Anika Therapeutics, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   ANIKA THERAPEUTICS,   INC. AND SUBSIDIARIES   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS   Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 58 Consolidated Balance Sheets as of December 31, 2022 and 2021 60 Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2022, 2021 and 2020 61 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020 62 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020 63 Notes to Consolidated Financial Statements 64                                         57     REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     To the Board of Directors and Stockholders of Anika Therapeutics, Inc.   Opinion on the Financial Statements   We have audited the accompanying consolidated balance sheets of Anika Therapeutics, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America (GAAP).   We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2023, expressed an adverse opinion on the Company's internal control over financial reporting.   Basis for Opinion   These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.   Critical Audit Matter   The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.   58     Inventories — Refer to Notes 2 and 5 to the financial statements   Critical Audit Matter Description   The Company evaluates inventory each reporting period for excess quantities and obsolescence, establishing reserves, when necessary, based upon historical experience, assessment of economic conditions, and expected demand. Once recorded, these reserves are considered permanent adjustments to the carrying value of inventory. As of December 31, 2022, the Company has total inventories of $56.5 million, net of excess quantities and obsolescence reserves.   We identified the reserve for excess quantities and obsolete inventory as a critical audit matter because of the significant estimates and assumptions management makes to quantify and to record the reserve, including the determination of expected demand. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the methodology and the reasonableness of assumptions including expected demand.   How the Critical Audit Matter Was Addressed in the Audit   Our audit procedures related to the reserve for excess quantities and obsolete inventory including management’s estimate of expected demand, included the following, among others:     • We tested the effectiveness of controls over inventory, including those over the estimation of reserves for excess quantities and obsolescence.     • We evaluated the reasonableness of the Company's excess and obsolete inventory policy, considering historical experience and the underlying assumptions.     • We tested the calculation of the excess and obsolescence reserve pursuant to the Company's policy, on a sample basis, including the completeness and accuracy of the data used in the calculation.     • We performed procedures to evaluate management’s ability to accurately forecast by comparing the historical expiring inventory estimates to subsequent inventory destructions and expirations.     • We performed a retrospective review by comparing management’s prior year projections of future demand by product, with actual sales in the current year to identify potential bias in the inventory reserve.     • We made inquiries of senior financial and operating management to determine whether any strategic, regulatory, or operational changes in the business were consistent with the projections of future demand that were utilized as the basis for the excess and obsolescence reserve recorded.     • We considered the existence of contradictory evidence based on consideration of internal communications to management and the board of directors, Company press releases, and analysts' reports, as well as any changes within the business.   /s/ Deloitte & Touche LLP   Boston, Massachusetts March 16, 2023   We have served as the Company’s auditor since 2017.   59       Anika Therapeutics, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except per share data)             As of  December 31,   ASSETS   2022     2021   Current assets:                 Cash and cash equivalents   $ 86,327     $ 94,386   Accounts receivable, net     34,627       29,843   Inventories     39,765       36,010   Prepaid expenses and other current assets     8,828       8,289   Total current assets     169,547       168,528   Property and equipment, net     48,279       47,602   Right-of-use assets     30,696       20,957   Other long-term assets     17,219       20,285   Deferred tax assets     1,449       -   Intangible assets, net     74,599       82,382   Goodwill     7,339       7,781   Total assets   $ 349,128     $ 347,535                     LIABILITIES AND STOCKHOLDERS ’ EQUITY                 Current liabilities:                 Accounts payable   $ 9,074     $ 7,633   Accrued expenses and other current liabilities     18,840       17,847   Contingent consideration     -       4,315   Total current liabilities     27,914       29,795   Other long-term liabilities     398       1,258   Deferred tax liability     6,436       10,157   Lease liabilities     28,817       19,240   Commitments and contingencies (Note 12)                     Stockholders’ equity:                 Preferred stock, $ 0.01 par value; 1,250 shares authorized, no shares issued and outstanding at December 31, 2022 and 2021, respectively     -       -   Common stock, $ .01 par value; 90,000 shares authorized, 14,625 and 14,441 shares issued and outstanding at December 31, 2022 and 2021, respectively     146       144   Additional paid-in-capital     81,141       67,081   Accumulated other comprehensive loss     ( 6,443 )     ( 5,718 ) Retained earnings     210,719       225,578   Total stockholders’ equity     285,563       287,085   Total liabilities and stockholders’ equity   $ 349,128     $ 347,535     The accompanying notes are an integral part of these consolidated financial statements.   60       Anika Therapeutics, Inc. and Subsidiaries Consolidated Statements of Operations and Comprehensive Income (Loss) (in thousands, except per share data)                 Years Ended December 31,       2022     2021     2020   Revenue   $ 156,236     $ 147,794     $ 130,457   Cost of revenue     62,660       64,851       61,431   Gross profit     93,576       82,943       69,026                             Operating expenses:                         Research & development     28,182       27,327       23,431   Selling, general & administrative     84,794       74,096       60,063   Goodwill impairment charge     -       -       42,520   Change in fair value of contingent consideration     -       ( 21,095 )     ( 28,666 ) Total operating expenses     112,976       80,328       97,348   (Loss) income from operations     ( 19,400 )     2,615       ( 28,322 ) Interest and other income (expense) , net     654       ( 188 )     ( 302 ) (Loss) income before income taxes     ( 18,746 )     2,427       ( 28,624 ) Benefit from for income taxes     ( 3,887 )     ( 1,707 )     ( 4,642 ) Net (loss) income   $ ( 14,859 )   $ 4,134     $ ( 23,982 )                           Net income (loss) per share:                         Basic   $ ( 1.02 )   $ 0.29     $ ( 1.69 ) Diluted   $ ( 1.02 )   $ 0.28     $ ( 1.69 )                           Weighted average common shares outstanding:                         Basic     14,561       14,401       14,222   Diluted     14,561       14,634       14,222                             Net (loss) income   $ ( 14,859 )   $ 4,134     $ ( 23,982 ) Foreign currency translation adjustment     ( 725 )     ( 1,176 )     1,356   Comprehensive (loss) income   $ ( 15,584 )   $ 2,958     $ ( 22,626 )   The accompanying notes are an integral part of these consolidated financial statements.   61     Anika Therapeutics, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (in thousands, except per share data)                                       Accumulated               Common Stock             Other     Total       Number of     $.01 Par     Additional Paid     Retained     Comprehensive     Stockholders'       Shares     Value     in Capital     Earnings     Loss     Equity   Balance, December 31, 2019     14,308     $ 143     $ 48,707     $ 245,426     $ ( 5,898 )   $ 288,378   Issuance of common stock for equity awards     123       1       1,523       –       –       1,524   Vesting of restricted stock units     54       –       –       –       –       –   Forfeiture of restricted stock awards     ( 9 )     –       –       –       –       –   Stock-based compensation expense     –       –       5,386       –       –       5,386   Retirement of common stock for minimum tax withholdings     ( 8 )     –       ( 262 )     –       –       ( 262 ) Repurchase of common stock     ( 139 )     ( 1 )     1       –       –       -   Net loss     –       –       –       ( 23,982 )     –       ( 23,982 ) Other comprehensive income     –       –       –       –       1,356       1,356   Balance, December 31, 2020     14,329     $ 143     $ 55,355     $ 221,444     $ ( 4.542 )   $ 272,400   Issuance of common stock for equity awards     32       -       1,128       -       -       1,128   Vesting of restricted stock units     92       1       ( 1 )     -       -       -   Stock-based compensation expense     -       -       11,085       -       -       11,085   Retirement of common stock for minimum tax withholdings     ( 12 )     -       ( 486 )     -       -       ( 486 ) Net income     -       -       -       4,134       -       4,134   Other comprehensive loss     -       -       -       -       ( 1,176 )     ( 1,176 ) Balance, December 31, 2021     14,441     $ 144     $ 67,081     $ 225,578     $ ( 5,718 )   $ 287,085   Issuance of common stock for equity awards     -       -       16       -       -       16   Vesting of restricted stock units     184       2       ( 2 )     -       -       -   Issuance of common stock from employee purchase plan     35       -       665       -       -       665   Stock-based compensation expense     -       -       14,315       -       -       14,315   Retirement of common stock for minimum tax withholdings     (35 )     -       ( 934 )     -       -       ( 934 ) Net loss     -       -       -       ( 14,859 )     -       ( 14,859 ) Other comprehensive loss     -       -       -       -       ( 725 )     ( 725 ) Balance, December 31, 2022     14,625     $ 146     $ 81,141     $ 210,719     $ ( 6,443 )   $ 285,563       The accompanying notes are an integral part of these consolidated financial statements.   