-cash product rationalization charges associated with certain non-core legacy products, each on a tax effected basis.

Acquisition related expenses are those that the we would not have incurred except as a direct result of acquisition transactions.

We present information below with respect to adjusted net income (loss) and adjusted EPS.

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.

1 unchanged sentence

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 GAAP diluted earnings per share excluding the above adjustments to net income used in calculating adjusted net income, each on 

The following is a reconciliation of adjusted net income to net income for the years ended December 31, 2020 and 2019, respectively:

For the Twelve Months Ended December 31,

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

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

Years Ended December 31,

Net income (loss)

6 unchanged sentences

Change in fair value of contingent consideration, tax effected

Adjusted net income

The following is a reconciliation of adjusted diluted EPS to diluted EPS for the years ended December 31, 2020 and 2019, respectively (in thousands, expect per share data):

For the Twelve Months Ended December 31,

Diluted earnings per share (EPS)

Adjusted net income (loss)

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

Years Ended December 31,

Diluted earnings (loss) per share

Product rationalization charges, tax effected

5 unchanged sentences

Change in fair value contingent consideration, tax effected

Adjusted diluted EPS

Adjusted net income and adjusted diluted EPS in the year ended December 31, 2020 decreased $19.2 million and $1.34 per share, respectively, as compared with the prior year.

The decrease was primarily due to the unfavorable impact of the COVID-19 pandemic on our revenues, unfavorable revenue mix and higher expenses following our acquisitions of Parcus Medical and Arthrosurface.

Year ended December 31, 2019 compared to year ended December 31, 2018

Adjusted diluted earnings (loss) per share

Adjusted net income (loss) in 2021, decreased $10.5 million as compared to 2020.

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

Year ended December  

31, 2020 compared to year ended December  

Statement of Operations Detail  

Years Ended December 31,

% change

Year Ended December 31,

(in thousands, except percentages)

Product revenue

Licensing, milestone and contract revenue

Total revenue

Cost of revenue

2 unchanged sentences

Selling, general & administrative

Goodwill impairment

Change in fair value of contingent consideration

Total operating expenses

Income from operations

Interest income, net

Income before income taxes

Provision for income taxes

Total revenue

Total revenue for the year ended December 31, 2019 increased by $9.1 million, as compared to the prior year, to $114.6 million.

This increase was primarily due to increase in global Joint Pain Management revenue and the recovery from the 2018 voluntary recall of certain production lots of certain of our HYAFF-based products.

Product revenue

Product revenue for the year ended December 31, 2019 was $114.5 million, an increase of $9.0 million, or 9%, compared to the prior year.

The following table presents comparative product revenue analysis by product franchise:

Income (loss) from operations

Interest and other income (expense), net

Income (loss) before income taxes

Provision for (benefit from) income taxes

Net income (loss)

Revenue for the year ended December 31, 2020 was $130.5 million, an increase of $15.9 million, or 14%, compared to prior year.

This increase was primarily driven by growth in our Joint Preservation and Restoration product family, as a result of our acquisitions of Parcus Medical and Arthrosurface in early 2020, offset by a decrease in revenue from our OA Pain Management products due to the impact of the COVID-19 pandemic on elective procedure volumes worldwide.

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

Years Ended December 31,

Joint Pain Management

Joint Preservation and Restoration

Joint Pain Management

Overall, revenue from our Joint Pain Management product family increased by $6.7 million in 2019 as compared to 2018, primarily driven by increased revenue from Monovisc domestically and internationally, as well as increased revenue from Cingal in international markets.

OA Pain Management

Joint Preservation and Restoration

Revenue from our Joint Preservation and Restoration product family increased by $0.9 million in 2019 as compared to 2018 primarily due to recovery from our 2018 voluntary product recall and the U.S.

commercial launch of Tactoset.

Overall, revenue from our Other product family increased by $1.3 million in 2019 as compared to 2018 primarily due to our recovery from 2018 voluntary recall of certain production lots.

Non-Orthopedic

Revenue from our OA Pain Management product family decreased, primarily due to the worldwide impact of the COVID-19 pandemic on elective procedure volumes.

