What changed in this filing

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Item 1. Financial Statements

2022-05-06 compared with 2021-11-05 · 374 added, 535 removed, 547 unchanged (62% of the section changed)

2 unchanged sentences

and Subsidiaries

Consolidated Balance Sheets

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

September 30,

Current assets:

2 unchanged sentences

$ 94,386  

Accounts receivable, net of reserves of $1,358 and $1,523 at September 30, 2021 and December 31, 2020, respectively

Accounts receivable, less allowance for credit losses of $1,350 and $1,442 at March 31, 2022 and December 31, 2021, respectively

29,313  

4 unchanged sentences

Prepaid expenses and other current assets

10,459  

Total current assets

23 unchanged sentences

17,847  

Contingent consideration –

current portion

13,090  

Contingent consideration

Total current liabilities

2 unchanged sentences

Other long-term liabilities

Contingent consideration

22,320  

Deferred tax liability

10,157  

11,895  

Lease liabilities

4 unchanged sentences

Preferred stock, $0.01 par value;

1,250 shares authorized, no shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

1,250 shares authorized, no shares issued and outstanding at March 31, 2022 and December 31, 2021, 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

90,000 shares authorized, 14,518 and 14,441 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

Additional paid-in-capital

12 unchanged sentences

$ 347,535  

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

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

Anika Therapeutics, Inc.

and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except per share data)

(unaudited)  

Three Months Ended

September 30,

Nine Months Ended

September 30,

Three Months Ended March 31,

$ 36,693  

$ 34,292  

Cost of revenue

14,889  

13,318  

21,804  

20,974  

Operating expenses:

1 unchanged sentence

Selling, general and administrative

Goodwill impairment

19,201  

18,175  

Change in fair value of contingent consideration

Total operating expenses

Income (loss) from operations

Interest and other expense, net

Income (loss) before income taxes

Provision for (benefit from) income taxes

Net income (loss)

Net income (loss) per share:

Weighted average common shares outstanding:

Net income (loss)

Foreign currency translation adjustment

Comprehensive income (loss)

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

Anika Therapeutics, Inc.

and Subsidiaries

Consolidated Statements of Stockholders' Equity

(in thousands)

Nine Months Ended September 30, 2021

Additional Paid

Comprehensive

Stockholders'

Balance, January 1, 2021

25,358  

19,716  

(Loss) income from operations

( 3,554 )  

Interest and other income (expense), net

( 154 )  

Issuance of common stock for equity awards

Vesting of restricted stock units

Stock-based compensation expense

Retirement of common stock for minimum tax withholdings

Other comprehensive income

Balance, March 31, 2021

(Loss) income before income taxes

( 3,708 )  

Benefit from income taxes

( 775 )  

Net (loss) income

$ ( 2,933 )  

$ 2,838  

Issuance of common stock for equity awards

Vesting of restricted stock units

Stock-based compensation expense

Retirement of common stock for minimum tax withholdings

Net (loss) income per share:

$ ( 0.20 )  

Other comprehensive income

Balance, June 30, 2021

$ 0.20  

1 unchanged sentence

$ 0.20  

Weighted average common shares outstanding:

14,466  

14,343  

Issuance of common stock for equity awards

Vesting of restricted stock units

Stock-based compensation expense

Retirement of common stock for minimum tax withholdings

14,466  

Other comprehensive income

14,435  

Balance, September 30, 2021

Net (loss) income

$ ( 2,933 )  

$ 2,838  

Foreign currency translation adjustment

( 81 )  

Comprehensive (loss) income

$ ( 3,014 )  

$ 2,329  

Nine Months Ended September 30, 2020

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

Anika Therapeutics, Inc.

and Subsidiaries

Condensed Consolidated Statements of Stockholders' Equity

(in thousands)

Three Months Ended March 31, 2022

Additional Paid

6 unchanged sentences

$ ( 5,718 )  

$ 287,085  

Issuance of common stock for equity awards

Vesting of restricted stock units

Forfeiture of restricted stock awards

Stock-based compensation expense

Retirement of common stock for minimum tax withholdings

Repurchase of common stock

( 30 )  

( 844 )  

( 2,933 )  

Other comprehensive loss

( 81 )  

Balance, March 31, 2022

3 unchanged sentences

$ ( 5,799 )  

Issuance of common stock for equity awards

Vesting of restricted stock units

Stock-based compensation expense

Retirement of common stock for minimum tax withholdings

Other comprehensive income

Balance, June 30, 2020

$ 285,787  

Three Months Ended March 31, 2021

Additional Paid

Comprehensive

Stockholders'