62     Anika Therapeutics, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands)       Years Ended December 31,       2022     2021     2020   Cash flows from operating activities:                         Net (loss) income   $ ( 14,859 )   $ 4,134     $ ( 23,982 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities:                         Depreciation     6,704       6,480       6,083   Amortization of acquisition related intangible assets     7,783       7,837       7,381   Amortization of acquisition related inventory step-up     -       6,465       11,082   Non-cash operating lease cost     1,850       1,708       1.531   Goodwill impairment charge     -       -       42,520   Change in fair value of contingent consideration     -       ( 21,095 )     ( 28,666 ) Loss on disposal of fixed assets     -       993       265   Loss on impairment of intangible asset     -       600       2,439   Stock-based compensation expense     14,315       11,085       5,386   Deferred income taxes     ( 5,270 )     ( 1,766 )     ( 3,543 ) Provision for doubtful accounts     378       64       549   Provision for inventory     5,329       6,628       5,490   Other     -       ( 18 )     ( 12 ) Changes in operating assets and liabilities:                         Accounts receivable     ( 5,630 )     ( 6.216 )     5,855   Inventories     ( 6,873 )     ( 6,619 )     ( 14,177 ) Prepaid expenses, other current and long-term assets     ( 792 )     1,424       ( 1,783 ) Accounts payable     1,965       ( 1,100 )     822   Operating lease liabilities     ( 1,485 )     ( 1,626 )     ( 1,439 ) Accrued expenses, other current and long-term liabilities     ( 443 )     3,510       ( 142 ) Income taxes     1,437       ( 1,311 )     ( 2,072 ) Payments of contingent consideration     -       ( 2,780 )     ( 522 ) Net cash provided by operating activities     4,409       8,397       13,065                             Cash flows from investing activities:                         Acquisition of Parcus Medical and Arthrosurface, net of cash acquired     -       ( 476 )     ( 94,601 ) Proceeds from maturities of investments     -       2,501       45,000   Purchases of investments     -       -       ( 20.035 ) Purchases of property and equipment     ( 7,486 )     ( 5,143 )     ( 1,628 ) Net cash (used in) provided by investing activities     ( 7,486 )     ( 3,118 )     ( 71,264 )                           Cash flows from financing activities:                         Payments made on finance leases     ( 284 )     ( 201 )     ( 208 ) Proceeds from long-term debt     -       -       50,000   Repayments of long-term debt     -       -       ( 50,350 ) Proceeds from employee stock purchase program     665       -       -   Cash paid for tax withheld on vested restricted stock awards     ( 934 )     ( 486 )     ( 262 ) Proceeds from exercises of equity awards     16       1,128       1,524   Payments of contingent consideration     ( 4,315 )     ( 7,220 )     ( 4,478 ) Net cash used by financing activities     ( 4,852 )     ( 6,779 )     ( 3,774 )                           Exchange rate impact on cash     ( 130 )     69       327                             Decrease in cash and cash equivalents     ( 8,059 )     ( 1,431 )     ( 61,646 ) Cash and cash equivalents at beginning of period     94,386       95,817       157,463   Cash and cash equivalents at end of period   $ 86,327     $ 94,386     $ 95,817   Supplemental disclosure of cash flow information:                         Cash paid for income taxes, net of refunds   $ 106     $ 1,233     $ 993   Right-of-use assets obtained in exchange for operating lease liabilities   $ 11,703     $ 220     $ -   Non-cash investing activities:                         Purchases of property and equipment included in accounts payable and accrued expenses   $ 108     $ 15     $ 17   Consideration for acquisitions included in accounts payable and accrued expenses   $ -      $ -     $ 476   Contingent consideration fair value on acquisition date     0       0       69,076     The accompanying notes are an integral part of these consolidated financial statements.   63     Anika Therapeutics,   Inc. and Subsidiaries Notes to Consolidated Financial Statements (amounts in thousands, except share and per share amounts or as otherwise noted)   1. Nature of Business   Anika Therapeutics, Inc. (“the Company”) is a global joint preservation company that creates and delivers meaningful advancements in early intervention orthopedic care, including in the areas of osteoarthritis (“OA”) pain management, regenerative solutions, sports medicine and bone preserving joint solutions.   In early 2020, the Company expanded its overall technology platform through its strategic acquisitions of Parcus Medical, LLC (“Parcus Medical”), a sports medicine implant and instrumentation company, and Arthrosurface Inc. (“Arthrosurface”), a company specializing in less invasive, bone preserving partial and total joint replacement solutions. These acquisitions broadened the Company's product portfolio, developed over its 30 years of expertise in hyaluronic acid technology, into joint preservation and restoration, added higher-growth revenue streams, increased its commercial capabilities, diversified its revenue base, and expanded its product pipeline and research and development expertise.   The Company is subject to risks common to companies in the life sciences industry including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, commercialization of existing and new products, and compliance with U.S. Food and Drug Administration (“FDA”) and foreign regulations and approval requirements, as well as the ability to grow the Company’s business through appropriate commercial strategies.   Since the global COVID pandemic began in 2020, there also continues to be increased volatility and uncertainty in the global macroeconomic environment, including staffing shortages, supply chain disruption, inflation and other direct and indirect impacts of the pandemic.     2. Summary of Significant Accounting Policies   Use of Estimates   The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.   Principles of Consolidation   The accompanying consolidated financial statements include the accounts of Anika Therapeutics, Inc. and its wholly owned subsidiaries, Anika Securities, Inc., Anika Therapeutics S.r.l. (“Anika S.r.l.”), Anika Therapeutics Limited, Parcus Medical and Arthrosurface. All intercompany balances and transactions have been eliminated in consolidation.   Foreign Currency Translation   The functional currency of Anika S.r.l. is the Euro, and the functional currency of Anika Therapeutics Limited is the British Pound Sterling. Assets and liabilities of the foreign subsidiaries are translated using the exchange rate existing on each respective balance sheet date. Revenues and expenses are translated using the average exchange rates for the period. The translation adjustments resulting from this process are included in stockholders’ equity as a component of accumulated other comprehensive income (loss) which resulted in a gain (loss) from foreign currency translation of ($ 0.7 ) million, ($ 1.2 ) million, and $ 1.3 million for the years ended December 31, 2022, 2021, and 2020, respectively.   Gains and losses resulting from foreign currency transactions are recognized in the consolidated statements of operations. Recorded balances that are denominated in a currency other than the functional currency are remeasured to the functional currency using the exchange rate at the balance sheet date and gains or losses are recorded in the statements of operations. The Company recognized a gain (loss) from foreign currency transactions of ($ 0.5 ) million, ($ 0.4 ) million, and $ 0.3 million during the years ended December 31, 2022, 2021, and 2020, respectively   64     Accounts Receivable   The Company estimates an allowance for credit losses with its accounts receivable resulting from the inability of its customers to make required payments, which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. In determining the adequacy of the allowance, management specifically analyzes individual accounts receivable, historical bad debts, customer concentrations, customer creditworthiness, current and reasonable and supportable forecasts of future economic conditions, accounts receivable aging trends, and changes in the Company’s customer payment terms.   The components of the Company’s accounts receivables are as follows:       As of December 31,       2022     2021   Accounts Receivable   $ 36,235     $ 31,285   Allowance for credit losses     1,608       1,442   Net balance, end of the year     34,627       29,843     A summary of activity in the allowance for credit losses is as follows:       As of December 31,       2022     2021     2020   Balance, beginning of the year   $ 1,442     $ 1,523     $ 962   Amounts provided     554       156       635   Amounts recovered     ( 180 )     ( 92 )     ( 86 ) Amounts written off     ( 158 )     ( 73 )     ( 78 ) Translation adjustments     ( 50 )     ( 72 )     90   Balance, end of the year   $ 1,608     $ 1,442     $ 1,523     Revenue Recognition   Pursuant to Accounting Standard Codification 606, Revenue from Contracts with Customers (“ASC 606” ), the Company recognizes revenue when a customer obtains control of promised goods or services. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company applies the following five -step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are capable of being distinct or distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.   Revenue   The Company generates sales principally through three types of customers: (i) commercial partnerships (ii) hospitals and ambulatory surgical centers (“ASCs”), and (iii) distributors, referred to as the distribution model.   For commercial partnership sales, the Company sells its 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. The Company’s largest such customer, DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopedics, Inc., part of the Johnson & Johnson Medical Companies (“Mitek”), represented 43 %, 45 % and 49 % of total revenues for the years-ended December 31, 2022, 2021 and 2020 respectively. The Company completed the performance obligations related to granted licenses and development services under the agreements with Mitek prior to 2016 and has no remaining material performance obligations. The Company recognizes revenue from product sales when the customer obtains control of the Company’s product, which typically occurs upon shipment to the customer. Commercial partnership agreements may also include sales-based royalties and milestones. As the Company considered the license to be the predominant item to which the royalties relate for these agreements, sales-based royalties and milestones are only recognized when the later of the underlying sale occurs or the performance obligation to which the sales-based royalty has been satisfied (or partially satisfied). This is generally in the same period that the Company’s licensees complete their product sales in their territory, for which the Company is contractually entitled to a percentage-based royalty. The Company records royalty revenues based on estimated net sales of licensed products as reported to the Company by its commercial partners. 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 revenue in the consolidated statement of operations. The Company’s certain supply agreements represent a promise to deliver products at the customer’s discretion that are considered distributor options. The Company assesses if these options provide a material right to the licensee, and if so, they are accounted for as separate performance obligations. Substantially all of the Company’s supply agreements do not provide options that are considered material rights.   65     For sales to hospitals and ASCs, which generally pairs in-house sales representatives with local or regional distributors, the inventory is generally consigned so that products are available when needed for surgical procedures. No revenue is recognized upon the placement of inventory into consignment, as the Company retains the ability to control the inventory. Revenue is typically recognized as of the date of surgical implantation of the product.   For distributor sales, the Company sells its products principally to distributors, generally outside the United States, who subsequently resell the products to sub-distributors and health care providers, among others. The Company recognizes revenue from product sales when the distributor obtains control of the Company’s product, which typically occurs upon shipment to the distributor, in return for agreed-upon, fixed-price consideration. Performance obligations are generally settled quickly after purchase order acceptance; therefore, the value of unsatisfied performance obligations at the end of any reporting period is generally insignificant. The Company sells to a diversified base of distributors and, therefore, believes there is no material concentration of credit risk.   