Revenue from our Non-Orthopedic product family decreased due to the impact of the COVID-19 pandemic on procedure volumes worldwide.

Revenue for the year ended December 31, 2019 includes licensing related revenue in the amount of $0.1 million which was zero in 2020.

Gross Profit and Margin

Gross profit for the year ended December 31, 2020 was $69.0 million, or gross margin of 53%, as compared with $85.9 million, or gross margin of 75%, for the year ended December 31, 2019.

The increase in gross margin for the year ended December 31, 2019 was primarily driven by more favorable changes in revenue mix, including an increase in domestic royalty revenue from our viscosupplement products and the recovery from the 2018 voluntary product recall.

Gross margin also decreased due to lower volumes as a result of the COVID-19 pandemic.

Research and Development

Research and development expenses for the year ended December 31, 2019 decreased by $1.5 million, or 8%, as compared to the prior year, primarily due to a decrease in clinical trial expenses related to the Cingal phase III clinical trial partially offset by higher pre-clinical product development activities associated with the development of product candidates in our research and development pipeline, including our rotator cuff therapy. 

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

For additional information on our research and development activities, please see the section captioned “Part I.

Business—

Research and Development ”

in this Annual Report on Form 10-K.

Selling, General and Administrative

Selling, general and administrative expenses for the year ended December 31, 2019 increased by $0.6 million, or 2%, as compared to 2018.

The increase was primarily due to costs related to the acquisitions of Parcus Medical and Arthrosurface, which totaled $2.9 million in 2019, the buildout of our U.S.

commercial infrastructure, and the launch of Tactoset, as well as increased personnel-related costs and external professional fees. 

Provisions for income taxes were $8.9 million and $4.5 million for the years ended December 31, 2019 and 2018, respectively.

The increase in the effective tax rate in 2019 of 5.4%, as compared to 2018, is primarily due to a windfall tax benefit in 2018 related to exercises of employee equity awards resulting in an income tax benefit of $1.5 million compared to an insignificant amount in 2019.

For the year ended December 31, 2019, net income was $27.2 million, or $1.89 per diluted share, compared to $18.7 million, or $1.27 per diluted share, for the same period in the prior year.

The increase in net income and diluted earnings per share was primarily a result of increased total revenue, increased gross profit and a decrease in one-time expenses associated with the retirement of a former CEO and the 2018 voluntary product recall.

Selling, general and administrative, or SG&A, expenses for the year ended December 31, 2020 were $60.1 million, an increase of $25.1 million, or 72%, as compared to the prior year.

Goodwill Impairment Charge

We assess goodwill for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment.

government policy responses to the COVID-19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of domestic elective surgical procedures.

The results of these interim impairment tests indicated that the estimated fair value of this reporting unit was less than its carrying value.

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

We also performed our annual impairment testing related to the Parcus Medical and Arthrosurface reporting unit in the fourth quarter of 2020.

The results of the annual impairment test indicated that the estimated fair value of the reporting unit was less than its carrying value.

Consequently, a non-cash goodwill impairment charge was recorded in the amount of $24.4 million during the fourth quarter of 2020.

The total non-cash goodwill impairment charge with respect to the reporting unit amounted to $42.5 million for the year ended December 31, 2020.

Contingent Consideration Fair Value Change

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

The decrease in fair value of the contingent consideration was largely due to a decrease in revenue projections related primarily to the COVID-19 pandemic.

On October 15, 2020, we received FDA clearance for the WristMotion Total Arthroplasty System, triggering a $5 million regulatory-based milestone payment per the Arthrosurface merger agreement.

The benefit from income taxes was $4.6 million for the twelve-month period ended December 31, 2020, based on an effective tax rate of 16.2%.

The provision for income taxes was $8.9 million for the twelve-month period ended December 31, 2019, based on an effective tax rate of 24.7%.

Net Income (Loss)

Concentration of Risk

We have historically derived the majority of our revenues from a small number of customers, most of whom resell our products to end-users and are significantly larger companies than us.