Balance, January 1, 2021

14,329  

1 unchanged sentence

$ 221,444  

$ 272,400  

Issuance of common stock for equity awards

Vesting of restricted stock units

1 unchanged sentence

Retirement of common stock for minimum tax withholdings

Other comprehensive income

Balance, September 30, 2020

( 333 )  

Other comprehensive loss

( 509 )  

Balance, March 31, 2021

14,366  

$ 57,281  

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

$ 224,282  

$ ( 5,051 )  

$ 276,656  

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

Anika Therapeutics, Inc.

and Subsidiaries

Consolidated Statements of Cash Flows

Condensed Consolidated Statements of Cash Flows

(in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities:

Net income (loss)

Net (loss) income

$ 2,838  

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation 

Amortization of acquisition related intangible assets  

Amortization of acquisition related inventory step-up  

Amortization of acquisition related intangible assets

Amortization of acquisition related inventory step-up

Non-cash operating lease cost

Goodwill impairment

18,144  

Change in fair value of contingent consideration

( 21,920 )  

Loss on disposal of fixed assets

Loss on impairment of intangible asset

Stock-based compensation expense

Deferred income taxes

Recovery for doubtful accounts

( 60 )  

Provision (recovery) for credit losses

Provision for inventory

( 13 )  

Changes in operating assets and liabilities:

Accounts receivable

( 8,321 )  

( 7,117 )  

Prepaid expenses, other current and long-term assets

Accounts payable

( 702 )  

Operating lease liabilities

( 1,247 )  

Accrued expenses, other current and long-term liabilities

Contingent consideration

( 2,780 )  

( 423 )  

Net cash provided by operating activities

10,478  

Net cash used in operating activities

Cash flows from investing activities:

Acquisition of Parcus Medical and Arthrosurface, net of cash acquired

( 363 )  

Proceeds from maturities of investments

27,000  

Purchases of investments

Purchases of property and equipment

( 4,016 )  

Net cash used in investing activities

( 1,878 )  

Net cash (used in) provided by investing activities

Cash flows from financing activities:

Payments made on finance leases

( 210 )  

Repayments of long term debt

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 )  

Proceeds from exercises of equity awards

Net cash (used in) provided by financing activities

( 6,839 )  

24,338  

Exchange rate impact on cash and cash equivalents

( 49 )  

Payments made on finance leases

Net cash used in financing activities

Exchange rate impact on cash

Decrease in cash and cash equivalents

( 4,841 )  

Cash and cash equivalents at beginning of period

7 unchanged sentences

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

Right of use assets

Consideration for acquisitions included in accounts payable and accrued expenses

$ 1,209  

Acquisition related contingent consideration

$ 69,076  

Non-cash Financing Activities:

Operating lease liabilities

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

Right-of-use assets obtained in exchange for operating lease liabilities

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

Anika Therapeutics, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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

5 unchanged sentences

(“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.

These acquisitions broadened the Company's product portfolio, developed over its 30 years of expertise in hyaluronic acid technology, into joint preservation and restoration space with higher market potential, added new revenue streams, increased and accelerated 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.

Food and Drug Administration 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.

), 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, business partners and broader impact on elective surgeries.

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.

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

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

1 unchanged sentence

Inter-company transactions and balances have been eliminated.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been 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 

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

The December 31, 2021 balances reported herein were derived from the audited consolidated financial statements.

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

The accompanying unaudited condensed 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, 2021.

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 

The results of operations for the three -month period ended March 31, 2022 are not indicative of the results to be expected for the year ending December 

Segment Information

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance.

The Company’s chief operating decision maker is its President and Chief Executive Officer as of September 30, 2021.

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

The Company’s chief operating decision maker as of March 31, 2022 was its President and Chief Executive Officer.

Based on the criteria established by Accounting Standards Codification 280,  

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

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.  

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

7 unchanged sentences

$ 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.

Pursuant to the Parcus Medical Merger Agreement, 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, and at each reporting date, was determined based on a Monte Carlo simulation model in an option pricing framework, whereby a range of possible scenarios were simulated.

The unobservable inputs used in the fair value determination are 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 as of March 31, 2022 ranged from 3.2 % - 4.1 %.

The weighted average cost of capital was 11.5 % as of March 31, 2022.

The deferred consideration related to certain purchase price holdbacks was resolved within one year of the acquisition date in accordance with the Parcus Merger.

The liability for contingent consideration was included in current liabilities on the condensed consolidated balance sheets and will be remeasured at each reporting period until the contingency is resolved.

