What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2023-03-16 compared with 2022-03-11 · 145 added, 174 removed, 340 unchanged (48% of the section changed)

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We currently intend to retain earnings, if any, for use in our business and do not anticipate paying cash dividends on our common stock in the foreseeable future.

Payment of future dividends, if any, on our common stock will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, anticipated cash needs, and plans for expansion.

Payment of future dividends, if any, on our common stock will be at the discretion of our Board of Directors after considering various factors, including our financial condition, operating results, anticipated cash needs, and plans for expansion.

Performance Graph

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

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

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

No open market repurchases were made during the years ended December 31, 2021 and 2022.

Securities Authorized for Issuance Under Equity Compensation Plans

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

SELECTED FINANCIAL DATA

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

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

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

MANAGEMENT ’

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Based on our collaborations with clinicians to understand what they need most to treat their patients, we develop minimally invasive products that restore active living for people around the world.

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

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

We are committed to leading in high opportunity spaces within orthopedics, including OA, pain management, regenerative solutions, sports medicine and Arthrosurface joint solutions (previously Bone Preserving Joint Solutions).

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

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

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

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

Through these acquisitions, we have transformed our company.

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

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

These acquisitions, have ignited the transformation of our company by augmenting our HA-based OA pain management and regenerative products with a broad suite of products and capabilities focused on early intervention joint preservation primarily in upper and lower extremities such as shoulder, foot/ankle, knee and hand/wrist.

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

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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 sports medicine soft tissue repair products;

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

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

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Key Developments during the Year Ended December 31, 2022

We completed enrollment of the U.S.

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

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

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

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

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

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

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

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

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

COVID-19 Pandemic

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

Year ended December  

31, 2021 compared to year ended December  

31, 2020 ”

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

Strengthened #1 U.S.

market share position for 2022 in OA Pain Management with single-injection Monovisc and multi-injection Orthovisc (SmartTRAK 2022 data).

In August 2022, DePuy Mitek extended our license and supply agreement for Orthovisc for another 5-year term through December 2028.

Continued accelerated growth of Tactoset, Anika’s regenerative solution for insufficiency fractures and soft tissue hardware augmentation, with multiple planned 510(k)s targeting further expansion.

Cingal, Anika’s next generation, non-opioid, single-injection HA-based product combined with fast-acting steroid, successfully achieved its primary endpoint in a third Phase III clinical trial, Cingal 19-01, which demonstrated the superiority of Cingal over steroid alone, for OA pain relief at 26 weeks.

Together with previous studies, Cingal has shown superiority over each of its active ingredients and placebo, consistently demonstrating strong and durable pain relief in OA patients.

Engaging with the FDA regarding next steps for U.S.

regulatory approval and exploring the potential to advance Cingal through commercial partnerships in the U.S.

and select Asian markets.

Submitted multiple 510(k)s for a new innovative HA-based regenerative rotator cuff system, which will further build upon Anika's growing and differentiated shoulder portfolio.

Hyalofast has been designated as a Breakthrough Device by the FDA, allowing prioritized interaction and review.

Approaching full enrollment in pivotal Phase III clinical trial with 199 of 200 subjects enrolled.  Company expects to be on track to file for a Premarket Approval (PMA) with the FDA in 2025.

Completed development of RevoMotion Reverse Shoulder Arthroplasty System, with limited market release initiated and first surgeries performed in Q1 2023.

RevoMotion’s differentiated bone preserving design expands Anika’s shoulder arthroplasty portfolio in the over $800 million U.S.

reverse shoulder market and offers the industry’s smallest diameter threaded glenoid baseplate.

Received 510(k) clearance and launched new X-Twist Fixation System, Anika’s cornerstone suture anchor system, with full market launch in early 2023 following successful limited launch in the second half of 2022.

X-Twist is a key addition to Anika’s portfolio and is uniquely positioned to address the needs of surgeons performing high volume soft tissue repair procedures such as rotator cuff repair and ankle stabilization surgeries.

Impact of COVID-19 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, staffing shortages and supply chain disruptions, as well as the impact on timelines associated with certain clinical studies.

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

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

This pandemic caused an economic downturn globally, which created volatility in our results 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.

Please see the section captioned “Part I.

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

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

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

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

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

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

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

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

The impact of these challenges is currently unknown but could be significant and we continue to take precautions so as not to disrupt our business.

OA Pain Management

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

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

Cingal, our novel, next-generation, single-injection OA Pain Management product consisting of our proprietary cross-linked HA material combined with a fast-acting steroid, designed to provide both short- and long-term pain relief, which is currently sold outside the United States in over 35 countries;

and Hyvisc, our high molecular weight injectable HA veterinary product.