For the year ended December 31, 2020, five customers accounted for 58% of product revenue, with Mitek alone accounting for 49% of product revenue.

We have historically derived the majority of our revenue from a small number of customers, most of whom resell our products to end-users and are significantly larger companies than us.

For the year ended December 31, 2021, Mitek accounted for 45% of revenue, as compared to 49% in prior year.

While we believe that our expanded commercial infrastructure will substantially diversify our revenue base, we expect to continue to be dependent on a small number of large customers, especially Mitek, for a sizeable portion of our revenues in the near-term future.

6 unchanged sentences

The loss of any one of our major customers or the delay of significant orders from such customers, even if only temporary, could reduce or delay our recognition of revenues, harm our reputation in the industry, and reduce our ability to accurately predict cash flow, and, as a consequence, it could seriously harm our business, financial condition, and results of operations.

See Note 13, Revenue by Product Group, by Significant Customer and by Geographic Location;

See Note 13, Revenue by Product Family, by Significant Customer and by Geographic Location;

Geographic Information , to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information regarding significant customers.

Liquidity and Capital Resources

We require cash to fund our operating expenses and to make capital expenditures.

We require cash to fund our operating activities and to make capital expenditures and other investments in the business.

We expect that our requirements for cash to fund these uses will increase as our operations expand.

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

Cash, cash equivalents, and investments aggregated $98.3 million and $184.9 million, and working capital totaled $140.5 million and $218.0 million, at December 31, 2020 and December 31, 2019, respectively. We are closely monitoring our liquidity and capital resources for any potential impact that the COVID-19 pandemic may have on our operations.

As a precautionary measure, we executed a drawdown of $50 million from our existing credit facility with Bank of America in April 2020, all of which we repaid during the year ended December 31, 2020.

As of December 31, 2020, there were no outstanding borrowings and we are in compliance with the terms of the existing credit facility.

During 2020, we also implemented a number of internal short-term expense controls and prioritized business initiatives to conserve cash flow.

Cash provided by operating activities was $13.1 million, $37.0 million, and $34.9 million for 2020, 2019, and 2018, respectively.

The decrease in 2020 was due primarily to the impact of the COVID-19 pandemic on sales and gross profit, as well as increased operational spending following the acquisitions of Parcus Medical and Arthrosurface.

Investing activities used $71.3 million of cash in 2020, provided $39.7 million of cash in 2019, and used $50.3 million of cash in 2018.

The change in 2020 was primarily due to the acquisitions of Parcus Medical and Arthrosurface.

Cash used in financing activities was $3.8 million, $8.1 million, and $28.9 million for 2020, 2019, and 2018, respectively.

The financing activities in 2020 were primarily associated with a $5 million regulatory-based milestone paid per the Arthrosurface merger agreement, of which $4.5 million was recorded within financing activities and the remainder within operating activities.

For the years ended December 31, 2019 and 2018 we executed $30 million accelerated share repurchase programs each year.

The decrease in cash used in financing activities for the year ended December 31, 2020, was primarily the result of a decrease in share repurchase partially offset by a decrease in proceeds from the exercise of employee equity awards as compared to the corresponding period in 2019 and 2018, respectively.

We continue to generate cash from operating activities and believe that our operating cash flows, cash currently on our balance sheet and availability under our credit facility will be sufficient to allow us to continue to invest in our existing business, to manage our capital structure on a short and long-term basis, and to meet our anticipated operating cash needs.

Cash, cash equivalents, and investments aggregated $94.4 million and $98.3 million, and working capital totaled $138.7 million and $140.5 million, at December 31, 2021 and 2020, respectively. We are closely monitoring our liquidity and capital resources for any potential impact that the COVID-19 pandemic may have on our operations.

We entered into a Third Amendment to Credit Agreement, on November 12, 2021, with Bank of America N.A.

as administrative agent, amended and restated our existing revolving line of credit agreement dated October 24, 2017 and provides up to $75.0 million in the form of a senior revolving line of credit.

Subject to certain conditions, we may request up to an additional $75.0 million for a maximum aggregate commitment of $150.0 million.