The Company’s payment terms are consistent with prevailing practice in the respective markets in which the Company does business. Most of the Company’s customers make payments based on contract terms, which are not affected by contingent events that could impact the transaction price. Payment terms fall within the one -year guidance for the practical expedient, which allows the Company to forgo adjustment of the contractual payment amount of consideration for the effects of a significant financing component.   Some of the Company’s distributor agreements have volume-based discounts with tiered pricing which are generally prospective in nature. These prospective discounts together with any free-of-charge sample units offered are evaluated as potential material rights. If the prospective discounts or free-of-charge sample units are considered material rights, these would be separate performance obligations and a portion of the sales transaction price is allocated to the material right. Revenue allocated to the material right is recognized when the additional goods are transferred to the customer or when the option expires. During 2022 and 2021, the consideration allocated to material rights was not significant.   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 its right to consideration is unconditional. Deferred revenue was $ 0 and $ 1.0 million as of December 31, 2022 and 2021, respectively.   Generally, customer contracts contain Free on Board (“FOB”) or Ex-Works shipping point terms where the customer pays the shipping company directly for all shipping and handling costs. In those contracts in which the Company pays 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. Value-add and other taxes collected by the Company concurrently with revenue-producing activities are excluded from revenue. The Company’s general product warranty does not extend beyond an assurance that the product or services delivered will be consistent with stated contractual specifications, which does not create a separate performance obligation. The Company recognizes the incremental costs of obtaining contracts as an expense when incurred as the amortization period of the assets that the Company otherwise would have recognized is one year or less in accordance with the practical expedient in paragraph ASC 340 - 40 - 25 - 4. These costs are included in selling, general and administrative expenses.   Licensing, Milestone and Contract Revenue   The agreements with Mitek include variable consideration such as contingent development and regulatory milestones. Since 2016, there have been no remaining regulatory milestones related to the Mitek agreements. In general, variable consideration is included in the transaction price only to the extent a significant reversal in the amount of cumulative revenue recognized is not probable to occur.   Cash and Cash Equivalents   The Company considers only those investments which are highly liquid, readily convertible to cash, and that mature within 90 days from the date of purchase to be cash equivalents. The Company’s cash equivalents consist of money market funds.   66     Investments   All of the Company’s investments are classified as available-for-sale which consist of U.S. treasury bills and are carried at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income (loss), net of related income taxes. For securities sold prior to maturity, the cost of securities sold is based on the specific identification method. Realized gains and losses on the sale of investments are recorded in interest and other income, net. Interest is recorded when earned. Investments with original maturities greater than approximately three months and remaining maturities less than one year are classified as short-term investments. Investments with remaining maturities greater than one year are classified as long-term investments. The Company had no investments as of December 31, 2022 or December 31, 2021.   All of the Company’s investments are subject to a periodic impairment review. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether (i) the Company intends to sell, or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through earnings. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors.   Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in the consolidated statement of operations as a component of credit loss expense. Available-for-sale securities are charged-off against the allowance or, in the absence of any allowance, written down through earnings when deemed uncollectible by management or when either of the criteria regarding intent or requirement to sell is met.   During the years ended  December  31, 2022, 2021 and 2020, the Company did not record any impairment charges on its available-for-sale securities because it is not more likely than not that the Company will be required to sell these securities before the recovery of their cost basis.   Concentration of Credit Risk   The Company has no significant off-balance sheet risks related to foreign exchange contracts, option contracts, or other foreign hedging arrangements. The Company’s cash equivalents and investments are held with two major international financial institutions.   The Company, by policy, routinely assesses the financial strength of its customers. As a result, the Company believes that its accounts receivable credit risk exposure is limited.   As of December  31, 2022 and 2021, Mitek represented 47 % and 41 %, respectively, of the Company’s accounts receivable balance. No other single customer accounted for more than 10% of accounts receivable in either period.   Inventories   Inventories are primarily stated at the lower of standard cost and net realizable value, with cost determined using the first -in, first -out method. Work-in-process and finished goods inventories include materials, labor, and certain manufacturing overhead. Manufacturing variances attributable to abnormally low production are expensed in the period incurred.     The Company’s policy is to write down inventory when conditions exist that suggest inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for the Company’s products and market conditions. The Company regularly evaluates the ability to realize the value of inventory based on a combination of factors including, but not limited to, historical usage rates, forecasted sales or usage, product end of life dates, and estimated current or future market values. Purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure.   When recorded, inventory write-downs are intended to reduce the carrying value of inventory to its net realizable value. If actual demand for the Company’s products deteriorates, or if market conditions are less favorable than those projected, additional inventory write-downs may be required. Other long-term assets include inventory expected to remain on hand beyond one year.   Leases   At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the circumstances present and evaluates whether the lease is an operating lease or a finance lease at the commencement date. Operating and finance leases with a term greater than one year are recognized on the consolidated balance sheet as right-of-use assets, lease liabilities, and, if applicable, long-term lease liabilities. The Company includes renewal options to extend the lease in the lease term where it is reasonably certain that it will exercise these options. Operating and finance lease liabilities and the corresponding right-of-use assets are recorded based on the present values of lease payments over the lease terms. The Company elected an accounting policy to combine the non-lease components (which include common area maintenance, taxes and insurance) with the related lease component. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rates, which are the rates that would be incurred to borrow on a collateralized basis, over similar terms, amounts equal to the lease payments in a similar economic environment. Variable payments that do not depend on a rate or index are not included in the lease liability and are recognized as incurred. Lease contracts do not include residual value guarantees nor do they include restrictions or other covenants. Certain adjustments to the right-of-use assets may be required for items such as initial direct costs paid, incentives received or lease prepayments. If significant events, changes in circumstances, or other events indicate that the lease term or other inputs have changed, the Company would reassess lease classification, remeasure the finance and operating lease liabilities by using revised inputs as of the reassessment date, and adjust the right-of-use asset. Operating lease expense is recognized on a straight-line basis over the lease term. Finance lease expense is recognized based on the effective-interest method over the lease term.   67     Property and Equipment   Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, which are typically:   Asset   Estimated useful life (in years)   Computer equipment and software     3       -       10   Furniture and fixtures     5       -       7   Equipment     5       -       20   Leasehold improvements           Shorter of useful life or term of lease             Maintenance and repairs are charged to expense when incurred; additions and improvements are capitalized. Fully depreciated assets are retained in the accounts until they are no longer used and no further charge for depreciation is made in respect of these assets. When an item is sold, retired or removed from service, the cost and related accumulated depreciation is relieved, and the resulting gain or loss, if any, is recognized in income.   Construction-in-process assets are stated at cost, which includes the cost of construction and other direct costs attributable to the construction. Construction-in-process assets are not depreciated until such time as the relevant assets are completed and put into use.   Goodwill and IPR&D Assets   Goodwill is the amount by which the purchase price of acquired net assets in a business combination exceeded the fair values of net identifiable assets on the date of acquisition. Acquired In-Process Research and Development (“IPR&D”) represents the fair value assigned to research and development assets that the Company acquires that have not been completed at the date of acquisition or are pending regulatory approval in certain jurisdictions. The value assigned to the acquired IPR&D is determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting revenue from the projects, and discounting the net cash flows to present value.     Goodwill and IPR&D are not amortized but are evaluated for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The goodwill impairment assessment is performed by reporting unit. A reporting unit is the operating segment, or a business one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. The Company has two reporting units: the legacy Anika reporting unit, which specializes in therapies based on its hyaluronic acid, or HA, technology platform, and a newly formed reporting unit established in 2020 upon the acquisitions of Parcus Medical and Arthrosurface. Factors that the Company considers important, on an overall company basis, that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the Company’s use of the acquired assets or the strategy for its overall business, significant negative industry or economic trends, a significant decline in the Company’s stock price for a sustained period, or a reduction of its market capitalization relative to net book value.   