As of March 31, 2022, the net sales related contingent consideration amounted to $ 4.3 million which was included in current liabilities.

As of March 31, 2022 the Company did not expect any further milestones to be achieved.

Acquisition-related costs were not included as a component of consideration transferred but were 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

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These estimates were based on assumptions that the Company believes to be reasonable, however, actual results may differ from these estimates.

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

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 was as follows:

Recognized identifiable assets acquired and liabilities assumed:

15 unchanged sentences

$ 75,136  

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

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

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

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

Developed technology

3 unchanged sentences

$ 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.

The goodwill was impaired in 2020 and there was no remaining goodwill as of December 31, 2020.

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.

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”).

Arthrosurface is a joint preservation technology company specializing in less invasive, bone-preserving partial and total joint replacement solutions.

The acquisition of Arthrosurface has been accounted for as a business combination under ASC 805.

Under ASC 805, assets acquired and liabilities assumed in a business combination 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

6 unchanged sentences

$ 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.

Pursuant to the Arthrosurface Merger Agreement, the Company could be required to make future payments of up to $ 40.0 million depending on the achievement of regulatory milestones and the level of net sales of Arthrosurface products from 2020 through 2021.

The fair value of contingent consideration related to regulatory milestones as of February 3, 2020 was determined through a scenario-based discounted cash flow analysis using scenario probabilities and regulatory milestone dates.

The fair value of contingent consideration related to net sales achievement as of February 3, 2020 was determined based upon a Monte Carlo simulation approach at acquisition date, whereby a range of possible scenarios were simulated.

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 paid $ 5.0 million in October 2020 and $ 10.0 million in July 2021 based upon the achievement of two distinct regulatory milestones.

As of December 31, 2021, there were no milestones remaining.

Acquisition-related costs were not included as a component of consideration transferred but were 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

27 unchanged sentences

$ 48,900  

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 fair value of developed technology will be amortized over an estimated useful life of 15 years, the fair value of customer relationships over 10 years, and the fair value of trade names over 5 years.

A total of $ 0.6 million represents the fair value of IPR&D with an indefinite useful life which was impaired during the quarter ended December 31, 2021.

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  

The Goodwill was impaired in 2020 and there was no remaining goodwill as of December 31, 2020.

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.

The Company has certain cash equivalents in money market funds that are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets.

For cash, accounts receivables, accounts payable, and accrued interest, 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

There were no transfers between fair value levels during the three -month periods ended March 31, 2022 or 2021.

See Note 3, Business Combinations for additional discussion of contingent consideration as of March 31, 2022.

The classification of the Company’s cash equivalents and other current liabilities within the fair value hierarchy was as follows:

Active Markets  

for Identical Assets  

Significant Other

for Identical Assets

Observable Inputs

Unobservable Inputs

September 30, 2021

March 31, 2022

Amortized Cost

4 unchanged sentences

$ 67,052  

Other current and long-term liabilities:

Other current liabilities:

Contingent Consideration - Short Term

1 unchanged sentence

$ 4,315  

Active Markets

Significant Other

Active Markets  

for Identical Assets

Significant Other

Observable Inputs

7 unchanged sentences

$ 67,046  

Treasury Bills

$ 2,501  

$ 2,524  

Other current and long-term liabilities:

Other current liabilities:

Contingent Consideration - Short Term

1 unchanged sentence

$ 4,315  

Contingent Consideration - Long Term

22,320  

Total other current and long-term liabilities

$ 35,410  

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

Three Months Ended March 31,

Balance, beginning

5 unchanged sentences

$ 30,590  

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.

Inventories consist of the following:

September 30,

Raw materials

14 unchanged sentences

19,044  

$ 54,757  

$ 55,054  

Inventories are stated net of inventory reserves of approximately $ 6.9 million and $ 9.1 million, as of March 31, 2022 and December 31, 2021, respectively.

Intangible Assets

Intangible assets as of September 30, 2021 and December 31, 2020 consisted of the following:

Nine Months Ended September 30, 2021

Intangible assets as of March 31, 2022 and December 31, 2021 consisted of the following:

Three Months Ended March 31, 2022

Currency Translation

20 unchanged sentences

$ 82,382  

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. 

The aggregate amortization expense related to intangible assets was $ 1.9 million for the three -month periods ended March 31, 2022 and 2021.