As a precautionary measure at the beginning of the COVID-19 pandemic, we executed a drawdown of $50.0 million in April 2020, all of which we repaid during the year ended December 31, 2020.

As of December 31, 2021, and 2020, there were no outstanding borrowings and we are in compliance with the terms of the credit facility.

Summary of Cash Flows (in thousands):

Years Ended December 31,

Cash provided by (used in)

Operating activities

Investing activities

Financing activities

Effect of exchange rate changes on cash

Net (decrease) increase in cash and cash equivalents

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

Operating Activities

Cash provided by operating activities was $8.4 million, $13.1 million, $37.0 million for 2021, 2020 and 2019. The change in 2021 was primarily attributable to payment of contingent consideration, as well as normal variations in the timing of collections, timing of certain state tax payments and a decrease in cash outflows related to acquisition related expenses.

In July 2021, we paid contingent consideration in the amount of $10.0 million, $2.8 million of which was classified within operating activities and the remaining $7.2 million was classified within financing activities.

For the foreseeable future, we expect to continue to invest substantial resources in research and development for new products and clinical trials as well as continued investment in our commercial infrastructure to support our growth strategy.

These costs will be funded with a combination of cash on hand and cash expected to be generated from future operations.

Investing Activities

Investing activities used $3.1 million and $71.3 million in 2021 and 2020, and provided $39.7 million in 2019.

The significant use of cash from investing activities in 2020 was primarily due to the $94.6 million of consideration paid, net of cash acquired, for the acquisitions of Parcus Medical and Arthrosurface.

Capital expenditures totaled $5.1 million, $1.6 million, and $2.8 million for 2021, 2020 and 2019, respectively.

Financing Activities

Cash used in financing activities was $6.8 million, $3.8 million and $8.1 million for 2021, 2020 and 2019.

The change was primarily due to the portion of the contingent consideration payment related to financing activities, as described above, in 2021. 

For a discussion of our liquidity and capital resources as of December 31, 2020, and our cash flow activities for the fiscal year ended December 31, 2020, see “Part II, Item 7.

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

of our annual report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 5, 2021, which is incorporated by reference in this Report.

Contractual Obligations and Other Commercial Commitments

5 unchanged sentences

Year Ended December 31, 2021

Includes purchase commitments for materials, clinical trials, and other day to day business requirements.

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

Parcus Medical has net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface has both regulatory and net sales earn-out milestones 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.

As of December 31, 2020, the Company estimated total remaining earn-outs to be $35.4 million, of which $13.1 million is due within one year and $22.3 million due thereafter.

Includes purchase commitments for materials and other day to day business requirements.

Accounting for Off-Balance Sheet Arrangements

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

Summary of Critical Accounting Policies;

Significant Judgments and Estimates

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, which consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

6 unchanged sentences

The impact and any associated risks related to these policies on our business operations are discussed throughout this section captioned “

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

Management ’

s Discussion and Analysis of Financial Condition and Results of Operations ”

where such policies affect our reported and expected financial results.

21 unchanged sentences

We believe the estimated purchased customer relationships, developed technologies, trade name, and in process research and development amounts so determined represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the assets.

We use the comparative sales method to determine the fair value of work-in-process and finished goods inventory acquired and ultimately the inventory step- up required.

If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges which could be material.

In addition, estimated economic lives of certain acquired assets are used to calculate depreciation and amortization expense.

If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.

We used the comparative sales method to determine the fair value of work-in-process (“WIP”) and finished goods inventory acquired and ultimately the inventory step- up required.

The fair value of WIP inventory was estimated as the selling price less the sum of (a) costs to complete, (b) costs of disposal, and (c) a reasonable profit allowance for the selling effort of the acquiring entity based on profit for similar products.

The fair value of finished goods inventory was estimated as the selling price less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity based on profit for similar products.

For contingent consideration, management updates these estimates and the related fair value of contingent consideration at each reporting period based on the estimated probability of achieving the earn-out targets and applying a discount rate that captures the risk associated with the expected contingent payments.

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

Parcus Medical has net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface has both regulatory and net sales earn-out milestones in 2020 and 2021.