68     Under U.S. GAAP, the Company has the option to perform a qualitative assessment to determine if it is necessary to perform the impairment test. If the Company concludes, based on a qualitative assessment, it is not more likely than not that the Goodwill or the IPR&D asset is impaired, the Company is not required to perform the quantitative test. The Company has an unconditional option to bypass the qualitative assessment in any period and proceed directly to the quantitative impairment test.   To conduct quantitative impairment tests of goodwill, the fair value of the reporting unit is compared to its carrying value. If the reporting unit’s carrying value exceeds its fair value, the Company records an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value, not to exceed the recorded amount of goodwill. The Company recorded a non-cash goodwill impairment charge with respect to the newly formed reporting unit amounted to $ 42.5 million for the year ended December 31, 2020. Please see Note 8, Goodwill for further details.   The Company performed a qualitative annual assessment for impairment of the remaining goodwill with respect to legacy Anika reporting unit as of November 30, 2022, including consideration of (i) general macroeconomic factors, (ii) industry and market conditions, and (iii) the extent of the excess of the fair value over the carrying value indicated in prior impairment testing. Accordingly, the Company determined it was not more likely than not that the fair value of the legacy Anika reporting unit is less than its carrying amount and thus goodwill was not impaired as of November 30, 2022.   To conduct impairment tests of IPR&D, the fair value of the IPR&D project is compared to its carrying value. If the carrying value exceeds its fair value, the Company records an impairment loss to the extent that the carrying value of the IPR&D project exceeds its fair value. The Company estimates the fair value for IPR&D using the income approach, which is based on the Multi-Period Excess Earnings Method (“MPEEM”). MPEEM measures economic benefit indirectly by calculating the income attributable to an asset after appropriate returns are paid to complementary assets used in conjunction with the subject asset to produce the earnings associated with the subject asset, commonly referred to as contributory asset charges. This approach incorporates significant estimates and assumptions related to the forecasted results including revenues, expenses, expected economic life of the asset, contributory asset charges and discount rates to estimate future cash flows.   Long-Lived Assets   Long-lived assets primarily include property and equipment and intangible assets with finite lives. The Company’s intangible assets are comprised of purchased developed technologies, patents, trade names, customer relationships and distributor relationships. These intangible assets are carried at cost, net of accumulated amortization. Amortization is recorded on a straight-line basis over the intangible assets' useful lives, which range from approximately five  to  sixteen  years. The Company reviews long-lived assets for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis.   In determining the useful lives of intangible assets, the Company considers the expected use of the assets and the effects of obsolescence, demand, competition, anticipated technological advances, changes in surgical techniques, market influences and other economic factors. For technology-based intangible assets, the Company considers the expected life cycles of products, absent unforeseen technological advances, which incorporate the corresponding technology.   Fair Value Measurements   Fair value is defined as the price that would be received from selling an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance. The accounting standard establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.   A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs that may be used to measure fair value are:     • Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 instruments include securities traded on active exchange markets, such as the New York Stock Exchange.     • Level 2 – Valuation is based upon quoted prices, unadjusted, for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are directly observable in the market.   69       • Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions market participants would use in pricing the instrument.   The Company’s financial assets have been classified as Level 1. The Company’s financial assets (which include cash equivalents and investments) have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing third party pricing services. The Company’s financial liabilities have been classified as Level 3. The Company’s financial liabilities (which include contingent considerations as discussed in Note 4 – Fair Value Measurements ) have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing a third -party valuation specialist.   Research and Development   Research and development costs consist primarily of salaries and related expenses for personnel, clinical trial expenses and fees paid to outside consultants and outside service providers. Research and development costs are expensed as incurred.   Stock-Based Compensation   The Company has stock-based compensation plans under which it grants various types of equity-based awards, the cost of which is based on the grant-date fair value of the underlying award and recognized over the period during which an employee is required to provide service in exchange for the award, which is generally the vesting period.   For performance-equity awards with market-based conditions, compensation cost is measured at the date of the award and is recorded over the vesting period, regardless of the likelihood of achievement of the market-based performance criteria. For performance-based equity awards with financial and business milestone achievement targets, compensation cost is based on the probable outcome of the performance conditions. Changes to the probability assessment and the estimated shares expected to vest will result in adjustments to the related stock-based compensation expense that will be recorded in the period of the change. If the performance targets are not achieved, no compensation cost is recognized, and any previously recognized compensation cost is reversed.   See Note 14, Equity Incentive Plan , for a description of the types of stock-based awards granted, the compensation expense related to such awards, and detail of equity-based awards outstanding.   Income Taxes   We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets, or DTAs, and deferred tax liabilities, or DTLs, for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine DTAs and DTLs based on the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on DTAs and DTLs is recognized in income in the period that includes the enactment date.   We recognize DTAs to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under the tax law, and results of recent operations.   We record uncertain tax positions in accordance with ASC 740, Income Taxes , on the basis of a two -step process in which ( 1 ) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and ( 2 ) for those tax positions that meet the more-likely-than- not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Interest and penalties associated with income tax filings are recorded in income tax expense.   Comprehensive Income (Loss)   Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), which includes foreign currency translation adjustments. For the purposes of comprehensive income (loss) disclosures, the Company does not record tax provisions or benefits for the net changes in the foreign currency translation adjustment, as it intends to indefinitely reinvest undistributed earnings of its foreign subsidiary. Accumulated other comprehensive income (loss) is reported as a component of stockholders' equity.   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 December 31, 2022. Based on the criteria established by ASC 280, Segment Reportin g, the Company has one operating and reportable segment.   Contingencies   In the normal course of business, the Company is involved from time-to-time in various legal proceedings and other matters such as contractual disputes, which are complex in nature and have outcomes that are difficult to predict. The Company records accruals for loss contingencies to the extent that it concludes that it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. The Company considers all relevant factors when making assessments regarding these contingencies. Although the outcomes of any potential legal proceedings are inherently difficult to predict, the Company does not expect the resolution of any potential legal proceedings to have a material adverse effect on its financial position, results of operations, or cash flow.   70     Recent Issued Accounting Pronouncements   No new accounting pronouncements issued or effective during the period had, or are expected to have, a material impact on the consolidated financial statements.     3. Business Combinations   Parcus Medical, LLC   On January 24, 2020, the Company completed the acquisition of Parcus Medical pursuant to the terms of the Agreement and Plan of Merger, dated as of January 4, 2020 ( the “Parcus Medical Merger Agreement”), by and among the Company, Parcus Medical, the Unitholder Representative, and Sunshine Merger Sub LLC, a Wisconsin limited liability company and a wholly owned subsidiary of the Company. At the closing date, Parcus Medical became a wholly owned subsidiary of the Company. Parcus Medical is a sports medicine implant and instrumentation solutions provider focused on surgical repair and reconstruction of soft tissue.   The acquisition of Parcus Medical has been accounted for as a business combination under ASC 805, Business Combinations (“ASC 805” ). Under ASC 805, assets acquired and liabilities assumed in a business combination are recorded at their fair value as of the acquisition date. The Company’s consolidated financial statements include results of operations for Parcus Medical from the January 24, 2020 acquisition date.   Consideration Transferred   Pursuant to the Parcus Medical Merger Agreement, the Company acquired all outstanding equity of Parcus Medical for estimated total purchase consideration of $ 75.1 million, as of January 24, 2020 which consisted of:   Cash consideration   $ 32,794   Deferred consideration     1,642   Estimated fair value of contingent consideration     40,700   Estimated total purchase consideration   $ 75,136     71     Pursuant to the Parcus Medical Merger Agreement, contingent consideration represents additional payments that the Company may be required to make in the future could total up to $ 60.0 million depending on the level of net sales of Parcus Medical products generated from 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. 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. During the three months ended September 30, 2022, the Company paid contingent consideration of $ 4.3 million related to net sales of Parcus Medical products earned in 2021 that was recorded in contingent consideration at December 31, 2021. As of December 31, 2022, there were no milestones remaining.   Acquisition-related costs are not included as a component of consideration transferred but are expensed in the periods in which the costs are incurred. The Company incurred approximately $ 1.9 million in transaction costs related to the Parcus Medical acquisition during the three -month period ending March 31, 2020. The transaction costs have been included in selling, general and administrative expenses in the consolidated statements of operations.   