Joint Preservation and Restoration

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

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

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

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

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Statement of Operations Detail

Year Ended December 31,

Years Ended December 31,

(in thousands, except percentages)

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Selling, general & administrative

Goodwill impairment

Change in fair value of contingent consideration

Total operating expenses

Income (loss) from operations

(Loss) income from operations

Interest and other expense, net

Income (loss) before income taxes

(Loss) income before income taxes

Benefit from income taxes

Net income (loss)

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

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

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

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

Net (loss) income

The following table presents revenue by product family for fiscal years 2022 and 2021 (dollars in thousands): 

Years Ended December 31,

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Non-Orthopedic

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

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

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

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

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

Revenue for the year ended December 31, 2022 was $156.2 million, an increase of $8.4 million, or 6%, compared to the prior year.

The increase in revenue was driven by recovery outside the U.S.

from the initial impact of the COVID-19 pandemic on sales volumes and related strategic partner ordering patterns, as well as from growing global commercial adoption of our products.

Revenue from our OA Pain Management product family increased 9% for the year ended December 31, 2022, as compared to prior year, due primarily to higher international sales on recovery from the initial impact of the COVID-19 pandemic, favorable ordering patterns and growth in adoption of our products globally.

The increase was also a result of growth in Mitek revenues as well as higher veterinary sales on favorable order patterns and COVID-19 recovery. 

Revenue from our Joint Preservation and Restoration product family increased 4% for the year ended December 31, 2022, as compared to prior year, due to improving elective procedure volumes and rapidly growing commercial adoption of our newest products.

Revenue from our Non-Orthopedic product family decreased 18% for the year ended December 31, 2022, as compared to prior year, primarily due to timing of distributor sales as well as last-time purchases of legacy products during 2021.

Gross Profit and Margin

Gross profit for the year ended December 31, 2022 was $93.6 million, or gross margin of 60%, as compared with $82.9 million, or gross margin of 56%, for the year ended December 31, 2021.

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

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

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

The increase in gross profit for the year ended December 31, 2022, primarily resulted from higher revenue growth and the conclusion of the amortization of inventory step-up costs related to the 2020 Arthrosurface and Parcus Medical acquisitions.

This increase was partially offset by higher product rationalization charges, as well as higher manufacturing-related costs.

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

These expenses together increased cost of revenue by $6.2 million, or 7 points of gross margin, for the year ended December 31, 2022, as compared to increased cost of revenue of $12.7 million, or 9 points of gross margin for the same periods in 2021.

Research and Development

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

Research and development expenses for the year ended December 31, 2022 were $28.2 million, an increase of $0.9 million, or 3%, as compared to the prior year, primarily due to increased costs to ensure compliance with growing regulatory requirements globally as well as new product development associated with our research and development pipeline.

Also included in research and development expenses are clinical costs.

We completed a third Phase III clinical trial for Cingal in 2022, which achieved its primary endpoint, and made significant progress in completing enrollment in our Hyalofast clinical trial.

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

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Selling, general and administrative, or SG&A, expenses for the year ended December 31, 2022 were $84.8 million, an increase of $10.7 million, or 14%, as compared to the prior year.

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

Goodwill Impairment Charge

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

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

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

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

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

There were no goodwill impairment charges during 2021.

The increase in SG&A expenses for the year ended December 31, 2022 was primarily related to the expansion of our commercial capability in the United States, including increased marketing, medical education and other operational capabilities to support our growing business needs, as well as increased commissions on higher sales.

The growth in SG&A expenses also reflects the increase in certain activities that were curtailed in the early stages of the COVID-19 pandemic, such as travel, as well as higher stock-based compensation expense driven by the growth in personnel to support Anika’s strategic transformation, and higher general corporate costs.

Contingent Consideration Fair Value Change

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

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

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

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

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

In September 2022, we made a milestone payment in connection with the Parcus Medical acquisition in the amount of $4.3 million.

As of December 31, 2022, we do not expect that any additional milestones associated with the Parcus Medical and Arthrosurface acquisitions to be achieved.

The benefit from income taxes was $3.9 million for the year ended December 31, 2022, resulting in an effective tax rate of 20.7%.

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

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

The increase in our effective rate for the year ended December 31, 2022 as compared to the year ended December 31, 2021 is primarily due to the change in fair value of contingent consideration and the release of the valuation allowance related to the net deferred tax assets in Italy during 2021.

Net Income (Loss)

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

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

For the year ended December 31, 2022, net loss was $14.9 million, or $1.02 per diluted share, compared to net income of $4.1 million, or $0.28 per diluted share, for the prior year.

The decrease in net income and diluted earnings per share was primarily due to the net of tax benefit of $17.0 million recorded in 2021 related to the reduction in fair value of contingent consideration, as well as higher operating expenses in 2022 primarily driven by increased spending to expand our commercial capability and development of new products, partially offset by higher revenues and favorable gross profit in 2022.