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

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

For contingent consideration, we update these estimates and the related fair value of contingent consideration at each reporting period based on the estimated probability of achieving the earn-out targets and applying a discount rate that measures the risk associated with the expected contingent payments.

Under the Parcus Medical and Arthrosurface merger agreements, there are contingent consideration milestones totaling up to $100 million payable from 2020 to 2022.

Parcus Medical has net sales milestones annually from 2020 to 2022, while Arthrosurface had both regulatory and net sales milestones in 2020 and 2021.

As of December 31, 2021, the remaining regulatory milestone and the net sales milestone related to Arthrosurface were not achieved.

The fair value of the Parcus Medical contingent consideration is estimated using a Monte Carlo simulation.

Changes in the fair value can result from changes pertaining to the achievement of the defined milestones and changes in assumed discount rates.

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

As of December 31, 2021, the contingent consideration for Parcus Medical associated with net sales in 2021 amounted to $4.3 million, which is included in current liabilities.

We do not expect the remaining earn-out milestone under the Parcus Medical merger agreement to be achieved.

Revenue Recognition –

8 unchanged sentences

We generate sales principally through three types of customers:

(i) commercial partnerships (ii) hospitals and surgery centers, and (iii) distributors, referred to as distribution model.

(i) commercial partnerships (ii) hospitals and ASCs, and (iii) distributors, referred to as distribution model.

For commercial partnership sales, we sell our products directly to these partners, who perform the vast majority of the downstream sales and marketing activities to customers and end-users.

7 unchanged sentences

Differences between actual and estimated royalty revenues have not been material and are typically adjusted in the following quarter when the actual amounts are known.

Revenue from sales-based royalties is included in product revenues.

For sales to hospitals and surgery centers, which generally pairs an in-house team of regional sales directors with local or regional distributors, the inventory is generally consigned to sales agents so that products are available when needed for surgical procedures.

Revenue from sales-based royalties is included in revenues in our consolidated statement of operations.

For sales to hospitals and ASCs, which generally pairs in-house sales representatives with local or regional distributors, the inventory is generally consigned so that products are available when needed for surgical procedures.

No revenue is recognized upon the placement of inventory into consignment, as we retain the ability to control the inventory.

20 unchanged sentences

Amounts are recorded as accounts receivable when our right to consideration is unconditional.

Deferred revenue was $0.2 million and $0 as of December 31, 2020 and 2019, respectively.

Generally, customer contracts contain Free on Board (FOB) or Ex-Works (EXW) shipping point terms where the customer pays the shipping company directly for all shipping and handling costs.

Deferred revenue was $1.0 million and $0.2 million as of December 31, 2021 and 2020, respectively.

Generally, customer contracts contain Free on Board (“FOB”) or Ex-Works shipping point terms where the customer pays the shipping company directly for all shipping and handling costs.

In those contracts in which we pay for the shipping and handling, the associated costs are generally recorded along with the product sale at the time of shipment in cost of revenue when control over the products has transferred to the customer.

3 unchanged sentences

These costs are included in selling, general and administrative expenses.

Inventories are primarily stated at the lower of standard cost and net realizable value, with approximate cost determined using the first-in, first-out (FIFO) method.

Inventories are primarily stated at the lower of standard cost and net realizable value, with approximate cost determined using the first-in, first-out method.

Work-in-process and finished goods inventories include materials, labor, and manufacturing overhead.

Manufacturing variances attributable to abnormally low production are expensed in the period incurred.

Inventory costs associated with product candidates that have not yet received regulatory approval are capitalized if we believe there is probable future commercial use and future economic benefit.

1 unchanged sentence

We regularly evaluate the ability to realize the value of inventory based on a combination of factors including, but not limited to, historical usage rates, forecasted sales or usage, product end of life dates, and estimated current or future market values.

Purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure.

Inventory needs and alternative usage avenues are explored within these processes to mitigate inventory exposure.

We recorded an inventory reserve of $2.9 million in 2021 based on future sales forecasts as a result of our product rationalization efforts with respect to certain of our Joint Preservation and Restoration product family.