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

Changes in the carrying value of goodwill for the three -month ended March 31, 2022 were as follows:

Three Month Ended

March 31, 2022

Balance, beginning

$ 7,781  

Effect of foreign currency adjustments

Balance, ending September 30, 2021

Balance, ending

$ 7,625  

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:

September 30,

Accrued Expenses

Accrued expenses consist of the following:

Compensation and related expenses

4 unchanged sentences

Clinical trial costs

Financing lease liability - current

$ 15,233  

7 unchanged sentences

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

The Company had no accrued warranties as of September 30, 2021 and December 31, 2020 and has no history of claims paid.

The Company had no accrued warranties as of March 31, 2022 or December 31, 2021 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 has engaged in the arbitration process and does not anticipate a resolution during 2022.

The Company is unable to estimate the potential liability with respect to this matter at this time.

1 unchanged sentence

The Company intends to vigorously defend against the claims and believes it has strong defenses to the claims asserted.

Revenue and Geographic Information

Revenue by product family was as follows: 

Three Months Ended September 30,

Nine Months Ended September 30,

Joint Pain Management

$ 26,153  

$ 18,439  

Three Months Ended March 31,

OA Pain Management

$ 22,733  

3 unchanged sentences

12,219  

35,296  

26,233  

$ 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,

Percentage of

Geographic Location:

United States

$ 30,910  

$ 26,409  

Non-Orthopedic

$ 36,693  

$ 34,292  

Nine Months Ended September 30,

Revenue from the Company’s sole significant customer, DePuy Synthes Mitek Sports Medicine, part of the Johnson & Johnson Medical Companies, as a percentage of the Company’s total revenue was 39 % and 41 % for the three months ended March 31, 2022 and 2021, respectively.

The Company receives payments from its customers based on billing schedules established in each contract.

Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements.

Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional.

Deferred revenue was $ 0.3 million and $ 1.0 million as of March 31, 2022 and December 31, 2021, respectively.

Total revenue by geographic location based on the location of the customer in total and as a percentage of total revenue were as follows: 

Three Months Ended March 31,

Percentage of

6 unchanged sentences

$ 34,292  

11,181  

$ 111,973  

$ 97,769  

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.

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 subsequently amended on June 18, 2019, June 16, 2020 and June 16, 2021.

The 2017 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights (“SARs”), restricted stock awards, 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 SARs 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 

There were 0.9 million shares available for future grant at March 31, 2022 under the 2017 Plan.

The Anika Therapeutics, Inc.

2021 Inducement Plan (the “Inducement Plan”) was adopted by the Company’s board of directors on November 4, 2021.

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 with the Company.

The Inducement Plan provides for the grant of awards under terms substantially similar to the 2017 Plan (as amended).

There were 70,591 shares available for future grant at March 31, 2022 under the Inducement Plan.

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.

Stock-based awards are granted with an exercise price equal to or greater than 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 three 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,

Three Months Ended March 31,

Cost of revenue

4 unchanged sentences

$ 2,259  

$ 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.

 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 or, in the case of premium options, are granted with an exercise price at 110 % of the market price of the Company’s common stock on the date of grant.

Options generally vest in equal annual installments over a period of three 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.

16 unchanged sentences

$ 38.23  

Outstanding as of September 30, 2021

1,184,992  

$ 39.65  

Outstanding as of March 31, 2022

1,543,895  

Vested, September 30, 2021

$ 36.59  

Vested, March 31, 2022

485,869  

Vested and expected to vest, September 30, 2021

$ 41.89  

Vested or expected to vest, March 31, 2022

1,543,895  

$ 36.59  

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 aggregate intrinsic value of options exercised for the three -month period ended March 31, 2021 was immaterial.

The Company granted 416,197 stock options during the three -month ended March 31, 2022, of which 382,201 shares were premium-priced options.

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 Company estimates the fair value of TSRs using Monte-Carlo simulation model where the expected volatility assumption is evaluated over 6.3 years.

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.

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,

There were 104,638 TSRs as of March 31, 2022.

 The assumptions used in the Black-Scholes pricing model for options granted during the three months ended March 31, 2022 and 2021, along with the weighted-average grant-date fair values, were as follows:

Three Months Ended

Risk free interest rate

0.30% –

0.21% –

Expected life of options (in years)

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.

Expected volatility

53.8 %  

54.6 %  

54.8 %  

Expected life (years)

Expected dividend yield

Fair value per option

$ 11.37  

$ 13.90  

As of March 31, 2022, there was $ 11.8 million of unrecognized compensation cost related to unvested stock options.

This expense is expected to be recognized over a weighted average period of 2.1 years.

Restricted Stock Units

RSUs generally vest in equal annual installments over a three or four year periods.