Non-GAAP Financial Measures

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

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

We have presented adjusted gross profit and adjusted gross margin, adjusted EBITDA, adjusted net income, adjusted EPS, because they are key measures used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business.

We believe these financial measures help identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude.

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

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

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

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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.

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

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

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Adjusted gross profit for the year ended December 31, 2021 was $98.1 million, or 66% of revenue.

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

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

The increase in adjusted gross profit for the year ended December 31, 2022 as compared to 2021, primarily resulted from the growth of revenue.

There was no change in adjusted gross margin for the year ended December 31, 2022 as compared to 2021, as the benefits of higher revenue and related production volumes were offset by increased costs and the continued impact of global supply chain and staffing challenges that arose following 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.

We have also excluded the impacts of goodwill impairment charges and changes in the fair value of contingent consideration associated with our acquisition transactions in early 2020.

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

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

We have also excluded the impact changes in the fair value of contingent consideration associated with our acquisition transactions in early 2020.

Adjusted EBITDA is not prepared in accordance with U.S.

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

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

GAAP equivalent.

Some of these limitations are:

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

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

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

we exclude certain impairment charges, including impairment related to In-Process Research and Development, or IPR&D, assets, certain product rationalization charges, the impact of COVID-19 and changing regulatory requirements;

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

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Years Ended December 31,

Net income (loss)

Net (loss) income

Interest and other expense, net

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IPR&D impairment

Acquisition related expenses

Acquisition related intangible asset amortization

Acquisition related inventory step up

Goodwill impairment

Change in fair value of contingent consideration

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Adjusted EBITDA for year ended December 31, 2022, decreased $3.8 million as compared to 2021.

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

Adjusted Net Income (Loss) and Adjusted EPS

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

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

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

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

Acquisition related expenses consist of investment banking, legal, accounting, and other professional and related expenses.

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

These assets include the estimated fair value of certain identified assets acquired in acquisitions, including in-process research and development, developed technology, customer relationships and acquired tradenames.

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

These assets include the estimated fair value of certain identified assets acquired in acquisitions, including in-process research and development, or IPR&D, developed technology, customer relationships and acquired trade names.

We define adjusted EPS as U.S.

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

The following is a reconciliation of adjusted net income (loss) to net income (loss) for the years ended December 31, 2022 and 2021, respectively:

Years Ended December 31,

Net income (loss)

Net (loss) income

Product rationalization charges, tax effected

IPR&D impairment, tax effected

Acquisition related expenses, tax effected

Acquisition related intangible asset amortization, tax effected

Acquisition related inventory step up

Goodwill impairment, tax effected

Acquisition related inventory step up, tax effected

Change in fair value of contingent consideration, tax effected

Adjusted net income (loss)

Adjusted net loss

The following is a reconciliation of adjusted EPS to diluted earnings (loss) per share for the years ended December 31, 2022 and 2021, respectively (in thousands, expect per share data):

Years Ended December 31,

Diluted earnings (loss) per share

Diluted (loss) earnings per share

Product rationalization charges, tax effected

IPR&D impairment, tax effected

Acquisition related expenses per share, tax effected

Acquisition related intangible asset amortization, tax effected

Acquisition related inventory step up

Goodwill impairment, tax effected

Change in fair value contingent consideration, tax effected

Adjusted diluted earnings (loss) per share

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

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

Adjusted diluted loss per share

Adjusted net loss in 2022, increased by $6.7 million as compared to 2021.

The increase in adjusted net loss for the period was primarily due to an increase in selling and marketing expenses to support our commercial capability in the United States, an increase in research and development expenses and an increase in stock-based compensation expense.

Results of Operations

Year ended December  

31, 2021 compared to year ended December  

Statement of Operations Detail  

Year Ended December 31,

Statement of Operations Detail

Years Ended December 31,

(in thousands, except percentages)

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Income (loss) from operations

Interest and other income (expense), net

Interest and other expense, net

Income (loss) before income taxes

Provision for (benefit from) income taxes

Benefit from income taxes

Net income (loss)

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

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

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

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Non-orthopedic

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

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

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

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

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

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

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

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

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

Gross Profit and Margin

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

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

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

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

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

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

Research and Development

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

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

Business—

Research and Development ”

in this Annual Report on Form 10-K.

Selling, General and Administrative

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

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

Goodwill Impairment Charge

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

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

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

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

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

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

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

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

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

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

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

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

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

There were no goodwill impairment charges during 2021.

Contingent Consideration Fair Value Change

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

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

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

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

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

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

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

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

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

Net Income (Loss)

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

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

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

Concentration of Risk

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For the year ended December 31, 2022, Mitek accounted for 43% of revenue, as compared to 45% in prior year.

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

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

The failure of these customers to purchase our products in the amounts they historically have or in amounts that we expect could materially impact our business.

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Accordingly, unless and until we diversify and expand our customer base, our future success will significantly depend upon the timing and size of future purchases by our largest customers and the financial and operational success of these customers.

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

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

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

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

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

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

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

Cash, cash equivalents, and investments aggregated $86.3 million and $94.4 million, and working capital totaled $141.6 million and $138.7 million, at December 31, 2022 and 2021, respectively. 

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

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

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

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

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Effect of exchange rate changes on cash

Net (decrease) increase in cash and cash equivalents

Net decrease in cash and cash equivalents

The following changes contributed to the net change in cash and cash equivalents from 2021 to 2022.

Operating Activities

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

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

Cash provided by operating activities was $4.4 million, $8.4 million, $13.1 million for 2022, 2021 and 2020. The change in 2022 was primarily attributable to an increase in operating spending largely attributable to expansion of our commercial capability in the United States and an increase in product development costs, partially offset by an increase in product sales.

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

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

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Investing Activities

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

Investing activities used $7.5 million, $3.1 million, $71.3 million in 2022, 2021 and 2020.

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

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Cash used in financing activities was $4.9 million, $6.8 million and $3.8 million for 2022, 2021 and 2020.

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

The change in 2022 was primarily due to lower payments of contingent consideration compared to 2021. 

For a discussion of our liquidity and capital resources as of December 31, 2021, and our cash flow activities for the fiscal year ended December 31, 2021, see “Part II, Item 7.

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of our annual report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 10, 2022, which is incorporated by reference in this Report.

Contractual Obligations and Other Commercial Commitments

The table below summarizes our non-cancelable operating leases, purchase commitments, and contractual obligations related to future periods which are not reflected in our consolidated balance sheet at December 31, 2022.

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Payments due by period (in thousands)

Operating and Finance Leases

Purchase Commitments (1)

Operating Leases

Year Ended December 31, 2022

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

Accounting for Off-Balance Sheet Arrangements

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

We also have purchase orders and commitments for materials and other day-to-day business requirements in which there are no material commitments greater than one year.

Critical Accounting Policies and Estimates

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We base our assumptions on the estimated revenue attributable to the trade name and the estimated royalty rate attributable to the trade name.

We use the avoided costs/lost profits method to determine the fair of customer relationships.

We use the avoided costs/lost profits method to determine the fair value of customer relationships.

This approach determines fair value by estimating the projected revenues related to the asset and estimated costs to recreate the intangible asset.

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

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

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

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

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

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

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

As of December 31, 2022, there were no more remaining regulatory or net sales milestones related to Parcus Medical or Arthrosurface expected to be achieved.

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

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

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

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

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

As of December 31, 2022, there was no contingent consideration for Parcus Medical or Arthrosurface.

Revenue Recognition –

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

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

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

These arrangements may include the grant of certain licenses, performance of development services, and the supply of product.

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We record royalty revenues based on estimated net sales of licensed products as reported to us by our commercial partners.

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

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

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

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therefore, the value of unsatisfied performance obligations at the end of any reporting period is generally insignificant.

We sell to a diversified base of distributors and, therefore, believes there is no material concentration of credit risk.

We sell to a diversified base of distributors and, therefore, we believe there is no material concentration of credit risk.

Certain of our supply agreements contain terms that represent a promise to deliver product at the customer’s discretion that are considered distributor options.

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Payment terms fall within the one-year guidance for the practical expedient, which allows us to forgo adjustment of the contractual payment amount of consideration for the effects of a significant financing component.

Our contracts with customers do not customarily provide a right of return, unless certain product quality standards are not met.

Some of our distributor agreements have volume-based discounts with tiered pricing which are generally prospective in nature.

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

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

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

Deferred revenue was $0 and $1.0 million as of December 31, 2022 and 2021, respectively.

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

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

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

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

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

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We have two reporting units:

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

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

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

The remaining goodwill as of December 31, 2022 pertains to the legacy Anika reporting unit, as the goodwill with respect to the Parcus Medical and Arthrosurface reporting unit was fully impaired in 2020.

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

When using the qualitative method in 2022, we considered several factors, including the following:

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

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

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

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

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

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

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

Based on sensitivity analysis performed on key assumptions at November 30, 2022, a 10% decrease in valuation multiples or a 10% increase in the weighted average cost of capital assumption would not have resulted in a fair value below the reporting unit’s carrying value.

Accordingly, we determined it was not more likely than not that the fair value of the legacy Anika reporting unit is less than its carrying amount and thus goodwill was not impaired as of November 30, 2022.

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

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

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

Based on a sensitivity analysis performed on key assumptions at November 30, 2022 with respect to the remaining IPR&D, a 10% decrease in the long-term growth factor assumption, or 10% increase in the weighted average cost of capital assumption would not have resulted in a fair value below the IPR&D carrying value.

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

What changed 10-K

Item 5. Market for Registrant’s Common Equity