When recorded, inventory write-downs are intended to reduce the carrying value of inventory to its net realizable value.

1 unchanged sentence

Other long-term assets include inventory expected to remain on hand beyond one year.

Goodwill and Acquired In-Process Research and Development

Goodwill and In-Process Research and Development

Goodwill is the amount by which the purchase price of acquired net assets in a business combination exceeded the fair values of net identifiable assets on the date of acquisition.

Acquired IPR&D represents the fair value assigned to research and development assets that we acquire that have not been completed at the date of acquisition or are pending regulatory approval in certain jurisdictions.

The value assigned to the acquired IPR&D is determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting revenue from the projects, and discounting the net cash flows to present value.

Goodwill and IPR&D are not amortized but are evaluated for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.

Our goodwill impairment assessment is performed by reporting unit.

A reporting unit is the operating segment, or a business one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management.

However, components are aggregated as a single reporting unit if they have similar economic characteristics.

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

We test goodwill for impairment at the reporting unit level on an annual basis as of November 30 or more frequently if we believe indicators of impairment exist.

We have two reporting units:

the legacy Anika reporting unit, which specializes in therapies based on our HA technology platform, and a joint preservation and restoration reporting unit established in 2020 upon the acquisitions of Parcus Medical and Arthrosurface.

Factors we consider important, on an overall company basis, that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, or a reduction of our market capitalization relative to net book value.

To conduct impairment tests of goodwill, the fair value of the reporting unit is compared to its carrying value.

If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value, not to exceed the recorded amount of goodwill.

We estimated the fair value of the reporting units using a discounted cash flow method, which is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the reporting units beyond the cash flows from the discrete projection period.

We determined that a discounted cash flow model provided the best approximation of fair value of the reporting units for the purpose of performing the impairment test.

This approach incorporates significant estimates and assumptions related to the forecasted results including revenues, expenses, the achievement of certain cost synergies, terminal growth rates and discount rates to estimate future cash flows.

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

While assumptions utilized are subject to a high degree of judgment and complexity, we made our best estimate of future cash flows under a high degree of economic uncertainty that existed as of November 30, 2020.

In developing the assumptions, we also considered observed trends of our industry participants.

and international government policy responses to the COVID-19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of global elective surgical procedures.

As a result, the widespread economic volatility triggered impairment testing in the first quarter of 2020, and accordingly, we performed interim impairment testing on the goodwill balances of our reporting units.

We also performed our annual impairment testing in the fourth quarter of 2020.

For the legacy Anika reporting unit, we performed an interim qualitative assessment in the first quarter including consideration of (i) general macroeconomic factors, (ii) industry and market conditions, and (iii) the extent of the excess of the fair value over the carrying value indicated in prior impairment testing.

We determined it was not more likely than not that the fair value of the legacy Anika reporting unit is less than its carrying amount and thus goodwill was not impaired as of March 31, 2020.

As part of our annual impairment testing, we decided to perform a quantitative assessment related to the legacy Anika reporting unit as of November 30, 2020, due to the expectation that the economic recovery would take longer than expected to materialize.

The results of the impairment test indicated that the estimated fair value of the legacy Anika reporting unit was greater than its carrying value, and therefore we did not record any impairment charges related to the legacy Anika reporting unit for the year ended December 31, 2020.

For our newly created reporting unit, which includes Parcus Medical and Arthrosurface, we also performed an interim quantitative assessment of goodwill impairment as of March 31, 2020.

We estimated the fair value of the reporting unit using a discounted cash flow method.

The results of the interim impairment test indicated that the estimated fair value of the reporting unit was less than its carrying value.

This was primarily due to decreases in near term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures which directly impact the reporting unit.

Consequently, a non-cash goodwill impairment charge was recorded in the amount of $18.1 million during the first quarter of 2020.

As part of our annual impairment testing, we also performed a quantitative assessment related to the new reporting unit as of November 30, 2020.

The results of the annual impairment test indicated that the estimated fair value of the reporting unit was less than its carrying value.