RSUs generally vest in equal annual installments over a three -year period.

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:

The Company determines the fair value of RSUs based on the closing price of its common stock on the date of grant.

RSU activity for the three -month period ended March 31, 2022 was as follows:

Number of Shares

5 unchanged sentences

$ 25.75  

( 87,953 )  

$ 35.19  

Forfeited and cancelled

( 32,376 )  

Outstanding as of September 30, 2021

$ 35.27  

Outstanding as of March 31, 2022

712,781  

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.

$ 30.28  

The weighted-average grant-date fair value per share of RSUs granted was $ 34.07 for the three -month ended March 31, 2021.

The total fair value of RSUs vested was $ 3.3 million and $ 2.1 million for the three months period ended March 31, 2022 and 2021, respectively.

As of March 31, 2022, there was $ 18.4 million of unrecognized compensation cost related to time-based RSUs, which was expected to be recognized over a weighted-average period of 2.4 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:

PSU activity for the three -month ended March 31, 2022 was as follows:

Number of Shares

Weighted Average

Weighted Average Fair Value

Outstanding as of December 31, 2021

1 unchanged sentence

$ 37.44  

Performance factor adjustment

$ 32.53  

( 19,125 )  

$ 32.53  

Forfeited and cancelled

( 23,400 )  

Outstanding as of September 30, 2021

$ 41.86  

Outstanding as of March 31, 2022

117,897  

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).

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.

$ 34.98  

The total fair value of PSUs vested was $ 0.6 million for the three -month period ended March 31, 2022.

As of March 31, 2022, none of the milestones related to the outstanding PSUs were expected to be achieved.

Employee Stock Purchase Plan

On March 17, 2021, the Company adopted the 2021 Employee Stock Purchase Plan (“ESPP”).

The ESPP is authorized to issue up to 200,000 shares of common stock to participating employees.

Employees that participate in the Company’s ESPP may purchase up to a maximum of 800 shares per six -month offering period or $ 25,000 worth of common stock per calendar year by authorizing payroll deductions of up to 10 % of their base salary.

The purchase price for each share purchased is 85 % of the lower of the fair market value of the common stock on the first or last day of the offering period.

The Company uses the Black-Scholes pricing model to determine the fair value of shares purchased under the ESPP.

The calculation of the fair value of shares purchased is affected by the stock price on the grant date, the expected volatility of the Company’s stock over the expected term and the risk-free interest rate.

The estimated fair value of shares purchased under the ESPP were based on the following assumptions:

Risk-free interest rate

Expected stock price volatility

Expected life of options (in years)

Expected dividend yield

The Company recorded an income tax benefit of $ 0.8 million for the three -month period ended March 31, 2022, resulting in an effective tax rate of 20.9 %.

The income tax benefit was $ 1.6 million for the three -month period ended March 31, 2021, based on an effective tax rate of ( 133.6 %).

The net change in the effective tax rate for the three -month period ended March 31, 2022, as compared to the same period in 2021, was primarily due to the discrete tax benefit on the decrease in the fair value of contingent consideration that occurred in the first quarter of 2021.

The Company’s effective tax rate for the first quarter of 2022 primarily reflects statutory rates, offset partially by a reduction of stock compensation related tax deductions.

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.

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, which varies by jurisdiction.

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 Company’s deferred income tax assets to offset future taxable income and tax liabilities.

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

On December 31, 2021, the Company released a valuation allowance that had been previously recorded related to its net deferred tax assets in Italy in the amount of $ 0.9 million.

The Company did not record a valuation allowance on its deferred tax balances as of March 31, 2022.

Earnings Per Share ( “

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

Basic EPS is calculated by dividing net income (loss) 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,

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

Three Months Ended March 31,

Shares used in the calculation of basic EPS

1 unchanged sentence

14,343  

14,389  

14,202  

Effect of dilutive securities:

3 unchanged sentences

14,435  

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. 

The Company had a net loss during the three -month ended March 31, 2022, and therefore all potential common shares would have been anti-dilutive and accordingly were excluded from the computation of diluted EPS.

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

impact on EPS would have been anti-dilutive.

MANAGEMENT ’

18 unchanged sentences

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.

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 and/or enhanced with 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.

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 and accelerated our commercial infrastructure, especially in the United States, through our strategic acquisitions of Parcus Medical, a sports medicine and instrumentation solutions provider focused on soft tissue repair, and Arthrosurface, a company specializing in bone preserving partial and total joint replacement solutions.

Through these acquisitions, we have transformed our company.