Fair Value of Net Assets Acquired   The estimate of fair value as of the acquisition date required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable, however, actual results may differ from these estimates.   The allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on estimates of fair value as of January 24, 2020, and is as follows:   Recognized identifiable assets acquired and liabilities assumed:         Cash and cash equivalents   $ 196   Accounts receivable     2,029   Inventories     10,968   Prepaid expenses and other current assets     364   Property and equipment, net     1,099   Right-of-use assets     944   Intangible assets     44,000   Accounts payable, accrued expenses and other current liabilities     ( 2,763 ) Other long-term liabilities     ( 594 ) Lease liabilities     ( 735 ) Net assets acquired     55,508   Goodwill     19,628   Estimated total purchase consideration   $ 75,136     The acquired intangible assets based on estimates of fair value as of January 24, 2020 are as follows:   Developed technology   $ 41,100   Trade name     1,800   Customer relationships     1,100   Total acquired intangible assets   $ 44,000     The fair value of the developed technology intangible assets has been estimated using the multi-period excess earnings method, which is based on the principle that the value of an intangible asset is equal to the present value of the incremental after-tax cash flows 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.   72     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 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 8, Goodwill , for further discussion.   Arthrosurface, Inc.   On February 3, 2020, the Company completed the acquisition of Arthrosurface pursuant to the terms of the Agreement and Plan of Merger, dated as of January 4, 2020 ( the “Arthrosurface Merger Agreement”), by and among the Company, Arthrosurface, the Stockholder Representative, and Button Merger Sub, a Delaware corporation and a wholly owned subsidiary of the Company. At the closing date, Arthrosurface became a wholly owned subsidiary of the Company. Arthrosurface is a joint preservation technology company specializing in less invasive, bone-preserving partial and total joint replacement solutions.   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 are recorded at their fair values as of the acquisition date. Anika’s consolidated financial statements include results of operations for Arthrosurface from the February 3, 2020 acquisition date.   Consideration Transferred   Pursuant to the Arthrosurface Merger Agreement, the Company acquired all outstanding equity of Arthrosurface for estimated total purchase consideration of $ 90.3 million, as of February 3, 2020 which consisted of:   Cash consideration   $ 61,909   Estimated fair value of contingent consideration     28,376   Estimated total purchase consideration   $ 90,285     Pursuant to the Arthrosurface Merger Agreement, the Company could be required to make future payments 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. 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, 2022, there were no milestones remaining.   Acquisition-related costs are not included as a component of consideration transferred but are expensed in the periods in which the costs are incurred. The Company incurred approximately $ 2.2 million in transaction costs related to the Arthrosurface acquisition during the three -month period ending March 31, 2020. The transaction costs have been included in selling, general and administrative expenses in the consolidated statements of operations.   Fair Value of Net Assets Acquired   The estimate of fair value required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable. However, actual results may differ from these estimates.   73     The allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on estimates of fair value as of February 3, 2020, as follows:   Recognized identifiable assets acquired and liabilities assumed:         Cash and cash equivalents   $ 1,072   Accounts receivable     5,368   Inventories     15,652   Prepaid expenses and other current assets     535   Property, plant and equipment     3,394   Other long-term assets     7,548   Intangible assets     48,900   Accounts payable, accrued expenses and other liabilities     ( 3,929 ) Deferred tax liabilities     ( 11,147 ) Net assets acquired     67,393   Goodwill     22,892   Estimated total purchase consideration   $ 90,285     Intangible assets acquired consist of:         Developed technology   $ 37,000   Trade name     3,400   Customer relationships     7,900   IPR&D     600   Total acquired intangible assets   $ 48,900     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 that 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. See Note 7, Acquired Intangible Assets, Net, for further discussion .   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 8, 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 year ended December 31, 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.   74     The following table presents unaudited supplemental pro forma information:       Year Ended December 31, 2020   Total revenue   $ 134,410   Net loss   $ ( 22,984 )     4. Fair Value Measurements   There were no available-for-sale securities as of December 31, 2022 and 2021.   The Company’s investments are all classified within Levels 1 of the fair value hierarchy and are valued based on quoted prices in active markets. For cash, current receivables, accounts payable, and interest accrual, the carrying amounts approximate fair value, because of the short maturity of these instruments, and therefore fair value information is not included in the table below. Contingent consideration related to the previously described business combinations are classified within Level 3 of the fair value hierarchy as the determination of fair value uses considerable judgement and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability.    The classification of the Company’s cash equivalents and investments within the fair value hierarchy is as follows:               Active Markets     Significant Other     Significant                       for Identical Assets     Observable Inputs     Unobservable Inputs               December 31, 2022     (Level 1)     (Level 2)     (Level 3)     Amortized Cost   Cash equivalents:                                         Money Market Funds   $ 67,801     $ 67,801     $ -     $ -     $ 67,801                 Active Markets     Significant Other     Significant                       for Identical Assets     Observable Inputs     Unobservable Inputs               December 31, 2021     (Level 1)     (Level 2)     (Level 3)     Amortized Cost   Cash equivalents:                                         Money Market Funds   $ 67,046     $ 67,046     $ -     $ -     $ 67,046                                             Other current and long-term liabilities:                                         Contingent Consideration - Short Term   $ 4,315     $ -     $ -     $ 4,315     $ -     There were no transfers between fair value levels in 2022 or 2021.     75     Contingent Consideration   The following table provides a roll forward of the contingent consideration related to business acquisitions discussed in Note 3, Business Combinations.       Years Ended December 31       2022     2021   Balance, beginning January 1   $ 4,315     $ 35,410   Additions     -       -   Payments     ( 4,315 )     ( 10,000 ) Change in fair value     -       ( 21,095 ) Balance, ending December 31   $ -     $ 4,315     Under the Parcus Medical Merger Agreement and Arthrosurface Merger Agreement, there were earn-out milestones totaling up to $ 100 million payable from 2020 to 2022. Parcus Medical had net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface had both regulatory and net sales earn-out milestones annually in 2020 and 2021.   In order to determine the fair value of contingent consideration at each reporting date, the projected contingent payment amounts were 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 earn-out milestone ranged from 3.1 % - 3.4 %. The weighted average cost of capital for Parcus Medical decreased from 11.4 % as of December 31, 2020 to 11.3 % as of December 31, 2021. The weighted average cost of capital for Arthrosurface was 11.4 % as of December 31, 2020. Increases or decreases in the discount rate would result in a lower or higher fair value measurement, respectively.   As of December 31, 2021, a net sales growth milestone with respect to the Parcus Merger Agreement was achieved for 2021, and a liability in the amount of $ 4.3 million was recorded in current liabilities. This amount was paid in September 2022. 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. As of December 31, 2022, there were no milestones remaining.   The overall fair value of the contingent consideration decreased by $ 21.1 million and $ 28.7 million during the years ended December 31, 2021 and 2020, respectively, due primarily to the decrease in the likelihood that certain contingent milestones would be achieved.     5. Inventories   Total inventories included in the balance sheet consist of the following:       As of December 31,       2022     2021   Raw materials   $ 20,535     $ 16,881   Work-in-process     10,648       11,442   Finished goods     25,306       26,731   Total   $ 56,489     $ 55,054                     Inventories   $ 39,765     $ 36,010   Other long-term assets     16,724       19,044   Total   $ 56,489     $ 55,054     Inventories are stated net of inventory reserves of approximately $ 9.9 million and $ 9.1 million, as of December 31, 2022 and 2021, respectively.   76       6. Property   and Equipment   Property and equipment is stated at cost and consists of the following:       As of December 31,       2022     2021   Equipment and software   $ 52,112     $ 48,804   Furniture and fixtures     2,413       2,389   Leasehold improvements     34,916       34,614   Construction in progress     5,021       1,378   Subtotal     94,462       87,185   Less accumulated depreciation     ( 46,183 )     ( 39,583 ) Total   $ 48,279     $ 47,602     Depreciation expense was $ 6.7 million, $ 6.5 million, and $ 6.1 million for the years ended December  31, 2022, 2021, and 2020, respectively.     7. Acquired Intangible Assets, Net   Intangible assets consist of the following:               Year Ended December 31, 2022       Gross Cost     Less: Accumulated Currency Translation Adjustment     Less: Current Period Impairment Charge     Less: Accumulated Amortization     Net Book Value     Weighted Average Useful Life (in Years)   Developed technology   $ 89,580     $ ( 1,608 )   $ -     $ ( 23,686 )   $ 64,286       15   IPR&D     2,656       ( 1,006 )     -       -       1,650     Indefinite   Customer relationships     9,000       -       -       ( 2,627 )     6,373       10   Distributor relationships     4,700       ( 415 )     -       ( 4,285 )     -       5   Patents     1,000       ( 189 )     -       ( 680 )     131       16   Tradenames     5,200       -       -       ( 3,041 )     2,159       5   Total   $ 112,136     $ ( 3,218 )   $ -     $ ( 34,319 )   $ 74,599       13                 Year Ended December 31, 2021       Gross Cost     Less: Accumulated Currency Translation Adjustment     Less: Current Period Impairment Charge     Less: Accumulated Amortization     Net Book Value     Weighted Average Useful Life   Developed technology   $ 89,580     $ ( 1,608 )   $ -     $ ( 17,891 )   $ 70,081       15   IPR&D     3,256       ( 1,006 )     ( 600 )     -       1,650     Indefinite   Customer relationships     9,000       -       -       ( 1,727 )     7,273       10   Distributor relationships     4,700       ( 415 )     -       ( 4,285 )     -       5   Patents     1,000       ( 189 )     -       ( 632 )     179       16   Tradenames     5,200       -       -       ( 2,001 )     3,199       5   Total   $ 112,736     $ ( 3,218 )   $ ( 600 )   $ ( 26,536 )   $ 82,382       13     77     Total amortization expense with respect to the definite lived acquired intangible assets was $ 7.8 million for each of the years ended December 31, 2022 and 2021 and $ 7.4 million for the year ended December  31, 2020.   During the fourth quarter of 2021, the Company decided not to further invest in a joint technology IPR&D project, as it is no longer aligned with the Company’s core strategic focus. As a result, the Company recorded an impairment charge in the amount of $ 0.6 million in research and development expenses in the Company’s consolidated statements of operations.   During the fourth quarter of 2020, the Company decided not to further invest in its Hyalobone and Hyalonect IPR&D projects as they were no longer aligned with the Company’s core strategic focus. As a result, the Company recorded an impairment charge in the period totaling $ 1.4 million recorded in research and development expenses in the Company’s consolidated statements of operations.   The Company performed its annual assessment of the remaining IPR&D intangible asset as of November 30, 2022. The Company estimated the fair value of the IPR&D intangible assets using the income approach which is based on the Multi-Period Excess Earnings Method (“MPEEM”). MPEEM measures economic benefit indirectly by calculating the income attributable to an asset after appropriate returns are paid to complementary assets used in conjunction with the subject asset to produce the earnings associated with the subject asset, commonly referred to as contributory asset charges. This approach incorporates significant estimates and assumptions related to the forecasted results including revenues, expenses, expected economic life of the asset, contributory asset charges and discount rates to estimate future cash flows. While assumptions utilized are subject to a high degree of judgment and complexity, the Company made its best estimate of future cash flows under a high degree of economic uncertainty that existed as of November 30, 2022. In developing its assumptions, the Company also considered observed trends of its industry participants. No impairment existed as the estimated fair value of the remaining IPR&D intangible asset was greater than its carrying value.   During 2020, the Company determined that it would not pursue CE mark renewals for certain of its legacy products, which resulted in an impairment of certain developed technology related assets in the amount of $ 1.0 million in 2020. This impairment charge was recorded in selling, general and administrative expenses on the Company’s consolidated statements of operations.     8. Goodwill   The following table provides a roll forward of goodwill for the years ended December 31, 2022 and 2021:       Years Ended December 31       2022     2021   Balance, beginning January 1   $ 7,781     $ 8,413   Effect of foreign currency adjustments     ( 442 )     ( 632 ) Balance, ending December 31   $ 7,339     $ 7,781     In the first quarter of 2020, the Company acquired Parcus Medical and Arthrosurface, as further discussed in Note 3, Business Combinations . As a result of the acquisitions, the Company determined that it had two reporting units. It created a reporting unit in 2020 that included Parcus Medical and Arthrosurface, which share similar economic and qualitative characteristics. This reporting unit produces sports medicine surgical products, instruments and joint repair implants. The Company also has another reporting unit that comprises the legacy Anika business, which specializes in therapies based on its hyaluronic acid, or HA, technology platform. The Company impaired the Parcus Medical and Arthrosurface reporting unit in 2020. The remaining goodwill balance at December 31, 2022 and 2021 was related to the legacy Anika reporting unit.   As part of its annual impairment testing as of November 30 each year for the goodwill related to the legacy Anika reporting unit, the Company performed a qualitative assessment including consideration of (i) general macroeconomic factors, (ii) industry and market conditions, and (iii) the extent of the excess of the fair value over the carrying value indicated in prior impairment testing. The Company determined it was not more likely than not that the fair value of the legacy Anika reporting unit is less than its carrying amount and thus goodwill was not impaired as of November 30, 2022.   Government policy responses to the COVID- 19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of global elective surgical procedures. As a result, the widespread economic volatility triggered impairment testing in the first quarter of 2020, and accordingly, the Company performed interim impairment testing on the goodwill balances of its reporting units. The Company also performed its annual impairment testing in the fourth quarter of 2020.   78     The Company estimated the fair value of the reporting units using a discounted cash flow method, which is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the reporting units beyond the cash flows from the discrete projection period. The Company determined that a discounted cash flow model provided the best approximation of fair value of the reporting units for the purpose of performing the impairment test. This approach incorporates significant estimates and assumptions related to the forecasted results including revenues, expenses, the achievement of certain cost synergies, terminal growth rates and discount rates to estimate future cash flows. While assumptions utilized are subject to a high degree of judgment and complexity, the Company made its best estimate of future cash flows under a high degree of economic uncertainty that existed as of November 30, 2020. In developing its assumptions, the Company also considered observed trends of its industry participants.   For the legacy Anika reporting unit, the Company performed a qualitative assessment including consideration of (i) general macroeconomic factors, (ii) industry and market conditions, and (iii) the extent of the excess of the fair value over the carrying value indicated in prior impairment testing. The Company determined it was not more likely than not that the fair value of the legacy Anika reporting unit is less than its carrying amount and thus goodwill was not impaired as of March 31, 2020. As part of its annual impairment testing, the Company decided to perform a quantitative assessment related to the legacy Anika reporting unit as of November 30, 2020, due to the expectation that the economic recovery will take longer than expected to materialize. The results of the impairment test indicated that the estimated fair value of the legacy Anika reporting unit was greater than its carrying value, therefore the Company did not record any impairment charges related to the legacy Anika reporting unit for the year ended December 31, 2020.   For its newly created reporting unit, which includes Parcus Medical and Arthrosurface, the Company performed an interim quantitative assessment of goodwill impairment as of March 31, 2020. The Company estimated the fair value of the reporting unit using a discounted cash flow method. The results of the interim impairment test indicated that the estimated fair value of the reporting unit was less than its carrying value. This was primarily due to decreases in near term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures, primarily due to the COVID- 19 pandemic which directly impacted the reporting unit. Consequently, a non-cash goodwill impairment charge was recorded in the amount of $ 18.1 million during the first quarter of 2020. As part of its annual impairment testing, the Company performed a quantitative assessment related to the newly created reporting unit as of November 30, 2020. The results of the annual impairment test indicated that the estimated fair value of the reporting unit was less than its carrying value. 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. There was no remaining goodwill with respect to the newly created reporting unit as of December 31, 2020.     9. Leases   The Company leases its buildings and manufacturing facilities under operating leases. As of December 31, 2022, the Company had real estate leases in Bedford, Massachusetts, Franklin, Massachusetts, Sarasota, Florida, Warsaw, Indiana and Padova, Italy.   In June 2022, the Company finalized a renewal option to extend the current term for its operating headquarters and manufacturing facility in Bedford through 2027. There are also lease renewal options into 2038. The current term of the Padova lease extends to 2032, with a right to terminate at the Company’s option in 2026 without penalty.   As a result of the acquisition of Parcus Medical and Arthrosurface, the Company acquired operating and finance leases for corporate offices, manufacturing and warehouse facilities and machinery. The operating leases consist of one real estate lease in Franklin, Massachusetts (Franklin lease) and two real estate leases in Sarasota, Florida (Sarasota lease). In October 2022, the Company entered into an option to extend the current term of the Franklin lease through 2024. In June 2022, the Company finalized an option to extend the current term of the two Sarasota leases through 2027. The finance leases include equipment utilized in the Company’s manufacturing facility in Sarasota, Florida and were terminated in September 2022.   The significant assumptions in recognizing the right-of-use asset and lease liability are as follows:   Incremental borrowing rate . The Company derives its incremental borrowing rate from information available at the lease commencement date in determining the present value of lease payments. The incremental borrowing rate represents a collateralized rate of interest the Company would have to pay to borrow over a similar term an amount equal to the lease payments in a similar economic environment. The Company’s lease agreements do not provide implicit rates. As the Company did not have any external borrowings at either the transition or subsequent renewal dates with comparable terms to its lease agreements, the Company estimated its incremental borrowing rate based on its credit quality, line of credit agreement and by comparing interest rates available in the market for similar borrowings, and adjusting this amount based on the impact of collateral over the term of the lease. The weighted average discount rate at December 31, 2022 was 3.6 % for operating leases.   79     Lease term.  The lease term begins at the lease commencement date and is determined on that date based on the non-cancelable term of the lease together with periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option, or periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option.   The components of lease expense and other information are as follows:        Years Ended December 31       2022     2021     2020   Finance lease amortization of right-of-use assets   $ 121     $ 143     $ 185   Interest on finance lease liabilities     11       19       25   Finance lease expense     132       162       210   Operating lease expense     2,839       2,468       2,383   Short-term lease expense     17       2       -   Variable lease expense     413       319       264   Total lease expense   $ 3,401     $ 2,951     $ 2,857         Years Ended December 31       2022     2021   Weighted Average Remaining Lease Term (in years)                 Operating leases     14.8       15.3   Financing leases     -       2.3   Weighted Average Discount Rate                 Operating leases     3.6 %     4.1 % Financing leases     -       4.9 % Other information                 Operating cash flows from operating leases   $ 2,471     $ 2,392   Operating cash flows from financing leases   $ 121     $ 136     Future commitments due under these lease agreements as of December 31, 2022 are as follows:   Years ended December 31,   Operating Leases             2023   $ 3,170   2024     3,055   2025     3,066   2026     2,760   2027     2,643   Thereafter     25,230   Present value adjustment     ( 9,034 ) Present value of lease payments     30,890   Less current portion included in accrued expenses and other current liabilities     ( 2,073 ) Total lease liabilities   $ 28,817       10. Accrued Expenses   Accrued expenses consist of the following:       As of December 31,       2022     2021                     Compensation and related expenses   $ 11,303     $ 9,523   Professional fees     3,145       3,590   Operating lease liability- current     2,073       1,526   Clinical trial costs     999       1,961   Finance lease liability - current     -       188   Income taxes payable     810       -   Other     510       1,059   Total   $ 18,840     $ 17,847     80       11. Revolving Credit Agreement   On November 12, 2021, the Company, entered into a “Third Amendment to Credit Agreement” amending the existing revolving line of credit agreement dated October 24, 2017 with Bank of America, N.A., as administrative agent, swingline lender and issuer of letters of credit, for a $ 75.0 million senior revolving line of credit (the “Credit Agreement”). Subject to certain conditions, the Company may request up to an additional $ 75.0 million in commitments for a maximum aggregate commitment of $ 150.0 million, which requests must be approved by the Revolving Lenders (as defined in the Credit Agreement). Loans under the Credit Agreement generally bear interest at a rate equal to (a) the Bloomberg Short-Term Bank Yield Index, (“BSBY”), rate plus (b) an additional percentage that will range from 0.25 % to 1.00 %, based on the Company’s consolidated leverage ratio at the time of the borrowings. The Company is required to pay a commitment fee in an amount that is equal to 0.20 % to 0.30 % per annum, based on the Company’s consolidated leverage ratio, on the actual daily unused amount of the credit facility and that is due and payable quarterly in arrears. Loan origination costs are included as assets on the balance sheet and are being amortized over the five -year term of the Credit Agreement. As of December 31, 2022 and 2021, there were no outstanding borrowings under the Credit Agreement and the Company is in compliance with the terms of the Credit Agreement.    The Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including financial covenants, events of default, and indemnification provisions in favor of the Lenders. These include restrictive covenants that require the Company not to exceed certain maximum leverage and interest coverage ratios, limit its incurrence of liens and indebtedness, and its entry into certain merger and acquisition transactions or dispositions and place additional restrictions on other matters, all subject to certain exceptions. The Revolving Lenders has been granted a first priority lien and security interest in substantially all of the Company’s assets, except for certain intangible assets.   In April 2020, the Company borrowed $ 50.0 million available under the previous credit facility, with an initial applicable interest rate of 2.08 %, all of which were repaid during the year ended December 31, 2020. Interest expense for the years ended December 31, 2022, 2021 and 2020 was $ 0 , $ 0 , and $ 0.8 million, respectively.     12. Commitments and Contingencies   In certain of its contracts, the Company warrants to its customers that the products it manufactures conform to the product specifications as in effect at the time of delivery of the specific product. The Company may also warrant that the products it manufactures do not infringe, violate or breach any U.S. or international patent or intellectual property rights, trade secret, or other proprietary information of any third party. On occasion, the Company contractually indemnifies its customers against any and all losses arising out of, or in any way connected with, any claim or claims of breach of its warranties or any actual or alleged defect in any product caused by the negligent acts or omissions of the Company. The Company maintains a products liability insurance policy that limits its exposure to these risks. Based on the Company’s historical activity, in combination with its liability insurance coverage, the Company believes the estimated fair value of these indemnification agreements is immaterial. The Company had no accrued warranties at December 31, 2022 or 2021, respectively, 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 the first half of 2023. The Company is unable to estimate the potential liability with respect to this matter at this time. There are numerous factors that make it difficult to estimate reasonably possible loss or range of loss at this stage of the matter, including the significant number of legal and factual issues still to be resolved in the arbitration process. The Company intends to vigorously defend against the claims and believes it has strong defenses to the claims asserted.     13. Revenue and Geographic Information   The Company categorizes its product portfolio into three product families: OA Pain Management, Joint Preservation and Restoration, and Non-Orthopedic. Anika’s consolidated financial statements include results of operations for Parcus Medical from the January 24, 2020 acquisition date and Arthrosurface from the February 3, 2020 acquisition date.   81     Product revenue by product family is as follows:       Years Ended December 31,       2022     2021     2020       Revenue     Percentage of Product Revenue     Revenue     Percentage of Product Revenue     Revenue     Percentage of Product Revenue   OA Pain Management   $ 97,887       63 %   $ 89,503       61 %   $ 83,029       64 % Joint Preservation and Restoration     50,402       32 %     48,588       33 %     39,368       30 % Non-Orthopedic     7,947       5 %     9,703       6 %     8,060       6 % Total   $ 156,236       100 %   $ 147,794       100 %   $ 130,457       100 %   Effective January 1, 2023, the Company will begin to report revenue from product sales to veterinary customers within the Non-Orthopedic product family whereas such revenue had been reported within the OA Pain Management revenue product family. Revenue from product sales to veterinary customers amounted to $ 5.9 million, $ 4.4  million and $ 3.8 million for 2022, 2021 and 2020, respectively.   Product revenue from the Company’s sole significant customer, Mitek, as a percentage of the Company’s total product revenue was 43 %, 45 %, and 49 % for the years ended December 31, 2022, 2021, and 2020, respectively.   Total revenue by geographic location based on the location of the customer in total and as a percentage of total revenue are as follows:       Years Ended December 31,       2022     2021     2020       Total     Percentage of     Total     Percentage of     Total     Percentage of       Revenue     Revenue     Revenue     Revenue     Revenue     Revenue   Geographic Location:                                                 United States   $ 119,151       76 %   $ 113,833       77 %   $ 103,182       79 % Europe     20,639       13 %     19,580       13 %     14,179       11 % Other     16,446       11 %     14,381       10 %     13,096       10 % Total   $ 156,236       100 %   $ 147,794       100 %   $ 130,457       100 %   Net long-lived assets, consisting primarily of net property and equipment, are subject to geographic risks because they are generally difficult to move and to effectively utilize in another geographic area in a reasonable time period and because they are relatively illiquid. Net tangible long-lived assets by principal geographic areas are as follows:       Years Ended December 31,       2022     2021   United States   $ 47,068     $ 46,068   Italy     1,211       1,534   Total   $ 48,279     $ 47,602     82       14. Equity Incentive Plan   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 (“RSAs”), performance restricted stock units (“PSUs”), restricted stock units (“RSUs”), total shareholder return options (“TSRs”) and performance options that may be settled in cash, stock, or other property. In accordance with the 2017 Plan approved by the Company’s stockholders, including the amendments thereto, each share award other than stock options or SAR’s will reduce the number of total shares available for grant by two shares. Subject to adjustment for specified types of changes in the Company’s capitalization, no more than 4.6 million shares of common stock may be issued under the 2017 Plan. There are 1.2 million shares available for future grant at December 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 are 4,883 shares available for future grant at December 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 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 one to four years with a maximum contractual term of ten years.   The Company presents the expenses related to stock-based compensation awards in the same expense line items as cash compensation paid to each of its employees. For the year ended December 31, 2022, the tax benefit associated with stock-based compensation was $ 1.1 million. A summary of the stock-based compensation in the Company’s statements of operations is as follows (in thousands):         Years Ended December 31,       2022     2021     2020   Cost of revenue   $ 820     $ 716     $ 719   Research and development     1,646       1,233       713   Selling, general and administrative     11,849       9,136       3,954   Total stock-based compensation expense   $ 14,315     $ 11,085     $ 5,386     For the years ended December 31, 2022, 2021 and 2020, windfall tax benefits (expense) of $( 0.5 ) million, $ 0.1 million and $ 0.2 million, respectively, are associated with the stock-based compensation expense above.   The Company’s former President and Chief Executive Officer, Joseph Darling, passed away unexpectedly in January 2020. According to the terms of Mr. Darling’s equity award grants and the 2017 Plan, the unvested portion of his stock-based compensation was forfeited upon his death, resulting in a one -time benefit of $ 1.8 million that was fully recognized during the three -month period ended March 31, 2020 within selling, general and administrative expenses.   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 to four years and expire 10 years after the date of grant. The grant-date fair value of options is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.   83     The following summarizes the activity under the Company’s stock option plans:       Number of Options     Weighted Average Exercise Price     Weighted Average Remaining Contractual Term (in years)     Aggregate Intrinsic Value (in thousands)   Outstanding as of December 31, 2021     1,175,993     $ 39.56                   Granted     553,827     $ 28.07                   Exercised     ( 433 )   $ 8.83             $ 10   Forfeited and canceled     ( 198,684 )   $ 43.24                   Outstanding as of December 31, 2022     1,530,703     $ 34.93       8.1     $ 1,050   Vested, December 31, 2022     640,056     $ 40.08       7.2     $ 12   Vested or expected to vest, December 31, 2022     1,530,703     $ 34.93       8.1     $ 1,050     The aggregate intrinsic value of options exercised for the years ended December 31, 2021 and 2020 was $ 0.3 million and $ 2.8 million, respectively.   The Company granted 553,827 stock options during the year ended December 31, 2022, of which 398,314 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 estimated 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 Company completed its evaluation of the TSR award and vested 139,168 TSRs as of December 31, 2022.   The assumptions used in the Black-Scholes pricing model for options granted during the years ended December 31, 2022 2021 and 2020, along with the weighted-average grant-date fair values, were as follows:     2022   2021   2020 Risk-free interest rate 1.28% - 4.28%   0.29% - 1.00%   0.21% - 1.59% Expected stock price volatility 53.80 % - 55.55 %   54.80 % - 56.35 %   46.48 % - 54.06 % Expected life of options (in years)   4.5       4.0       4.0   Expected dividend yield   0.0%       0.0%       -%   Fair value per option   11.45       14.80       16.31     As of December 31, 2022, there was $ 7.4 million of unrecognized compensation cost related to unvested stock options. This expense is expected to be recognized over a weighted average period of 1.8 years.   84     Restricted Stock Units   RSUs generally vest in equal annual installments over a three - or four -year periods. The grant-date fair value of RSUs is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. The Company determines the fair value of restricted stock units based on the closing price of its common stock on the date of grant.   RSU activity for the year ended December 31, 2022 is as follows:       Number of Shares     Weighted Average Fair Value   Outstanding as of December 31, 2021   $ 412,658     $ 36.33   Granted     507,524     $ 25.14   Vested     ( 164,167 )   $ 36.77   Forfeited and cancelled     ( 80,610 )   $ ( 31.40 ) Outstanding as of December 31, 2022   $ 675,405     $ 28.40     The weighted-average grant-date fair value per share of RSUs granted was $ 25.14 , $ 35.88 and $ 38.20 for the years ended December 31, 2022, 2021 and 2020, respectively. The total fair value of RSUs vested was $ 6.0 million, $ 3.7 million and $ 2.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.   As of December 31, 2022, there was $ 12.3 million of unrecognized compensation cost related to time-based RSUs, which is expected to be recognized over a weighted-average period of 1.8 years.   Performance Stock Units   PSUs generally vest over a three -year period from the grant date and include both a service and performance component. The PSUs granted to employees in 2019 contained performance conditions with business and financial targets. The business target, amounting to 30 % of the total performance condition awards, was measured and achieved in the 2019 fiscal year. One of the financial targets, amounting to 55 % of the total performance condition awards, was measured and achieved in the 2022 fiscal year, while the remaining financial target, amounting to 15 % of the total performance condition awards, was not achieved. The PSUs granted to employees in 2020 contained performance conditions with business and financial targets. One of the business targets, amounting to 20 % of the total performance condition awards, was not achieved in the 2021 fiscal year, while the remaining business target related to a certain timely regulatory approval, amounting to 20 % of the total performance condition awards, was not achieved in the 2022 fiscal year. The financial targets, amounting to 60 % of the total performance condition awards, were not achieved in the 2022 fiscal year.   PSU activity for the year ended December 31, 2022 is as follows:       Number of Shares     Weighted Average Fair Value   Outstanding as of December 31, 2021     158,297     $ 37.44   Granted     2,125     $ 32.53   Vested     ( 19,125 )   $ 32.53   Forfeited and cancelled     ( 23,400 )   $ 41.86   Outstanding as of December 31, 2022     117,897     $ 34.98     The weighted-average grant-date fair value per share of PSUs granted was $ 32.53 , $ 0 and $ 36.93 for the years ended December 31, 2022, 2021 and 2020, respectively. The total fair value of PSUs vested was $ 0.6 million, $0 and $0 for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, there was no unrecognized compensation cost related to PSUs in which milestones are 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.   85       15. Employee Benefit Plan   The Company’s U.S. employees are eligible to participate in the Company’s 401 (k) savings plan. Employees may elect to contribute a percentage of their compensation to the plan, and the Company will make 140 % matching contributions up to a limit of 5 % of an employee’s eligible compensation. In addition, the Company may make annual discretionary contributions. The Company made matching contributions of $ 2.3  million, $ 2.0 million, and $ 1.7 million for the years ended December  31, 2022, 2021, and 2020, respectively.     16. Income Taxes     Income Tax Expense   The components of the Company’s income (loss) before income taxes and its provision for (benefit from) income taxes consist of the following:       Years ended December 31,       2022     2021     2020   (Loss) income before income taxes                         Domestic   $ ( 19,080 )   $ ( 2,529 )   $ ( 25,722 ) Foreign     334       4,956       ( 2,902 )     $ ( 18,746 )   $ 2,427     $ ( 28,624 )       Years ended December 31,       2022     2021     2020   Provision for (benefit from) income taxes:                         Current:                         Federal   $ 1,005     $ 494     $ 357   State     285       ( 635 )     ( 1,970 ) Foreign     96       167       49   Total current     1,386       26       ( 1,564 ) Deferred:                         Federal     ( 3,243 )     ( 553 )     ( 1,980 ) State     ( 1,256 )     ( 426 )     ( 1,070 ) Foreign     ( 774 )     ( 754 )     ( 28 ) Total deferred     ( 5,273 )     ( 1,733 )     ( 3,078 ) Total benefit from income taxes   $ ( 3,887 )   $ ( 1,707 )   $ ( 4,642 )   86     Deferred Tax Assets and Liabilities   Significant components of the Company’s deferred tax assets and liabilities consist of the following:       As of  December 31,       2022     2021   Deferred tax assets:                 Lease liability   $ 7,468     $ 4,684   Capitalized research expenditures     5,451       -   Stock-based compensation expense     2,795       2,782   Inventory reserves     2,763       2,453   Compensation accrual     1,635       1,236   Net operating loss carry forwards     1,551       2,822   Tax credits     741       3,022   Accrued expenses     519       491   Foreign currency exchange     221       282   Deferred tax assets   $ 23,144     $ 17,772         As of  December 31,       2022     2021   Deferred tax liabilities:                 Acquisition-related intangible asset   $ ( 12,075 )   $ ( 14,770 ) Depreciation     ( 8,804 )     ( 8,509 ) Right of use asset     ( 7,252 )     ( 4,650 ) Deferred tax liabilities   $ ( 28,131 )   $ ( 27,929 )                   Net deferred tax liabilities   $ ( 4,987 )   $ ( 10,157 )   As of December 31, 2022, the Company had no Federal net operating loss (“NOL”) carryforwards and state net NOL carryforwards of $ 3.1 million that will begin to expire in 2026. The Company also had NOL carryforwards in Italy of $ 6.1 million that do not expire but are limited to 80% of taxable income. As of December 31, 2022, the Company had federal and state research and development tax credit carryforwards of $ 0.4 million and $ 0.5 million, respectively, that will begin expiring in 2023.   The Tax Cuts and Jobs Act (“TCJA”) requires taxpayers to capitalize and amortize research and experimental (“R&D”) expenditures for tax years beginning after December 31, 2021. This rule became effective for the Company during the year ended December 31, 2022 and resulted in the capitalization of R&D costs of $ 23.4 million. The Company will amortize these costs for tax purposes over 5 years if the R&D was performed in the U.S. and over 15 years if the R&D was performed outside the U.S.   The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under the tax law, and results of recent operations. Based upon future reversals of existing taxable temporary differences, the Company believes it is more likely than not that it will realize its domestic deferred tax assets. Based upon future reversals of existing taxable temporary differences and projected future taxable income, the Company believes it is more likely than not it will realize its foreign deferred tax assets.   During the year ended December 31, 2021, the Company released the valuation allowance recorded related to the net deferred tax assets in Italy in the amount of $ 0.9 million.    Undistributed earnings of certain of the Company’s foreign subsidiaries amounted to approximately $ 0.5 million at December 31, 2022. The Company expects to be able to take a 100% dividend received deduction to offset any U.S. federal income tax liability on the undistributed earnings. Determination of the amount of unrecognized state and local deferred income tax liability is not practicable due to the complexities associated with its hypothetical calculation.   87     Effective Tax Rate   The reconciliation between the U.S. federal statutory rate and the Company’s effective rate is summarized as follows:       Years ended December 31,       2022     2021     2020   Statutory federal income tax rate     21.0 %     21.0 %     21.0 % State tax expense, net of federal benefit     1.4 %     ( 3.2 %)     1.5 % Stock compensation     ( 4.7 % )     22.3 %     ( 2.2 %) Section 162(m) limitation     ( 8.2 % )     8.7 %     -   Goodwill impairment     -       -       ( 16.8 %) Change in fair value of contingent consideration     -       ( 36.7 %)     6.7 % Change in tax rates and state apportionment     1.2 %     ( 29.8 %)     4.9 % Federal, state and foreign tax credits     5.1 %     ( 28.4 %)     2.2 % Valuation allowance     -       ( 35.3 %)     ( 3.0 %) Return to provision adjustments     5.0 %     -       -   Other permanent items     ( 0.1 )%     11.0 %     1.9 % Effective income tax rate     20.7 %     ( 70.4 %)     16.2 %   Accounting for Uncertainty in Income Taxes   The Company had no unrecognized tax benefits for the years ended December 31, 2022 and 2021, respectively. The Company does not anticipate experiencing any significant increase or decrease in its unrecognized tax benefits within the twelve months following December 31, 2022.   In the normal course of business, Anika and its subsidiaries may be periodically examined by various taxing authorities. 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. With a few exceptions, the Company is no longer subject to income tax examinations for years prior to 2019.     17. Earnings per Share ( “ EPS ” )   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):       Years Ended December 31,       2022     2021     2020   Shares used in the calculation of basic EPS     14,561       14,401       14,222   Effect of dilutive securities:                         Share based awards     -       233       -   Diluted shares used in the calculation of EPS     14,561       14,634       14,222     Stock options of 1.1 million shares were outstanding for the year ended December 31, 2021 and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive. The Company was in a loss position during the years ended December 31, 2022 and 2020, therefore all potential common shares would have been anti-dilutive and accordingly were excluded from the computation of diluted EPS.   88     ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   [None].