Consequently, a non-cash goodwill impairment charge was recorded in the amount of $24.4 million during the fourth quarter of 2020.

The total non-cash goodwill impairment charge with respect to the reporting unit amounted to $42.5 million for the year ended December 31, 2020.

During the fourth quarter of 2020, we decided not to further invest in our HyaloBone and HyaloNect IPR&D projects as they were no longer aligned with our core strategic focus.

As a result, we recorded an impairment charge in the period totaling $1.4 million recorded in research and development expenses in our consolidated statements of operations.

We performed our annual assessment of the remaining IPR&D intangible assets as of November 30, 2020.

We estimated the fair value of the IPR&D intangible assets using the income approach which is based on the Multi-Period Excess Earnings Method, or MPEEM.

MPEEM measures economic benefit indirectly by calculating the income attributable to an asset after appropriate returns are paid to complementary assets used in conjunction with the subject asset to produce the earnings associated with the subject asset, commonly referred to as contributory asset charges.

This approach incorporates significant estimates and assumptions related to the forecasted results including revenues, expenses, expected economic life of the asset, contributory asset charges and discount rates to estimate future cash flows.

In developing the assumptions, we also considered observed trends of our industry participants.

No impairment existed as the estimated fair value of the remaining IPR&D intangible assets was greater than their carrying value.

the legacy Anika reporting unit and a newly created reporting unit established in 2020 upon the acquisitions of Parcus Medical and Arthrosurface.

The remaining goodwill as of December 31, 2021 pertains to the legacy Anika reporting unit, as the goodwill with respect to the newly created reporting unit was fully impaired in 2020.

We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.

When using the qualitative method in 2021, we considered several factors, including the following:

the amount by which the fair value of the reporting unit exceeded its carrying value as of the date of the most recent quantitative impairment analysis, which indicated there would need to be substantial negative developments in the markets in which the reporting unit operates in order for there to be potential impairment;

the carrying value of the reporting unit as of the assessment date compared to their previously calculated fair value as of the date of the most recent quantitative impairment analysis;

the current forecasts as compared to the forecasts included in the most recent quantitative impairment analysis;

public information from competitors and other industry information to determine if there were any significant adverse trends in our competitors' businesses;

changes in the value of major U.S.

stock indices that could suggest declines in overall market stability that could impact the valuation of our reporting unit;

whether there had been any significant increases to the weighted-average cost of capital rates for the reporting unit, which could materially lower our prior valuation conclusions under a discounted cash flow approach.

Significant assumptions utilized in the impairment analysis included valuation multiple with respect to revenue and weighted-average cost of capital.

Based on sensitivity analysis performed on key assumptions at November 30, 2021, a 10% decrease valuation multiples or a 10% increase in the weighted average cost of capital assumption would not have resulted in a fair value below the reporting unit’s carrying value.

Accordingly, we determined it was not more likely than not that the fair value of the legacy Anika reporting unit is less than its carrying amount and thus goodwill was not impaired as of November 30, 2021.

IPR&D represents the fair value assigned to research and development assets that we acquire that have not been completed at the date of acquisition or are pending regulatory approval in certain jurisdictions.

We conduct annual impairment tests of IPR&D, by comparing the fair value of each IPR&D project to its carrying value.

If the carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of the IPR&D project exceeds its fair value.

We estimate the fair value for IPR&D using the income approach which incorporates significant estimates and assumptions related to the forecasted results including revenues, expenses, expected economic life of the asset, contributory asset charges and discount rates to estimate future cash flows.

During 2021 and 2020, we decided not to further invest in certain of our projects and recorded an impairment charge in the amount of $0.6 million and $1.4 million in 2021 and 2020, respectively, in research and development expenses in the consolidated statements of operations.

Based on a sensitivity analysis performed on key assumptions at November 30, 2021 with respect to the remaining IPR&D, a 10% decrease in the long-term growth factor assumption, or 10% increase in the weighted average cost of capital assumption would not have resulted in a fair value below the IPR&D carrying value.

Recent Accounting Pronouncements

1 unchanged sentence

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

What changed 10-K

Item 5. Market for Registrant’s Common Equity