We expanded our addressable market from the over $1 billion global OA pain management market to the over $8 billion 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 processes 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 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;

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 and increased focus on the ambulatory surgery centers site of care 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.

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.

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

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

There has been significant volatility in our results on a quarterly basis due to the worldwide cancellation or delay of elective procedures, 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.

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

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.

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.

Resurgence of COVID-19 as a result of emerging variants or other factors could result in additional staffing shortages or supply chain disruptions that could impact our business and operations.

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, volatility in elective surgical procedures or supply chain disruptions due to COVID-19 and its 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 and Orthovisc, our single- and multi-injection, HA-based viscosupplement product offerings indicated to provide pain relief from OA conditions solely for use in the knee.

Our OA 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.

The Monovisc and Orthovisc products have been the market leaders, based on combined overall revenue in the viscosupplement market, since 2018.

Internationally, we market our OA Pain Management products directly through a worldwide network of commercial distributors.

Cingal, our novel, third-generation, single-injection OA Pain Management product consisting of our proprietary cross-linked HA material combined with a fast-acting steroid.

Cingal is designed to provide both short- and long-term pain relief.

Cingal is CE Mark approved and for several years has been sold outside the United States directly in over 30 countries through our network of distributors.

In the United States, Cingal is a pipeline product currently under clinical trial studies and is not available for commercial sale.

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

Joint Preservation and Restoration

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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.

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

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

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.

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.

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.

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

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

Regenerative Solutions .

Our portfolio of orthopedic regenerative solutions leveraging 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 hardware fixation, such as suture anchors and Hyalofast, a biodegradable support for human bone marrow mesenchymal stem cells used for cartilage regeneration and as an adjunct for microfracture surgery.

Tactoset cleared and commercialized principally in the United States, whereas Hyalofast is CE Mark approved and currently available outside the United States in over 30 countries within Europe, South America, Asia, and certain other international markets.

In the United States, Hyalofast is a product under clinical trial studies and is not available for commercial sale.

We currently commercialize Bone Preserving Joint Technologies, Soft Tissue Repair products, and Tactoset (from our Regenerative Solutions portfolio) in the United States by selling to hospitals and ambulatory surgery centers, through an independent network of sales representatives and distributors, and utilize our distributor network for sales in certain international markets.

Non-Orthopedic

Our Non-Orthopedic product family consists of legacy HA-based products that are marketed principally for non-orthopedic applications.

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

These Non-Orthopedic products are sold through commercial sales and marketing partners around the world.

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,

(in thousands, except percentages)

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Three Months Ended March 31,

(in thousands, except percentages)

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Selling, general and administrative

Goodwill impairment

Change in fair value of contingent consideration

Total operating expenses

Income (loss) from operations

Interest and other expense, net

Income (loss) before income taxes

Provision for (benefit from) income taxes

Net income (loss)

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,

(in thousands, except percentages)

Joint Pain Management

Joint Preservation and Restoration

Nine Months Ended September 30,

(Loss) income from operations

Interest and other income (expense), net

(Loss) income before income taxes

Benefit from for income taxes

Net (loss) income

Revenue for the three-month period ended March 31, 2022 was $36.7 million, an increase of $2.4 million as compared to $34.3 million for the three-month period ended March 31, 2021.

The increase in revenue was primarily driven by continued recovery from the impact of the COVID-19 pandemic on sales volumes and ordering patterns.

Three Months Ended March 31,

(in thousands, except percentages)

Joint Pain Management

OA Pain Management

Joint Preservation and Restoration

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.

Non-Orthopedic

Revenue from our OA Pain Management product family increased 18% for the three-month period ended March 31, 2022, as compared to the same period in 2021, due primarily to continued recovery from the impact of the COVID-19 pandemic on global sales volumes and strategic partner and distributor ordering patterns which can vary significantly on a quarterly basis.

Revenue from our Joint Preservation and Restoration product family decreased 1% for the three-month period ended March 31, 2022, as compared to the same period in 2021, due primarily to the impact of limitations on access to customers during the early part of the quarter due to a surge in COVID-19 cases caused by a new variant.

Revenue from our Non-Orthopedic product family decreased 34% for the three-month ended March 31, 2022, as compared to the same period in 2021, primarily due to timing of distributor sales as well as due to higher revenues from certain legacy products related to end-of-life purchases during the first quarter of 2021.

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.

Gross profit for the three-month period ended March 31, 2022 increased $0.8 million to $21.8 million, representing a 59% gross margin for the period as compared to 61% in the prior year.

The increase in gross profit for the three-month period ended March 31, 2022, as compared to the same period in 2021, was primarily resulted from increased revenue.

Gross margin for the three-month period ended March 31, 2022, decreased compared to the same period of prior year due primarily to unfavorable production volumes caused partially by supply chain and staffing challenges, due largely to the impact of the COVID-19 pandemic, and increased inventory reserves.

The gross margin included the impact of inventory step-up associated with the Arthrosurface and Parcus Medical acquisitions, as well as acquisition-related amortization expenses, which together increased cost of revenue by $1.6 million, or 5 points of gross margin, for the three-month period ended March 31, 2022, as compared to increased cost of revenue of $4.1 million, or 12 points of gross margin, for the same period in 2021.

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.

Research and development expenses for the three-month period ended March 31, 2022 were $6.2 million, a decrease of $0.2 million as compared to the same period in 2021.

This decrease was primarily due to lower clinical trial activity.

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.

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. 

Selling, general and administrative expenses for the three-month period ended March 31, 2022 were $19.2 million, an increase of $1.0 million, as compared to the same period in 2021.

This increase for the three-month period ended March 31, 2022 was due to expansion of our commercial capabilities in the United States and expanded marketing activities and other operational capabilities to support the growing business needs.

Certain marketing and medical education activities also were more limited in 2021 due to the COVID-19 pandemic.

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.

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.

The fair value of contingent consideration as of March 31, 2022 did not change compared to December 31, 2021.

In the three-month period ended March 31, 2021, the fair value of our contingent consideration liabilities decreased by $4.8 million resulting in a non-cash benefit to net income recorded in that period.

The benefit from income taxes was $0.8 million for the three-month period ended March 31, 2022, resulting in an effective tax rate of 20.9%.

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

The net change in the effective tax rate for the three-month period ended March 31, 2022, as compared to the same period in 2021, was primarily due to the discrete tax benefit on the decrease in the fair value of contingent consideration that occurred in the first quarter of 2021.

Our effective tax rate for the first quarter of 2022 primarily reflects statutory rates, offset partially by a reduction of stock compensation related tax deductions.

Net (Loss) Income

For the three-month period ended March 31, 2022, net loss was $2.9 million, or $0.20 per diluted share, compared to net income of $2.8 million, or $0.20 per diluted share, for the same period in prior year.

The decrease in net income and diluted earnings per share was primarily due to the nonrecurring gain recorded in the first quarter of 2021 related to the change in fair value of contingent consideration, as well as increased spending to expand our commercial capability in the United States, partially offset by increased revenue.

Non-GAAP Financial Measures

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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 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 three- and nine-month periods ended September 30, 2021 and 2020, respectively:

Three Months Ended September 30,

Nine Months Ended September 30,

Product rationalization charges

The following is a reconciliation of adjusted gross profit to gross profit for the three-month periods ended March 31, 2022 and 2021, respectively:

Three-Month Periods Ended March 31,

Acquisition related intangible asset amortization

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Adjusted gross margin

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.

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 gross profit for the three-month period ended March 31, 2022 decreased $1.8 million to $23.4 million representing adjusted gross margin of 64%.

Adjusted gross profit for the three-month period ended March 31, 2021 was $25.1 million, or adjusted gross margin of 73%.

This decrease in adjusted gross profit and adjusted gross margin for the three-month period ended March 31, 2022 as compared to 2021, is due primarily to unfavorable production volumes and increased inventory reserves caused in part 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.

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

We have also excluded the impact of 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.

There are a number of limitations related to the use of adjusted EBITDA rather than net (loss) income, 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;

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, amortization and depreciation of acquired assets in recent acquisitions, and the impact of inventory fair-value step up on cost of revenue;

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.

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,

The following is a reconciliation of adjusted EBITDA to net (loss) income for the three-month periods ended March 31, 2022 and 2021, respectively:

Three Months Ended March 31,

(in thousands)

Net income (loss)

Net (loss) income

Interest and other expense, net

Provision for (benefit) from income taxes

Benefit from income taxes

Depreciation and amortization

Stock-based compensation

Product rationalization charges

Acquisition related expenses

Share-based compensation

Acquisition related intangible asset amortization

Acquisition related inventory step up

Goodwill impairment

Change in fair value of contingent consideration

Adjusted EBITDA

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.

Adjusted EBITDA in the three-month period ended March 31, 2022 decreased $2.2 million as compared with the same period in 2021.

The decrease in adjusted EBITDA for the period was primarily due to lower adjusted gross profit, from unfavorable production volumes and increased inventory reserves caused in part by supply chain and staffing challenges due largely to the impact of the COVID-19 pandemic, as well as increased commercial spending to support future growth as certain marketing and medical education activities were more limited in 2021.

Adjusted Net (Loss) Income and Adjusted EPS

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

We define adjusted net (loss) income as our net (loss) income excluding amortization and depreciation of acquired assets, the impact of inventory fair-value step up on cost of revenue and changes in the fair value of contingent consideration, on a tax effected basis.

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,

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

 The following is a reconciliation of adjusted net (loss) income to net (loss) income for the three-month periods ended March 31, 2022 and 2021, respectively:

Three Months Ended March 31,

(in thousands)

Net income (loss)

Product rationalization charges, tax effected

Acquisition related expenses, tax effected

Net (loss) income

Acquisition related intangible asset amortization, tax effected

Acquisition related inventory step up, tax effected

Goodwill impairment, tax effected

Change in fair value of contingent consideration, tax effected

Adjusted net income

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,

Diluted earnings (loss) per share

Product rationalization charges, tax effected

Acquisition related expenses per share, tax effected

Change in fair value contingent consideration, tax effected

Adjusted net (loss) income

The following is a reconciliation of adjusted diluted EPS to diluted EPS for the three-month periods ended March 31, 2022 and 2021, respectively:

Three Months Ended March 31,

Diluted (loss) earnings per share

Acquisition related intangible asset amortization, tax effected

Acquisition related inventory step up, tax effected

Goodwill impairment, tax effected

Change in fair of value contingent consideration, tax effected

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.

Change in fair value contingent consideration, tax effected

Adjusted diluted (loss) earnings per share

Adjusted net (loss) income and adjusted diluted (loss) earnings per share in the three-month period ended March 31, 2022 decreased $2.3 million and $0.17, respectively, as compared with the same period in 2021.

The decrease for the period was primarily due to a lower adjusted gross profit, from unfavorable production volumes and increased inventory reserves caused in part by supply chain and staffing challenges due largely to the impact of the COVID-19 pandemic, as well as increased commercial spending to support future growth as certain marketing and medical education activities were more limited in 2021.

Liquidity and Capital Resources

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

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, 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 continue to generate cash from operating activities and believe that our operating cash flows, cash currently on our condensed consolidated 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 $90.3 million and $94.4 million, and working capital totaled $138.3 million and $138.7 million, at March 31, 2022 and December 31, 2021, 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.

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

as administrative agent, amended and restated our existing revolving line of credit agreement dated October 24, 2017 which 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 of March 31, 2022, and December 31, 2021, there were no outstanding borrowings, and we are in compliance with the terms of the credit facility.

Summary of Cash Flows (in thousands):

Three Months Ended March 31,

Cash provided by (used in)

Operating activities

Investing activities

Financing activities

Effect of exchange rate changes on cash

Net (decrease) in cash and cash equivalents

The following changes contributed to the net change in cash and cash equivalents in the three-month period ended March 31, 2022 as compared to the same period in 2021.

Operating Activities

Cash used in operating activities was $1.9 million for the three-month period ended March 31, 2022, as compared to cash used in operating activities of $2.4 million for the same period in 2021.

The decrease in cash used in operating activities in 2021 was primarily due to an improvement in working capital attributable to timing of collections, decrease in inventories and lower income tax payments.

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

Cash used in investing activities was $1.3 million for the three-month period ended March 31, 2022, as compared to cash provided by investing activities of $1.7 million for the same period in 2021.

The change was primarily due to an increase in capital expenditures to support commercial growth of the business in the three-month period ended March 31, 2022 and proceeds from maturities of investments that occurred in 2021.

Financing Activities

Cash used in financing activities was $0.9 million for the three-month period ended March 31, 2022, as compared to cash used in financing activities of $0.5 million for the same period in 2021.

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

Critical Accounting Policies and Estimates

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.

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

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

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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.  

Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.

Recent Accounting Pronouncements

A discussion of Recent Accounting Pronouncements is included in our 2020 Form 10-K and is updated in the Notes to the consolidated financial statements included in this report.

A discussion of Recent Accounting Pronouncements is included in our 2021 Form 10-K for the fiscal year ended December 31, 2021 and is updated in the Notes to the condensed consolidated financial statements included in this report.

Contractual Obligations and Other Commercial Commitments

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

in our 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.

in our 2021 Form 10-K for the year ended December 31, 2021.

There were no material changes to our contractual obligations reported in our 2021 Form 10-K during the three months ended March 31, 2022.

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

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

3 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements