(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~October 17, 2019,~~July 27, 2020, there were ~~14,269,367~~14,207,419 outstanding shares of Common Stock, par value $0.01 per share.

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

~~Condensed~~ Consolidated ~~Balance Sheets~~Statements of Operations and Comprehensive Income

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

~~Condensed~~ Consolidated Statements of ~~Operations and Comprehensive Income~~Stockholders' Equity

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

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

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

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

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

Nature of Business

Anika Therapeutics, Inc. ~~(the “Company”)~~, or the Company, is a global, integrated joint preservation, restoration and regenerative ~~therapies~~solutions company based in Bedford, Massachusetts. The ~~Company~~Company’s mission is to be the global leader in orthopedic joint solutions and sports medicine with innovative technologies that exceed its customers’ expectations. Anika is committed to delivering ~~innovative therapies~~solutions to improve the lives of patients across athe orthopedic early-intervention continuum of care, ranging from ~~osteoarthritis~~joint pain management and regenerative products to sports medicine and orthopedic joint preservation and restoration. With close to three decades of expertise commercializing innovative products, Anika has expanded beyond its hyaluronic acid ("HA") technology platform, to add innovative and differentiated offerings to a consolidated orthopedic portfolio. Today, the Company is supported by direct and distributor sales forces and an active R&D engine focused on delivering innovative orthopedics 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 solutions provider focused on surgical repair and reconstruction of ligaments and tendons and Arthrosurface, Incorporated (“Arthrosurface”), a joint preservation technology company specializing in less invasive joint replacement solutions. The Company ~~has over two decades~~expects the Parcus Medical and Arthrosurface acquisitions to drive growth by broadening Anika's product portfolio into joint preservation and restoration, adding high-growth revenue streams, expanding its commercial capabilities, diversifying its revenue base, and expanding its product pipeline and research and development expertise.

There continues to be uncertainties regarding the pandemic of ~~global expertise commercializing more than 20 products based~~the novel coronavirus (“COVID-19”), and the Company is closely monitoring the impact of COVID-19 on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, and business partners. The Company is unable to predict the impact that COVID-19may have on its ~~proprietary hyaluronic acid (“HA”) technology.~~financial position and operations moving forward due to the numerous uncertainties. Any estimates made herein may change as new events occur and additional information is obtained, and actual results could differ materially from any estimates made herein under different assumptions or conditions. The Company’s therapeutic portfolio includes ORTHOVISC, MONOVISC, and CINGAL, viscosupplements which alleviate osteoarthritis pain and restore joint function by replenishing depleted HA, TACTOSET, a surgically-delivered therapy for bone repair procedures, and HYALOFAST, a solid HA-based scaffoldCompany will continue to ~~aid cartilage repair and regeneration.~~assess the evolving impact of COVID-19.

The Company is subject to risks common to companies in the biotechnology and medical device industries 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.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and in accordance with accounting principles generally accepted in the United States (“US GAAP”). The financial statements include the accounts of Anika Therapeutics, Inc. and its subsidiaries. Inter-company transactions and balances have been eliminated. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to SEC rules and regulations relating to interim financial statements. The December 31, ~~2018~~ 2019 balances reported herein are derived from the audited consolidated financial statements. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the condensed consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company’s annual financial statements filed with its Annual Report on Form ~~10-K~~10-K for the year ended December 31, ~~2018.~~ 2019. The results of operations for the ~~three-~~three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~ 2020 are not ~~necessarily~~ indicative of the results to be expected for the year ending December 31, ~~2019.~~2020.

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, Cheryl R. Blanchard, Ph.D., who has held that role since her appointment on April 26, 2020. Based on the criteria established by Accounting Standards Codification (“ASC”) 280,Segment Reporting, the Company has one operating and reportable segment.

Recent Accounting ~~Pronouncements~~Adoptions

In ~~February 2016,~~ August 2018, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued Accounting Standards Update (“ASU”) No. ~~2016-02,~~ ~~Leases~~, which, among other things, results in the recognition of lease assets and lease liabilities on the Company’s balance sheets for virtually all leases. ASU 2016-02 supersedes most previous lease accounting guidance and is effective for interim and annual periods beginning after December 2018-15, 2018. The Company adopted the new guidance as of January 1, 2019 using the modified retrospective adoption method, which did not require restatement of prior periods. The adoption of this standard did not have a material impact on the condensed consolidated statement of operations. See Note 12 for further details.
~~In August 2018, the FASB issued ASU No. 2018-15,~~ Intangibles – Goodwill and Other – Internal-Use Software (Subtopic ~~350-40)~~350-40), which amends ASU No. ~~2015-05,~~2015-05, Customers Accounting for Fees in a Cloud Computing Agreement, to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The most significant change ~~will align~~aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. Accordingly, the amendments in ASU ~~2018-15~~2018-15 require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic ~~350-40~~350-40 to determine which implementation costs to capitalize as assets related to the service contract and which costs to expense. ASU ~~2018-15~~2018-15 is effective for fiscal years and interim periods beginning after December 15, 2019. ~~Early adoption is permitted, including adoption in any interim period.~~ The Company ~~is assessing~~adopted ASU ~~2018-15 and~~2018-15 using the prospective method as of January 1, 2020. The adoption of this standard did not have a significant impact ~~that adopting this new accounting standard will have~~ on ~~its~~the Company’s consolidated financial statements and ~~footnote~~related disclosures.

In June 2016, the FASB issued ASU No.2016-13,Financial Instruments - Credit Losses. The standard, including subsequently issued amendments, requires a financial asset measured at amortized cost basis, such as accounts receivable and certain other financial assets, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for fiscal years and interim periods beginning after December 15, 2019 and requires the modified retrospective approach. The Company adopted ASU 2016-13 as of January 1, 2020. The adoption primarily impacted its trade receivables. The Company assesses its customer's ability to pay by conducting a credit review which includes an assessment of the customer's creditworthiness. The Company monitors the credit exposure through active review of customer balances. The Company's expected loss methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' account balances. Concentrations of credit risks are limited due to the large number of customers and their dispersion across a number of geographic areas. The historical credit losses have not been significant due to this dispersion and the financial stability of its customers. The Company considers credit losses immaterial to its business and, therefore, has not provided all the disclosures otherwise required by the standard.

~~Revenue~~

Business Combinations

~~Distribution Model~~Parcus Medical, LLC

On January 24, 2020, Anika Therapeutics, Inc. 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, 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 ligaments and tendons.

The acquisition of Parcus Medical has been accounted for as a business combination under ASC 805. Under ASC 805, assets acquired and liabilities assumed in a business combination must be recorded at their fair value as of the acquisition date. Recorded fair valuation of assets acquired and liabilities assumed related to the acquisition of Parcus Medical is preliminary and will be completed as soon as practicable, but no later than one year after the consummation of the transaction. Anika’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, which consists of:
Cash consideration
$ 32,794
Deferred consideration
1,642
Estimated fair value of contingent consideration
40,700
Estimated total purchase consideration
$ 75,136
Contingent consideration represents additional payments that the Company may be required to make in the future, which totals up to $60.0 million depending on the level of net sales generated in 2020 through 2022. The fair value of contingent consideration related to net sales 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. Deferred consideration is related to certain purchase price holdbacks which will be resolved within one year of the acquisition date and were recorded in accounts payable as of June 30, 2020. 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.
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 for the three-month period ending June 30, 2020 were immaterial. The transaction costs are included in selling, general and administrative expenses in the consolidated statements of operations.
Fair Value of Net Assets Acquired
The preliminary estimate of fair value required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable, however, actual results may differ from these estimates. The assessment of fair value is preliminary and is based on information that was available to management at the time the condensed consolidated financial statements were prepared. Those estimates and assumptions are subject to change as the Company obtains additional information related to those estimates during the applicable measurement periods (up to one year from the acquisition date). The most significant open items necessary to complete are related to intangible assets and tax related matters.
9
The preliminary allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on preliminary 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
9,088
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
53,628
Goodwill
21,508
Estimated total purchase consideration
$ 75,136
The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and assigned to the newly established reporting unit for Parcus Medical and Arthrosurface. The goodwill is attributable to the workforce of the business and the value of future technologies expected to arise after the acquisition. Goodwill will not be amortized and is expected to be deductible for income tax purposes as the acquisition of the limited liability company is an asset purchase for tax purposes. The acquired intangible assets based on preliminary estimates of fair value as of January 24, 2020 are as follows:
Intangible assets acquired consist of:

Developed technology
$ 41,100
Trade name
1,800
Customer relationships
1,100
Total intangible assets
$ 44,000
The preliminary 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 preliminary 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 preliminary 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 final fair value determination of the identified intangible assets may differ from this preliminary determination, and such differences could be material. Based on the preliminary valuation, approximately $44.0 million represents the fair value of identifiable intangible assets. Approximately $41.1 million represents the fair value of developed technology that will be amortized over a useful life of 15 years, $1.1 million represents the fair value of customer relationships that will be amortized over a useful life of 10 years, and $1.8 million represents the fair value of the trade name that will be amortized over a useful life of 5 years.
10
Revenue and Net Loss

The Company ~~receives~~recorded revenue from Parcus Medical of $2.0 million and a net loss of $2.0 million in the three-month period ended June 30, 2020. The Company recorded revenue from Parcus Medical of $4.6 million and a net loss of $2.9 million in the period from January 24 through June 30, 2020.
Arthrosurface, Incorporated
On February 3, 2020, Anika Therapeutics, Inc. completed the acquisition of Arthrosurface Incorporated 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, 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 must be recorded at their fair values as of the acquisition date. The final valuation of assets acquired and liabilities assumed related to the acquisition of Arthrosurface is expected to be completed as soon as practicable, but no later than one year after the consummation of the transaction. 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, which consists of:
11
Cash consideration
$ 61,909
Estimated fair value of contingent consideration
28,376
Estimated total purchase consideration
$ 90,285
The Company may 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 generated in 2020 through 2021. The fair value of contingent consideration related to regulatory milestones 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 certain net sales levels from ~~its customers~~2020 through 2021 was determined based upon a Monte Carlo simulation approach in an option pricing framework at acquisition date, whereby a range of possible scenarios were simulated. The liability for contingent consideration is included in current and long-term liabilities on ~~billing schedules established in~~the consolidated balance sheets and will be remeasured at 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~~reporting period until the contingency is resolved.
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 ~~performs its obligations under these arrangements. Amounts~~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 for the three-month period ending June 30, 2020 were immaterial. The transaction costs are ~~recorded as accounts receivable when~~included in selling, general and administrative expenses in the ~~Company’s right to consideration is unconditional. As~~consolidated statements of ~~September 30, 2019, deferred revenue was $28 thousand.~~operations.
Fair Value of Net Assets Acquired

The preliminary 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 ~~has agreements with DePuy Synthes Mitek Sports Medicine, a division~~believes to be reasonable. However, actual results may differ from these estimates. The assessment of ~~DePuy Orthopaedics, Inc. (“Mitek”)~~fair value is preliminary and is based on information that ~~include~~was available to management at the ~~grant of certain licenses, performance of development services,~~time the condensed consolidated financial statements were prepared. Those estimates and ~~supply of product. Revenues~~assumptions are subject to change as the Company obtains additional information related to those estimates during the applicable measurement periods (up to one year from the ~~agreements~~acquisition date). The most significant open items are related to intangible assets, property, plant and equipment and tax related matters.
The preliminary allocation of purchase price to the identifiable assets acquired and liabilities assumed was based on preliminary 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
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.
12

Intangible assets acquired consist of:

Developed technology
$ 37,000
Trade name
3,400
Customer relationships
7,900
IPR&D
600
Total intangible assets
$ 48,900
The preliminary 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 preliminary 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 preliminary 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 final fair value determination of the identified intangible assets may differ from this preliminary determination, and such differences could be material. Based on the preliminary valuation, approximately $48.9 million represents the fair value of identifiable intangible assets. Approximately $37.0 million represents the fair value of developed technology that will be amortized over an estimated useful life of 15 years, $7.9 million represents the fair value of customer relationships that will be amortized over an estimated useful life of 10 years, and $3.4 million represents the fair value of trade names that will be amortized over an estimated useful life of 5 years. A total of $0.6 million represents the fair value of in-process research and development (“IPR&D”) with ~~Mitek represent 71% and 70% of total Company revenues~~an indefinite useful life that will be evaluated for impairment annually, or more frequently if events or changes in circumstances indicate that the ~~three- and nine-month periods ended September 30, 2019, respectively. The Company has agreements with other customers that may include the delivery of a license and supply of product.~~asset might be impaired.

~~Hybrid Commercial Model~~Revenue and Net Loss

The Company ~~recently completed the implementation~~recorded revenue from Arthrosurface of $4.2 million and a ~~U.S.-based hybrid commercial model through which the Company launched TACTOSET, its surgically-delivered bone repair therapy,~~net loss of $2.8 million in the ~~third~~three-month period ended June 30, 2020. The Company recorded revenue from Arthrosurface of $8.4 million and a net loss of $6.8 million in the period from February 3 through June 30, 2020.
Pro-forma Information
The Parcus Medical and Arthrosurface acquisitions were both completed in the first quarter of ~~2019. The Company sells TACTOSET utilizing a network~~2020. Both acquired companies have similar businesses with all of ~~regional~~their products in the Orthopedic Joint Preservation and ~~local distributors~~Restoration product family as discussed in ~~conjunction with its own small internal sales team.~~Note 11, serving orthopedic surgeons, ambulatory surgical centers and hospitals. We have combined legacy Anika, Parcus Medical and Arthrosurface proforma supplemental information as follows.

The unaudited pro forma information for the three- and six-month periods ended June 30, 2020 and 2019 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 Therapeutics, Inc., 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 product revenue based on the preliminary fair value inventory adjustment 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 Merger Agreements, (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 rate presented in this unaudited pro forma condensed 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 ownership change. As further information becomes available, any such adjustment described above could be material to the amounts presented in the unaudited pro forma condensed 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.
13
The following table presents unaudited supplemental pro forma information:

For the Three Months ended June 30,

For the Six Months ended June 30,

2020

2019

2020

2019

Total revenue
$ 30,678 $ 40,428 $ 70,028 $ 75,133
Net income (loss)
(7,708 ) 5,073 (917 ) 2,387
4.
Fair Value Measurements
The Company ~~recognizes revenue from TACTOSET product sales when the customer obtains control or upon utilization~~held U.S. treasury bills of ~~the Company’s product in return for agreed-upon, fixed-price consideration. Revenues were not significant for the period. Performance obligations are settled upon transfer or utilization~~$20.1 million and certificates of the Company’s product to the customer. The Company’s payment terms are consistent with prevailing practice in the respective markets in which the Company does business. The Company’s customers make payments based on fixed-price 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 adjustmentdeposit of ~~the contractual payment amount of consideration for the effects of a significant financing component. Product returns are only accepted~~$7.5 million at the discretion of the Company and are not expected to be significant. The Company accrues for sales returns and allowances on TACTOSET based upon research performed and current market conditions. The Company assesses the risk of loss on accounts receivable and adjusts the allowance for doubtful accounts based on this risk assessment, and this adjustment is not expected to be significant. Management believes that the allowance for doubtful accounts is adequate to provide for probable losses resulting from accounts receivable. The Company sells to a diversified base of customers and, therefore, believes there is no material concentration of credit risk.
8
~~Product and Total Revenue~~
~~Product revenue by product group was as follows:~~
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Orthobiologics $ 26,765 $ 24,097 $ 74,975 $ 69,778
Surgical 578 1,191 4,071 3,700
Dermal 417 80 990 163
Other 1,855 1,413 4,709 4,940
Product Revenue $ 29,615 $ 26,781 $ 84,745 $ 78,581
~~Total revenue by geographic location was as follows:~~
Three Months Ended September 30,
2019 2018
Total Percentage of Total Percentage of
Revenue Revenue Revenue Revenue
Geographic Location:
United States $ 23,512 79 % $ 21,695 81 %
Europe 3,943 13 % 3,132 12 %
Other 2,242 8 % 1,960 7 %
Total Revenue $ 29,697 100 % $ 26,787 100 %
Nine Months Ended September 30,
2019 2018
Total Percentage of Total Percentage of
Revenue Revenue Revenue Revenue
Geographic Location:
United States $ 66,538 78 % $ 63,377 81 %
Europe 11,396 14 % 9,021 11 %
Other 6,904 8 % 6,201 8 %
Total Revenue $ 84,838 100 % $ 78,599 100 %
On May 2, 2018, the Company publicly disclosed a voluntary recall of certain lots of its HYAFF-based products, HYALOFAST, HYALOGRAFT C, and HYALOMATRIX. The Company initiated the recall after internal quality testing, which indicated that the products were at risk of not maintaining certain measures throughout their entire shelf life. While there was no indication of any safety or efficacy issue related to the products at the time, the Company removed the products from the field as a precautionary measure. During the three-month period ended March 31, 2018, the Company recorded a revenue reserve for this voluntary recall of $1.1 million of which $0.9 million was related to revenue recorded in prior periods. The adjustments related to the initial revenue reserve subsequent to June 30, 2018 were immaterial. The revenue reserves impacted Dermal and Orthobiologics product groups and all geographic locations. Recall recovery activities were completed during the fourth quarter of 2018, and product shipments resumed in December 2018.

The following table provides a rollforward of the contingent consideration related to business acquisitions discussed in Note 3.

~~Inventories~~

Inventories consist of the following:

June 30,

December 31,

2020

2019

Raw materials
$ 13,851 $ 12,058
Work-in-process
11,914 8,330
Finished goods
33,680 8,777
Total
$ 59,445 $ 29,165

Inventories
$ 46,479 $ 21,995
Other long-term assets
12,966 7,170
September 30, December 31,
2019 2018
Raw materials $ 12,686 $ 13,688
Work-in-process 7,762 4,626
Finished goods 10,234 6,819
Total $ 30,682 $ 25,133

Inventories $ 25,243 $ 21,300
Other long-term assets $ 5,439 $ 3,833
15
The increase in inventories for the six months ended June 30, 2020 is due to the acquisitions of Parcus Medical and Arthrosurface in January and February 2020 discussed in Note 3.

12
~~Other long-term assets include $5.4~~The Company recorded an inventory reserve of $1.9 million ~~and $3.8 million~~during the three-month period ended June 30, 2020 as the Company will not pursue CE mark renewals, primarily for certain advanced wound care products as a result of the Company's product rationalization efforts. The additional inventory ~~expected~~reserve represents excess inventory which will not be sold prior to ~~remain~~expiration of the applicable CE mark based on ~~hand beyond one year as of September 30, 2019 and December 31, 2018, respectively.~~ current projections.

9.
6.
Intangible Assets

Intangible assets as of ~~September~~June 30, ~~2019~~ 2020 and December 31, ~~2018~~ 2019 consisted of the following:

Six Months Ended June 30, 2020

Gross Value

Less: Accumulated Currency Translation Adjustment

Less: Current Period Impairment Charge

Less: Accumulated Amortization

Net Book Value

Weighted Average Useful Life

Developed technology
$ 93,953 $ (2,904 ) $ (1,025 ) $ (11,460 ) $ 78,564 15
In-process research & development
5,006 (1,242 ) - - 3,764
Indefinite

Customer relationships
9,000 - - (377 ) 8,623 10
Distributor relationships
4,700 (415 ) - (4,285 ) - 5
Patents
1,000 (177 ) - (555 ) 268 16
Tradenames
5,200 - - (441 ) 4,759 5
Total
$ 118,859 $ (4,738 ) $ (1,025 ) $ (17,118 ) $ 95,978 13
September 30, 2019 December 31, 2018
Gross
Value Accumulated
Currency
Translation
Adjustment Impairment Accumulated
Amortization Net Book
Value Accumulated
Currency
Translation
Adjustment Accumulated
Amortization Net Book
Value Useful
Life
Developed technology $ 17,100 $ (3,056 ) $ (303 ) $ (9,448 ) $ 4,293 $ (2,824 ) $ (8,672 ) $ 5,604 15
In-process research & development 4,406 (1,316 ) - - 3,090 (1,168 ) - 3,238 Indefinite
Distributor relationships 4,700 (415 ) - (4,285 ) - (415 ) (4,285 ) - 5
Patents 1,000 (184 ) - (519 ) 297 (169 ) (482 ) 349 16
Elevess trade name 1,000 - - (1,000 ) - - (1,000 ) - 9
Total $ 28,206 $ (4,971 ) $ (303 ) $ (15,252 ) $ 7,680 $ (4,576 ) $ (14,439 ) $ 9,191

Year ended December 31, 2019

Gross Value

Less: Accumulated Currency Translation Adjustment

Less: Current Period Impairment Charge

Less: Accumulated Amortization

Net Book Value

Weighted Average Useful Life

Developed technology
$ 17,100 $ (2,934 ) $ (389 ) $ (9,657 ) $ 4,120 15
In-process research & development
4,406 (1,234 ) - - 3,172
Indefinite

Distributor relationships
4,700 (415 ) - (4,285 ) - 5
Patents
1,000 (176 ) - (531 ) 293 16
Elevess Tradename
1,000 - - (1,000 ) - 9
Total
$ 28,206 $ (4,759 ) $ (389 ) $ (15,473 ) $ 7,585 11
The aggregate amortization expense related to intangible assets was ~~$0.3~~$2.2 million and ~~0.2~~$0.2 million for the ~~three-month~~three-month periods ended ~~September~~June 30, ~~2019~~ 2020 and ~~2018, respectively. The aggregate amortization expense related to intangible assets was $0.8~~2019, respectively, and $3.5 million and $0.5 million for ~~each of~~ the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~ 2020 and ~~2018.~~2019, respectively.

~~The~~In the first quarter of 2020, the Company ~~recorded a~~acquired Parcus Medical and Arthrosurface as discussed in Note 3, which resulted in an increase of $92.9 million of gross value in intangible assets. During the six-month period ended June 30, 2020, the Company determined that it will not pursue CE Mark renewals for certain of its products, which resulted in an impairment of $1.0 million of which $0.3 million ~~impairment charge for the HYALOSPINE developed technology asset~~was recognized in the ~~three-month period ended March 31, 2019. HYALOSPINE was an adhesion prevention gel for use after spinal surgery and received initial CE Mark approval~~first quarter of 2020. The impairments are included in ~~January 2015. In March 2019,~~ the ~~Company made the decision not to renew the CE Mark as the product was not aligned with the Company’s core strategic focus. As a result, an impairment charge was recorded. This amount is included in~~ selling, general & administrative expenses on ~~the Company’s~~its condensed consolidated statements of operations.

~~Through September~~The Company assessed the recoverability of intangible and long-lived assets besides goodwill and concluded 0 impairments existed as of March 31, 2020. If the pandemic's economic impact is more severe, or if the economic recovery takes longer to materialize or does not materialize as strongly as anticipated, this could result in intangible or long-lived asset impairment charges. For the quarter ended June 30, ~~2019, except~~2020, there were no impairments related to the pandemic’s economic impact. However, the Company did identify certain intangible asset impairments as ~~set forth in this paragraph, there have~~ a result of product rationalization and the related decision to not ~~been any other~~ pursue certain related CE Mark renewals.
7.
Goodwill
The Company assesses goodwill for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances ~~that~~ indicate ~~that~~there may be impairment on each reporting unit. In connection with the ~~carrying value~~evaluation of ~~the other acquired intangible assets may not be recoverable. The Company was notified by the distributor of MEROGEL INJECTIBLE that it would not continue to order the product from~~goodwill for impairment, the Company or market the product. As a result, the depreciation schedule of the remaining $0.1 million of net book value was accelerated. The Company continues to monitor and evaluate the financial performance of its business including the impact of general economic conditions,may first consider qualitative factors to assess ~~the potential for~~whether there are any indicators to suggest it is more likely than not that the fair value of a reporting unit may not exceed its carrying amount. If after assessing such factors or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then a quantitative assessment is not required. If the Company chooses to bypass the qualitative assessment, or if it chooses to perform a qualitative assessment but is unable to qualitatively conclude that no impairment has occurred, then the Company will perform a quantitative assessment. If the estimated fair value of a reporting unit is less than its carrying value, an impairment charge is recognized for the excess of the reporting ~~unit to decline below~~unit’s carrying value over its ~~recorded amount.~~
fair value.

16
As of December 31, 2019, the Company concluded that it operated as a single reporting unit and performed the 2019 goodwill impairment test using a single reporting unit.
~~10.~~ ~~Goodwill~~

~~The Company completed its annual impairment review as of November 30, 2018 and concluded that no impairment~~Changes in the carrying value of goodwill ~~exists~~were as follows:

Six Months Ended
June 30, 2020

Year Ended
December 31, 2019

Balance, beginning
$ 7,694 $ 7,851
Effect of foreign currency adjustments
8 (157 )
Acquisitions
44,400 -
Impairment
(18,144 ) -
Balance, ending
$ 33,958 $ 7,694
The increase in goodwill for the six months ended June 30, 2020 is related to the acquisitions of Parcus Medical and Arthrosurface in January and February 2020 as further discussed in Note 3. As a result of the acquisitions, the Company now has 2 reporting units. The newly formed reporting unit includes Parcus Medical and Arthrosurface, which share similar economic and qualitative characteristics. This reporting unit produces sports medicine surgical tools, instruments and joint implants. The legacy Anika business remains in one reporting unit, which specializes in therapies based on its hyaluronic acid, or HA, technology platform.
The widespread economic volatility resulting from the COVID-19 pandemic 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. For the legacy Anika reporting unit, the Company performed a qualitative assessment including consideration of 1) general macroeconomic factors, 2) industry and market conditions, and 3) 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 carry amount and thus, goodwill was not impaired as of ~~that date.~~ March 31, 2020. Through ~~September~~June 30, ~~2019,~~ 2020, there have been no events or changes in circumstances that indicate that the carrying value of goodwill may not be recoverable. ~~Changes~~
U.S. government policy responses to the COVID-19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of domestic elective surgical procedures. As a result of these events during the first quarter of 2020, the Company performed a quantitative assessment of goodwill impairment related to the Parcus Medical and Arthrosurface reporting unit as of March 31, 2020. The Company then estimated the fair value of the Parcus Medical and Arthrosurface reporting unit 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 unit for the purpose of performing the interim 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 reasonable assumptions to best estimate future cash flows under a high degree of economic uncertainty that existed as of March 31, 2020. In developing its assumptions, the Company also considered observed trends of its industry participants.
17
The results of the interim impairment test indicated that the estimated fair value of the Parcus and Arthrosurface reporting unit was less than its carrying value. This is primarily due to decreases in near term revenue and related cash flows as a result of the temporary suspension of domestic elective procedures which directly impact the Parcus and Arthrosurface reporting unit. Consequently, a non-cash goodwill impairment charge was recorded as reflected in the table above as of March 31, 2020. For the quarter ended June 30, 2020, there have been no events or changes in circumstances that indicate that the carrying value of goodwill ~~were~~ as ~~follows:~~determined on March 31, 2020 may not be recoverable. If the pandemic's economic impact is more severe, or if the economic recovery takes longer to materialize or does not materialize as strongly as anticipated, this could result in further goodwill impairment charges.

September 30,
2019
Balance at January 1, 2019 $ 7,851
Effect of foreign currency adjustments (362 )
Balance at September 30, 2019 $ 7,489
13
8.
~~11.~~ ~~Accrued Expenses~~
Leases
~~Accrued expenses consist of the following:~~
September 30, December 31,
2019 2018
Compensation and related expenses $ 4,039 $ 4,446
Professional fees 1,333 1,989
Operating lease liability - current 1,109 -
Income taxes payable 766 385
Research grants 381 400
Clinical trial costs 497 577
Other 368 349
Total $ 8,493 $ 8,146
~~The lease liability as of September 30, 2019 is the result of the Company adopting ASU 2016-02 as of January 1, 2019 as more fully described in Note 12.~~
~~12.~~ ~~Operating Leases~~
The Company adopted ASU 2016-02 as of January 1, 2019 using the modified retrospective adoption method, which did not require it to restate prior periods, and there was no impact on retained earnings. The transition guidance associated with ASU 2016-02 also permitted certain practical expedients. The Company has elected the “package of 3” practical expedients permitted under the transition guidance which eliminates the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs. The Company also adopted the practical expedient to use hindsight to determine the lease term. The Company adopted an accounting policy which provides that leases with an initial term of 12 months or less and no purchase option the Company is reasonably certain of exercising will not be included within the lease right-of-use assets and lease liabilities on its consolidated balance sheet. 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 Company elected this practical expedient to all asset classes upon the adoption of ASU 2016-02.
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the circumstances present. 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. Lease liabilities and the corresponding right-of-use assets are recorded based on the present values of lease payments over the lease terms. 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 lease liability by using revised inputs as of the reassessment date, and adjust the right-of-use asset.
The Company has two primary leases, which are its real estate leases in Bedford, Massachusetts and Padova, Italy. The Company leases approximately 134,000 square feet of administrative, research and development, and manufacturing space in Bedford, Massachusetts (the “Bedford lease”), and approximately 33,000 square feet of office, research and development, training, and warehousing space in Padova, Italy (the “Padova lease”). The current term of the Bedford lease extends to 2022 with several lease renewal options into 2038, and the current term of the Padova lease extends to 2032, with a right to terminate at the Company’s option in 2026 without penalty.
14
~~The Company identified and assessed significant assumptions in recognizing the right-of-use asset and lease liability on January 1, 2019 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 the transition date 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 September 30, 2019 is 4.1%.
~~Lease term.~~ The Company applied the hindsight practical expedient and as a result the lease term for the Bedford lease was determined to include all lease renewal options. There were no changes to the lease terms for its other leases. For the Padova lease, the Company considered the termination option when determining the lease term. The weighted average lease term at September 30, 2019 is 17.1 years.

The components of lease expense and other information are as follows:

For the Three Months Ended

For the Six Months Ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Amortization of ROU Assets
49 - 86 -
Interest on finance lease liabilities
8 - 15 -
Finance lease expense
$ 57 $ - $ 101 $ -
Operating lease expense
595 521 1,169 1,043
Short-term lease expense
- 4 - 6
Variable lease expense
74 60 137 112
Total lease expense
$ 726 $ 585 $ 1,407 $ 1,161
For the three months ended
September 30, 2019 For the nine months ended
September 30, 2019
Lease cost
Operating lease cost $ 525 $ 1,568
Short-term lease cost - 6
Variable lease cost 43 155
Total lease cost $ 568 $ 1,729

Other information
Operating cash flows from operating leases $ 488 $ 1,482

For the Three Months Ended

For the Six months ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Weighted Average Remaining Lease Term (in years)

Operating leases
16.1 17.3 16.1 17.3
Financing leases
3.7 - 3.7 -
Weighted Average Discount Rate

Operating leases
4.1 % 4.1 % 4.1 % 4.1 %
Financing leases
5.0 % - 5.0 % -
Other information

Operating cash flows from operating leases
$ 593 $ 497 $ 1,137 $ 994
Operating cash flows from financing leases
$ 59 $ - $ 110 $ -

Future commitments due under these lease agreements as of ~~September~~June 30, ~~2019~~ 2020 are as follows:

Operating Lease Obligation As Of
Years ended December 31, September 30, 2019
2019 (remaining 3 months) $ 497
2020 2,025
2021 2,024
2022 1,981
2023 1,965
Thereafter 23,530
Present value adjustment (9,310 )
Present value of lease payments 22,712
Less current portion included in Accrued expenses and other current liabilities (1,109 )
Operating lease liabilities $ 21,603
Years ended December 31,

Operating Leases

Financing Leases

Total

2020 (Remaining 6 months)
$ 1,195 $ 128 $ 1,323
2021
2,304 174 2,478
2022
2,240 166 2,406
2023
2,123 160 2,283
2024
2,059 44 2,103
Thereafter
21,374 - 21,374
Present value adjustment
(8,405 ) (57 ) (8,462 )
Present value of lease payments
22,890 615 23,505
Less current portion included in accrued expenses and other current liabilities
(1,476 ) (186 ) (1,662 )
Total lease liabilities
$ 21,414 $ 429 $ 21,843

15
9.
Accrued Expenses

~~The following table summarizes the future minimum payments due for the Company’s operating leases under the prior lease guidance without the hindsight practical expedient for each~~Accrued expenses consist of the ~~next five years and the total thereafter as of December 31, 2018:~~following:

June 30,
2020

December 31,
2019

Compensation and related expenses
$ 3,212 $ 5,830
Professional fees
3,052 3,850
Operating lease liability - current
1,476 1,141
Clinical trial costs
1,113 788
Current portion of acquisition related contingent consideration (Note 4)
11,688 -
Finance lease liability - current
186 -
Other
1,018 836
Total
$ 21,745 $ 12,445
Years ended December 31,
2019 $ 1,879
2020 1,917
2021 1,924
2022 1,672
2023 414
2024 and thereafter 897
Total $ 8,703

18

~~13.~~
10.
Commitments and Contingencies

In certain of its contracts, the Company warrants to its customers that the products it manufactures conform to the product specifications as in effect at the time of delivery of the specific product. The Company may also warrant that the products it manufactures do not infringe, violate, or breach any U.S. or international patent or intellectual property right, trade secret, or other proprietary information of any third party. On occasion, the Company contractually indemnifies its customers against any and all losses arising out of, or in any way connected with, any claim or claims of breach of its warranties or any actual or alleged defect in any product caused by the negligent acts or omissions of the Company. The Company maintains a products liability insurance policy that limits its exposure to these risks. Based on the Company’s historical activity, in combination with its liability insurance coverage, the Company believes the estimated fair value of these indemnification agreements is immaterial. The Company had no0 accrued warranties as of ~~September~~June 30, ~~2019~~ 2020 or December 31, ~~2018~~ 2019 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 flow.
~~14.~~
11.
~~Income Taxes~~
Revenue

The ~~provision~~Company receives payments from its customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. As of June 30, 2020, deferred revenue was immaterial.
The Company has agreements with DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopaedics, Inc. (“Mitek”) that include the grant of certain licenses, performance of development services, and supply of product. Revenues from the agreements with Mitek represent 54% of total Company revenues for the three- and six-month periods ended June 30, 2020. The Company has agreements with other customers that may include the delivery of a license and supply of product.
Product and Total Revenue
Historically, the Company categorized its product offerings into four product families: Orthobiologics, Dermal, Surgical, and Other, which included its ophthalmic and veterinary products. As a result of the Company’s acquisitions of Parcus Medical and Arthrosurface during the first quarter of 2020, the Company now divides the product portfolio into three product families: Joint Pain Management, Orthopedic Joint Preservation and Restoration, and Other.
Product revenue by product family was as follows:

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Joint pain management
$ 22,247 $ 26,632 $ 47,730 $ 49,482
Orthopedic joint preservation and restoration
6,622 802 14,518 966
Other
1,809 2,979 3,827 4,682
$ 30,678 $ 30,413 $ 66,075 $ 55,130
19
Total revenue by geographic location was as follows:

Three Months Ended June 30,

2020

2019

Total

Percentage of

Total

Percentage of

Revenue

Revenue

Revenue

Revenue

Geographic Location:

United States
$ 25,133 82 % $ 22,937 76%
Europe
2,910 9 % 4,927 16%
Other
2,635 9 % 2,554 8%
Total
$ 30,678 100 % $ 30,418 100%

Six Months Ended June 30,

2020

2019

Total

Percentage of

Total

Percentage of

Revenue

Revenue

Revenue

Revenue

Geographic Location:

United States
$ 51,438 78 % $ 43,026 78%
Europe
8,186 12 % 7,454 14%
Other
6,451 10 % 4,661 8%
Total
$ 66,075 100 % $ 55,141 100%
12.
Equity Incentive Plan
The Company estimates the fair value of stock options and stock appreciation rights (“SARs”) using the Black-Scholes valuation model, and estimates the fair value of the total shareholder return (“TSRs”) options using a Monte-Carlo simulation model as of the grant date. Fair value of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) is measured by the grant-date price of the Company’s shares. Fair value of performance restricted stock units (“PSUs”) is measured by the grant-date price of the Company’s shares with corresponding compensation cost recognized over the requisite service period. Compensation cost of PSUs is recognized based on the estimated probabilities of achieving the performance goals. Changes to the probability assessment and the estimated shares expected to vest will result in adjustments to the related compensation cost 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. Compensation cost of the TSRs is recognized on a straight-line basis over the vesting period, regardless of whether the market condition for vesting is ultimately achieved.
The fair value of each stock option award, including TSRs, during the six-month periods ended June 30, 2020 and 2019 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

Six months ended
June 30,

2020

2019

Risk free interest rate
0.31% - 1.59% 2.18% - 2.54%
Expected volatility
46.48% - 51.87% 44.05% - 44.72%
Expected life (years)
4.0 - 6.3 3.5
Expected dividend yield
0.00% 0.00%
20
The Company presents the expenses related to stock-based compensation awards in the same expense line items as cash compensation paid to each of its employees as follows:

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Cost of product revenue
$ 216 $ 82 $ 362 $ 174
Research & development
156 91 352 268
Selling, general & administrative
1,868 1,270 1,319 2,387
Total stock-based compensation expense
$ 2,240 $ 1,443 $ 2,033 $ 2,829
The Company’s former President and Chief Executive Officer, Joseph Darling passed unexpectedly in January 2020. According to the terms of Mr. Darling’s equity award grants and the Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan (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 & administrative expenses.
The following table sets forth share information for stock-based compensation awards granted and exercised during the three- and six-month periods ended June 30, 2020 and 2019:

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Grants:

Stock options
106,438 27,325 317,213 131,617
RSUs
83,476 8,000 184,107 173,507
PSUs
88,820 - 146,220 114,500
TSRs
104,638 - 104,638 -
Exercises:

Stock options
2,146 22,400 2,146 22,900
Forfeitures:

Stock options 20,625 38,163 54,103 39,072
RSAs
- 14,450 8,574 21,116
RSUs
8,483 22,000 72,166 22,500
PSUs
8,000 - 71,000 18,000
Expirations:

Stock options
200 2,855 563 18,862
During the three- and six-month periods ended June 30, 2020, the Company granted stock-based compensation awards in the form of stock options, PSUs, TSRs, and RSUs to employees and RSUs to non-employee directors, the majority of which become exercisable or vest ratably over a three-year period. The PSUs granted to employees contained performance conditions with business and financial targets. The business target, amounting to 40% of the total performance conditions, will be measured based on achievement in the 2020-2022 fiscal years, while the financial targets, amounting to 60% of the total performance conditions, will ultimately be measured with respect to the Company’s operating results in the 2020-2022 fiscal years. The Company recorded $0.3 and ($0.2) million of stock-based compensation expense associated with PSUs for the three- and six-month periods ended June 30, 2020.
During the second quarter of 2020, the initial equity grants to the Company’s current President and Chief Executive Officer contained a TSR option award at 104,638 targeted options, with market and service conditions. The actual number of 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 grant-date fair value of the TSRs is recorded as stock-based compensation expense on a straight-line basis over the period from the date of grant to the settlement date. The Company recorded $0.2 million of stock-based compensation expense associated with TSRs for the three and six-month periods ended June 30, 2020.
21
13.
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 earnings per share. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, SARs, RSAs, RSUs, TSRs, and PSUs using the treasury stock method.
The following table provides share information used in the calculation of the Company's basic and diluted earnings (loss) per share:

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Shares used in the calculation of basic earnings per share
14,199 13,916 14,201 14,054
Effect of dilutive securities:

Stock options, RSAs, PSUs, TSRs and RSUs
- 172 - 149
Diluted shares used in the calculation of earnings per share
14,199 14,088 14,201 14,203
For the three- and six-month periods ended June 30, 2020, the net loss available to common shareholders is divided by the weighted average number of common shares outstanding during the period to calculate basic earnings per share. The assumed exercise of stock options would have been anti-dilutive. Stock options of 1.0 million shares were outstanding for the three-month periods ended June 30, 2020 and 2019 and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive. Stock options of 0.9 million and 1.0 million shares were outstanding for the six-month periods ended June 30, 2020 and 2019 and were not included in the computation of diluted EPS because the awards’ impact on EPS would have been anti-dilutive.
14.
Accelerated Share Repurchase
In May 2019, the Company’s Board of Directors authorized a repurchase program of up to $50.0 million shares of the Company’s common stock with $30.0 million to be repurchased through an accelerated share repurchase program and up to $20.0 million to be potentially repurchased on the open market from time-to-time. On May 7, 2019, the Company entered into an accelerated share repurchase agreement with Morgan Stanley & Co. LLC (“Morgan Stanley”) pursuant to a Fixed Dollar Accelerated Share Repurchase Transaction (“ASR Agreement") to purchase $30.0 million of shares of its common stock. Pursuant to the terms of the ASR Agreement from May 2019 to January 2020, the Company repurchased 0.6 million shares under the ASR Agreement at an average repurchase price of $50.78 per share. The ASR Agreement settled on January 14, 2020. Through June 30, 2020, no open market repurchases had been executed.
15.
Income Taxes
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The CARES Act includes several provisions that provide economic relief for individuals and businesses. The Company will continue to evaluate the impact of the CARES Act, but does not expect it to result in a material impact.
The benefit from income taxes was ~~$3.3~~$2.0 million and ~~$7.8~~$0.4 million for the ~~three-~~three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019,~~ 2020, based on effective tax rates of ~~26.6%~~20.6% and ~~25.3%~~17.9%, respectively. The provision for income taxes was ~~$1.5~~$3.0 million and ~~$1.9~~$4.5 million for the ~~three-~~three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2018,~~ 2019, based on effective tax rates of ~~16.4%~~24.2% and ~~14.7%~~24.3%, respectively. The net ~~increase~~decrease in the effective tax rate for the ~~three-~~three- and ~~nine- month~~six-month periods ended ~~September~~June 30, ~~2019,~~ 2020, as compared to the same periods in ~~2018,~~2019, was primarily due to the ~~windfall~~$1.9 million tax ~~benefit~~expense on the ~~Company realized in June 2018 related to exercises~~impairment of ~~employee equity awards~~non-tax deductible goodwill offset by the ~~limitation~~$1.7 million tax benefit on the ~~deductibility of executive compensation for accelerated stock vesting upon~~decrease in the ~~retirement~~fair value of the ~~Company’s former Chief Executive Officer on March 9, 2018.~~contingent consideration. In addition, the Company recorded a $0.3 million ~~and $0.4 million~~ tax ~~shortfall~~windfall for the ~~three- and nine-month periods~~six-month period ended ~~September~~June 30, ~~2019~~ 2020 related to exercises of employee equity awards. The Company recognized a net deferred tax liability of $11.2 million primarily due to intangible assets and inventory step up offset by net operating losses and research and development tax credits associated with the Arthrosurface acquisition discussed in Note 3.

22
The Company files income tax returns in the United States on a federal basis, in certain U.S. states, and in Italy. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate.

In connection with the preparation of the financial statements, the Company assesses whether it was more likely than not that it would be able to utilize, in future periods, the net deferred tax assets associated with its net operating loss carry-forward. In the second quarter of 2020, the Company established a valuation allowance in the amount of $0.4 million against the portion of the deferred tax asset balance that is “more likely than not”not to be realized.
16.
Revolving Credit Agreement
On April 8, 2020, the Company submitted a loan notice to draw down the $50.0 million available under its existing credit facility, with an initial applicable interest of 2.08%. Interest expense for the three-month period ended June 30, 2020 was $0.2 million associated with the revolving credit agreement. The credit facility will mature in October 2022, and the Company may prepay the credit facility at any time without penalty. Proceeds from the borrowing may be used for purposes permitted under the Credit Agreement, as defined below, including for working capital and general corporate purposes.
The existing credit facility was entered into on October 24, 2017. The Company, as borrower, entered into a new five-year agreement with Bank of America, N.A., as administrative agent, swingline lender and issuer of letters of credit, for a $50.0 million senior revolving line of credit (the “Credit Agreement”). Subject to certain conditions, the Company may request up to an additional $50.0 million in commitments for a maximum aggregate commitment of $100.0 million, which requests must be approved by the Revolving Lenders (as defined in the Credit Agreement). Loans under the Credit Agreement generally bear interest equal to, at the Company’s option, either: (i) LIBOR plus the Applicable Margin, as defined below, or the (ii) Base Rate, defined as the highest of: (a) the Federal Funds Rate plus 0.50%, (b) Bank of America, N.A.’s prime rate and (c) the one month LIBOR adjusted daily plus 1.0%, plus the Applicable Margin. The Applicable Margin ranges from 0.25% to 1.75% based on the Company’s consolidated leverage ratios at the time of the borrowings under the Credit Agreement. The Company has ~~concluded~~agreed to pay a commitment fee in an amount that is equal to 0.25% per annum on the ~~positive evidence outweighs~~actual daily unused amount of the credit facility and that is due and payable quarterly in arrears. Loan origination costs are included in Other long-term assets and are being amortized over the five-year term of the Credit Agreement. As of December 31, 2019 and 2018, there were 0 outstanding borrowings under the Credit Agreement and the Company was in compliance with the terms of the Credit Agreement. The Credit Agreement contains customary representations, warranties, affirmative and negative ~~evidence~~covenants, including financial covenants, events of default, and ~~thus,~~indemnification provisions in favor of the ~~deferred tax assets~~ Lenders. These include restrictive covenants that require the Company not ~~otherwise~~ 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 Lender has been granted a ~~valuation allowance are realizable on a “more likely than not” basis. As such,~~first priority lien and security interest in substantially all of the ~~Company did not record a valuation allowance as of September 30, 2019 or December 31, 2018.~~Company’s assets, except for certain intangible assets.

16
23

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ~~(amounts in thousands, except per share amounts or as otherwise noted)~~

You should read the following discussion in conjunction with our financial statements and related notes appearing elsewhere in this report. In addition to historical information, this report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning our business, consolidated financial condition, and results of operations. The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking statements so that investors can better understand a company’s prospects and make informed investment decisions. Forward-looking statements are subject to risks and uncertainties, many of which are outside our control, which could cause actual results to differ materially from these statements. Therefore, you should not rely on any of these forward-looking statements. Forward-looking statements can be identified by such words as "will," "likely," "may," "believe," "expect," "anticipate," "intend," "seek," "designed," "develop," "would," "future," "can," "could," “estimate,” “potential,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters. All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, operations, costs, plans, and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements regarding the effect of COVID-19 and related impacts on our business, operations, and financial results, expected future operating results, expectations regarding the timing and receipt of regulatory results, anticipated levels of capital expenditures, and expectations of the effect on our financial condition of claims, litigation, and governmental and regulatory proceedings.

Please also refer to those factors described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 and in Part II, Item 1A “Risk Factors” of this report for important factors that we believe could cause actual results to differ materially from those in our forward-looking statements. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

Management Overview

We are a global, integrated joint preservation, restoration and regenerative ~~therapies~~solutions company based in Bedford, Massachusetts. Our mission is to be the global leader in orthopedic joint solutions and sports medicine with innovative technologies that exceed our customers’ expectations. We are committed to delivering ~~innovative therapies~~solutions to improve the lives of patients across athe orthopedic early-intervention continuum of care, ranging from ~~osteoarthritis~~joint pain management and regenerative products to sports medicine and orthopedic joint preservation and restoration. ~~We have over two~~With close to three decades of ~~global~~ expertise commercializing ~~more than 20~~innovative products, ~~based on our proprietary~~Anika has expanded beyond its hyaluronic acid, ~~(“HA”) technology. Our therapeutic portfolio includes ORTHOVISC, MONOVISC,~~or HA, technology platform, to add innovative and ~~CINGAL, viscosupplements which alleviate osteoarthritis pain~~differentiated offerings to a consolidated orthopedic portfolio. Today, we are supported by direct and ~~restore joint function by replenishing depleted HA, TACTOSET, a surgically-delivered therapy for bone repair procedures,~~distributor sales forces and ~~HYALOFAST, a solid HA-based scaffold to aid cartilage repair and regeneration.~~an active R&D engine focused on delivering innovative orthopedic solutions.

As we look towards the future, our business is uniquely positioned to capture value within our target market. Our ~~therapeutic offerings consist~~success is driven by our focus on our talent and culture, investment in innovative research and development programs to feed our product pipeline, expanding our commercial footprint domestically and internationally, and pursuing strategic inorganic growth opportunities. We intend to continue to accelerate our commercial capabilities as we transform into a customer-centric company dedicated to advancing the orthopedic early-intervention continuum of ~~products~~care. We believe that this commitment, along with our financial resources and operating history, have positioned us well to deliver sustained value to our shareholders.

In early 2020, we expanded our overall technology platform through our strategic acquisitions of Parcus Medical, LLC, or Parcus Medical, a sports medicine implant and instrumentation solutions provider focused on surgical repair and reconstruction of ligaments and tendons, and Arthrosurface, Incorporated, or Arthrosurface, a joint preservation technology company specializing in less invasive, bone preserving partial and total joint replacement solutions. We expect the ~~following areas: Orthobiologics, Dermal, Surgical,~~Parcus Medical and ~~Other, which includes~~Arthrosurface acquisitions to drive growth by:

•		Broadening our product portfolio further into the sports medicine joint preservation and restoration space;
•		Adding high-growth potential revenue streams;
•		Expanding our commercial capabilities;
•		Diversifying our revenue base; and
•		Expanding our product pipeline and research and development expertise.

In addition, we believe that our ~~ophthalmic~~historical HA and ~~veterinary products. All~~regenerative medicine expertise will be highly complementary to the sports medicine implants and instrumentation expertise of our products are based on HA, a naturally occurring, biocompatible polymer found throughout the body. Due to its unique biophysical and biochemical properties, HA plays an important role in a number of physiological functions such as the protection and lubrication of soft tissues and joints, the maintenance of the structural integrity of tissues,Parcus Medical and the ~~transport~~partial and total joint replacement expertise of ~~molecules~~Arthrosurface. We believe that the combination of these three businesses positions us to provide innovative solutions along the early-intervention orthopedic continuum of care and ~~within cells.~~

~~Our proprietary technologies~~build significant value for modifying the HA molecule allow product properties to be tailored specifically to therapeutic use. Our patented technology chemically modifies HA to allow for longer residence time in the body. We also offer products made from HA based on two other technologies: HYAFF, which is a solid form of HA,patients, physicians, and ~~ACP gel, an autocross-linked polymer of HA. Our technologies are protected by an extensive portfolio of owned and licensed patents.~~key healthcare system stakeholders.

Since our inception in 1992 through mid-2019, we ~~have~~ utilized a commercial partnership model for the distribution of our products to end-users. Our strong, worldwide network of distributors has historically provided, and continues to provide, a solid foundation for our revenue growth and territorial expansion. In ~~the third quarter of~~ 2019, we ~~completed the implementation of~~implemented a ~~U.S.-based~~ hybrid commercial approach that comprises a small direct model ~~through which we launched TACTOSET, our surgically-delivered bone repair therapy. By utilizing~~with a network of regional and local distributors in conjunction with our own small internal sales team, our hybrid model grants us a direct line of sight to our customers, enhanced commercial control over all aspects of sales, marketing, and market access, and the ability to scale our operations where and when appropriate. We intend to employ our hybrid commercial strategy for additional opportunitiesdistributor partners in the U.S. market, and we utilized this hybrid approach for the launch of TACTOSET in the second half of 2019. The acquisitions of Arthrosurface and Parcus Medical each added to our commercial infrastructure, especially in the United States. Arthrosurface has approximately 35 sales representatives and 100 distributors in the U.S., while Parcus Medical employs a similar, though more mature, model as us and has over 50 U.S. distributors in place.

For products in our Orthopedic Joint Preservation and Restoration family, including those currently in research and development or those not yet developed, we intend to leverage the expanded hybrid-direct sales infrastructure of the consolidated entity. This framework pairs an internal direct sales team with ~~respect~~external sales agent partners to maximize territorial coverage and sales generation. Generally, products within this family are sold into surgical ~~products utilized~~environments, such as hospitals or ambulatory surgery centers, and we believe that we have a strong infrastructure now in ~~an operating room environment.~~ place to service these customers. We completed the integration of our U.S. commercial organization including cross-training the sales staffs to sell the consolidated product portfolio. We assessed each selling territory to maximize our coverage and reach as many customers and patients as possible.

For longer-term future products in the U.S. market ~~especially those that are not utilized in an operating room environment,~~within our Joint Pain Management or Other families, we intend to evaluate ~~the appropriate~~our commercial model ~~for~~and possible alternatives or augmentations in each instance on a case-by-case basis, based on market dynamics ~~product type~~ and other factors. These models could include direct sales, distribution partnerships, or a hybrid of those forms. ~~We believe that~~For current products in the ~~combination of the direct and distribution commercial models will maximize the revenue potential from~~U.S. market, we intend to retain our current distribution relationships, including with DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopaedics, or Mitek, as they continue to provide meaningful revenue and ~~future product portfolio.~~growth opportunities.

Please see the section captioned “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Management Overview” in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, for a description of each of the above therapeutic areas, including the individual products.

On May 2, 2018, we publicly disclosed a voluntary recall of certain production lots of our HYAFF-based products, HYALOFAST, HYALOGRAFT C, and HYALOMATRIX. We communicated with all affected distributors in advance of that announcement, and we are taking all required or otherwise appropriate actions with respect to applicable regulatory bodies. We initiated the recall following internal quality testing, which indicated that the products were at risk of not maintaining certain measures throughout their entire shelf life. While there was no indication of any safety or efficacy issue related to the products, we are committed to the highest standards of quality and removed the products from the field as a precautionary measure. During the fourth quarter of 2018, we resolved this matter and resumed shipment of these products.

Key Developments during the Quarter Ended ~~September~~June 30, ~~2019~~2020

•		Our Board of Directors appointed Dr. Cheryl Blanchard as President and Chief Executive Officer on April 26, 2020. In addition, we enhanced our leadership team with the appointments of: • Bart Bracy as Vice President of Sales and Marketing for the Americas; • Steven Ek as Vice President of Research and Development; • Mark Brunsvold as President of Sports Medicine; and • James Chase as Senior Vice President of International Sales and Marketing with the additional responsibility for our Italian operations.
•		We completed the integration of our U.S. commercial organization, which includes 35 sales professionals and shared sales support and marketing functions. Our U.S. commercial team has been cross-trained to support the commercialization of the entire consolidated product portfolio through our hybrid-direct sales model.
•		We completed prelaunch activities for six sports medicine surgical devices and instruments, which recently received U.S. Food and Drug Administration clearance. The new products will enable procedures ranging from rotator cuff repair to arthroscopic knee repairs and treating arthritis damage in the hand and wrist. The products will be commercialized through our recently expanded sales and marketing team throughout the third quarter of 2020.
•		We expanded the TACOSET franchise, our surgically delivered regenerative therapy for bone repair procedures focused on treating insufficiency fractures, to include a small bone cannula set enabling improved and more accurate access in small joints and extremities.
•		We continued international expansion of our Joint Pain Management therapies, including the launch and first sales of CINGAL in Australia, and viscosupplement product approvals in Finland and Serbia.

~~We deployed our hybrid commercial model~~
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COVID-19 Pandemic

In March 2020, the World Health Organization declared the spread of the COVID-19 virus a pandemic. This pandemic has caused an economic downturn on a global scale, as well as significant volatility in the ~~U.S. by onboarding four regional sales directors~~financial markets. We cannot at this time predict the impact that the COVID-19 pandemic will have on our full year financial condition and ~~engaging~~operations, although we are continuing to monitor our ~~first U.S. distribution agent.~~

~~We completed~~operations for COVID-19 pandemic related changes. In the ~~soft commercial launch and the first sale~~second quarter of ~~TACTOSET,~~2020, we experienced product demand above our ~~first surgically-delivered regenerative therapy~~initial expectations determined in light of COVID-19, as elective procedure volume had a limited recovery in the ~~U.S. for bone repair procedures.~~

~~We expanded our experienced executive team with the addition of James Loerop as Executive Vice President of Business Development and Strategic Planning, and completed the recruitment efforts~~second half of the ~~Vice President~~quarter due to the easing of ~~Regulatory, Quality~~COVID-19 related restrictions in certain jurisdictions. However, certain areas of the United States and ~~Clinical Affairs, filled~~certain other countries have recently seen and continue to see increasing infection rates, which makes future results difficult to predict. Please see the section captioned “Part II, Item 1A. Risk Factors” of this report for additional information with respect to the risks faced by ~~Mira Leiwant.~~

our business in light of the COVID-19 pandemic. In this time of uncertainty as a result of the COVID-19 pandemic, we are focused on serving our customers while taking every precaution to provide a safe work environment for our employees and customers. We ~~held an Analyst~~have established and ~~Investor Day highlighting key facets~~implemented a work from home policy where possible. We may have to take further actions that we determine are in the best interests of our ~~5-year strategic plan~~employees or as required by federal, state, or local authorities. To date, we do not anticipate disruption to our ability to supply products to our customers. Our commercial day-to-day operations have been impacted due to the worldwide cancellation or delay of elective procedures, and ~~providing updates~~timelines associated with certain clinical studies and research and development programs have been delayed. While the impact has been limited to these items to date, we caution that there continues to be a possibility for potential future implementation of certain additional restrictions. The impact of these restrictions on our ~~transformation into a global commercial company.~~

operations, if implemented, is currently unknown but could be significant.

Research and Development

Our research and development efforts primarily consist of the development of new medical applications for our ~~HA-based~~ technology platform, the development of intellectual property with respect to our technology platform, the management of clinical trials for certain product candidates, the preparation and processing of applications for regulatory approvals, ~~or clearances at all relevant stages of product development,~~ and process development and scale-up manufacturing activities for our existing and new products. Our development focus is orthopedic and regenerative medicine and includes products for ~~joint~~ tissue ~~preservation~~protection, repair, and ~~restoration,~~regeneration, and we believe that our HA and surgical platform ~~technology provides~~technologies provide broad pipeline versatility and expansion opportunities within this targeted space. We routinely interact with key external stakeholders to leverage customer and patient insights in our development process to ensure that we bring needed therapies to the market. We anticipate that we will continue to commit significant resources in the near future to research and development activities, including in relation to preclinical activities and clinical trials. These activities are aimed at the delivery of a steady cascade of new product development and launches over the next several years. The COVID-19 pandemic, however, has resulted in a significant decline in elective procedures worldwide. This decline has impacted our ability to enroll patients in our clinical trials. Given the uncertainty around the scale and duration of the COVID-19 pandemic, it is difficult to predict the precise impact on our clinical activities.

In the third quarter of 2017, we submitted an application to the FDA for 510(k) clearance of TACTOSET, a surgically-delivered therapy for bone repair procedure that is reabsorbed by the body and replaced by the growth of new bone during the healing process. We received the 510(k) clearance from the FDA in December 2017, and we made this bone repair product commercially available in the United States during the third quarter of 2019 utilizing the previously-described hybrid commercial approach. In addition, we are working to expand our regenerative medicine pipeline with a new product candidate in the form of an implant for rotator cuff repair utilizing our proprietary solid HA, which could be used to repair partial and full-thickness rotator cuff tears. We finalized development of an initial product prototype during the fourth quarter of 2018. We are currently working on refining the prototype and performing preclinical testing of and developing the surgical instrumentation for the potential product. We anticipate that we will seek 510(k) clearance for this product in late 2020 or early 2021, with a potential commercial launch to occur in late 2021.

Our ~~third generation,~~third-generation, single-injection osteoarthritis product under development in the United States, CINGAL, ~~which~~ is a joint pain management therapy composed of our proprietary cross-linked HA material combined with an approved steroid, ~~and~~ is designed to provide both short- and long-term pain relief to patients, and is a main pipeline product and a component of our growth strategy. ~~We completed an initial~~In pursuing a U.S. regulatory pathway for CINGAL, we have conducted two Phase III clinical ~~trial during the fourth quarter of 2014~~trials and ~~an associated retreatment study in the first half of 2015. The results of the initial Phase III clinical trial~~two follow-up studies, and the associated retreatment study supported the Health Canada and CE Mark approval of the product, and the commercial launch of the product in both Canada and the European Union occurred in the second quarter of 2016. In the United States ~~after discussions with the U.S.~~ Food and Drug Administration, (“FDA”) related to the regulatory pathway for CINGAL, and a formal meeting with the FDA’s Office of Combination Products (“OCP”), we submitted a formal request for designation with OCP in October 2015. In its response, OCP assigned the product to the FDA’s Center for Drug Evaluation and Research (“CDER”) as the lead agency center for premarket review and regulation. We subsequently commenced work on a second Phase III clinical trial (“CINGAL 16-02 Study”) in the first quarter of 2017 and completed the associated 6-month follow-up in April 2018. We received and analyzed the data from the CINGAL 16-02 Study during the second quarter of 2018, and, while substantial pain reduction associated with CINGAL was evident at each measurement point, we determined based on statistical analysis that it did not meet the primary study endpoint of demonstrating a statistically significant difference in pain reduction between CINGAL and the approved steroid component of CINGAL at the six-month time point. In the first quarter of 2019, we met with theor FDA, ~~to discuss the potential approval pathway for CINGAL in the United States moving forward in light of the work we have previously done. In the meeting, the FDA~~has indicated ~~that~~ an additional Phase III ~~clinical~~ trial ~~would be~~is necessary to support U.S. ~~marketing approval for CINGAL, and we received feedback from the FDA on the parameters and requirements for this additional clinical trial. After substantial internal review, we decided~~approval. We are currently working to ~~conduct~~initiate a pilot study to ~~enable us to evaluate~~confirm our ~~full-scale Phase III clinical~~ trial design, ~~including patient and site selection criteria, and~~ increase ~~the~~our probability of success ~~for the~~in a Phase III ~~trial. We expect~~trial and generate data that ultimately will be needed to ~~begin enrolling patients in~~support FDA approval. As a result of the COVID-19 pandemic, we face uncertainty related to the timing of this CINGAL pilot ~~study in~~study. Given the ~~first half~~evolving environment, we will update product development and clinical trial timelines after we have more visibility with respect to the length and regional impacts of ~~2020.~~the COVID-19 pandemic.

We have several research and development programs underway for new products, including for HYALOFAST (in the United States), an innovative product for cartilage tissue repair, and other early stage regenerative medicine development programs. HYALOFAST, which received CE Mark approval in September 2009, is commercially available in Europe and certain international countries. During the first quarter of 2015, we submitted an Investigational Device Exemption (“IDE”) for HYALOFAST to the FDA, which was approved in July 2015. We commenced patient enrollment in a Phase III clinical trial in December 2015 and advanced site initiations and patient enrollment activities. In the second quarter of 2016, a supplement to the HYALOFAST IDE was approved to expand the inclusion criteria for the clinical study, which was aimed at decreasing the time needed to complete the clinical trial. An additional supplement to the HYALOFAST IDE was approved in June 2019, amending the clinical protocol to allow worldwide trial site locations and to adjust inclusion criteria with the goal of accelerating trial enrollment and maximizing our probability of a successful trial outcome. Given the changing medical landscape with respect to the randomization arm for this trial, the microfracture procedure, we are also actively pursuing other alternative strategies to accelerate patient enrollment. The previously-described voluntary recall of certain production lots of our HYAFF-based products did not impact the HYALOFAST clinical trial, as the product used in the clinical trial is not sourced from the affected production lots.

We are also currently proceeding with other research and development programs, one of which utilizes our proprietary HA technology to treat pain associated with common repetitive overuse injuries, such as lateral epicondylitis, also known as tennis elbow. We submitted a CE Mark application for this treatment during the first quarter of 2016 and received a CE Mark for the treatment of pain associated with tennis elbow in December 2016. We began work towards a post-market clinical study in relation to the CE Mark for this product in the fourth quarter of 2018. Outside of the United States, this product is marketed under the trade name ORTHOVISC-T. Additionally, in the second quarter of 2016, we submitted an IDE to the FDA to conduct a Phase III clinical trial for this treatment, which was approved by the FDA in June 2016. Notwithstanding that approval and in light of recent changes to the regulatory environment for HA-based products, in the first quarter of 2019, the FDA requested that we submit this product to OCP for designation, which we did early in the second quarter of 2019. We remain in discussions with the FDA with respect to the designation and approval pathway for this product. We also have several other research and development programs underway focused on expanding the ~~indications of our current products, including MONOVISC. During 2019, we will also be performing post-market clinical work in relation to the CE Mark for MONOVISC.~~

~~In addition to other early stage research~~orthopedic joint preservation and development initiatives we have undertaken, we previously entered into an agreement with the University of Liverpool in January 2018 to develop an injectable mesenchymal stem cell therapy for the treatment of age-related osteoarthritis. This agreement was mutually terminated in August 2019 after discussions between the parties.restoration product portfolio.

Results of Operations

Three and ~~Nine~~ SixMonths Ended ~~September~~June 30, ~~2019~~2020 Compared to Three and ~~Nine~~ SixMonths Ended ~~September~~June 30, ~~2018~~2019

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 $ Inc/(Dec) % Inc/(Dec) 2019 2018 $ Inc/(Dec) % Inc/(Dec)
(in thousands, except percentages) (in thousands, except percentages)
Product revenue $ 29,615 $ 26,781 $ 2,834 11 % $ 84,745 $ 78,581 $ 6,164 8 %
Licensing, milestone and contract revenue 82 6 76 1,267 % 93 18 75 417 %
Total revenue 29,697 26,787 2,910 11 % 84,838 78,599 6,239 8 %

Operating expenses:
Cost of product revenue 5,951 8,282 (2,331 ) (28 %) 20,098 24,279 (4,181 ) (17 %)
Research & development 4,158 4,232 (74 ) (2 %) 12,581 14,126 (1,545 ) (11 %)
Selling, general & administrative 7,539 5,700 1,839 32 % 22,713 28,207 (5,494 ) (19 %)
Total operating expenses 17,648 18,214 (566 ) (3 %) 55,392 66,612 (11,220 ) (17 %)
Income from operations 12,049 8,573 3,476 41 % 29,446 11,987 17,459 146 %
Interest and other income, net 482 522 (40 ) (8 %) 1,513 907 606 67 %
Income before income taxes 12,531 9,095 3,436 38 % 30,959 12,894 18,065 140 %
Provision for (benefit from) income taxes 3,331 1,496 1,835 123 % 7,817 1,890 5,927 314 %
Net income $ 9,200 $ 7,599 $ 1,601 21 % $ 23,142 $ 11,004 $ 12,138 110 %
Product gross profit $ 23,664 $ 18,499 $ 5,165 28 % $ 64,647 $ 54,302 $ 10,345 19 %
Product gross margin 79.9 % 69.1 % 76.3 % 69.1 %

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

$ Inc/(Dec)

% Inc/(Dec)

2020

2019

$ Inc/(Dec)

% Inc/(Dec)

(in thousands, except percentages)

(in thousands, except percentages)

Product revenue
$ 30,678 $ 30,413 $ 265 1 % $ 66,075 $ 55,130 $ 10,945 20%
Licensing, milestone and contract revenue
- 5 (5 ) (100% ) - 11 (11 ) (100%)
Total revenue
30,678 30,418 260 1 % 66,075 55,141 10,934 20%

Operating expenses:

Cost of product revenue
16,936 6,836 10,100 148 % 31,136 14,147 16,989 120%
Research & development
4,532 4,165 367 9 % 10,582 8,423 2,159 26%
Selling, general & administrative
14,550 7,502 7,048 94 % 28,981 15,174 13,807 91%
Goodwill impairment
- - - - 18,144 - 18,144 -
Change in fair value of contingent consideration
4,196 - 4,196 - (20,326 ) - (20,326 ) -
Total operating expenses
40,214 18,503 21,711 117 % 68,517 37,744 30,773 82%
Income (loss) from operations
(9,536 ) 11,915 (21,451 ) (180% ) (2,442 ) 17,397 (19,839 ) (114%)
Interest and other income (expense), net
(169 ) 533 (702 ) (132% ) 110 1,031 (921 ) (89%)
Income (loss) before income taxes
(9,705 ) 12,448 (22,153 ) (178% ) (2,332 ) 18,428 (20,760 ) (113%)
Provision for (benefit from) income taxes
(1,997 ) 3,013 (5,010 ) (166% ) (417 ) 4,486 (4,903 ) (109%)
Net income (loss)
$ (7,708 ) $ 9,435 $ (17,143 ) (182% ) $ (1,915 ) $ 13,942 $ (15,857 ) (114%)
Product gross profit
$ 13,742 $ 23,577 $ (9,835 ) (42% ) $ 34,939 $ 40,983 $ (6,044 ) (15%)
Product gross margin
45 % 78 % 53 % 74 %

Product Revenue

Product revenue for the three-month period ended ~~September~~June 30, ~~2019~~2020 was ~~$29.6~~$30.7 million, an increase of ~~$2.8~~$0.3 million as compared to ~~$26.8~~$30.4 million for the three-month period ended ~~September~~June 30, ~~2018.~~2019. Product revenue for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2019~~2020 was ~~$84.7~~$66.1 million, an increase of ~~8%, or $6.2~~$11.0 million as compared to ~~$78.6~~$55.1 million for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2018.~~2019. For the ~~three-month period~~three- and six-month periods ended ~~September~~June 30, ~~2019,~~2020, the increase in product revenue was primarily driven by growth in our ~~orthobiologics, dermal~~Orthopedic Joint Preservation and ~~other franchises. For~~Restoration product family, as a result of the ~~nine-month period ended September 30, 2019, the increase in product revenue was driven by growth in our orthobiologics, dermal~~recent acquisitions of Parcus Medical and ~~surgical franchises, partially~~Arthrosurface, offset by a decrease ~~resulting~~in revenue from ~~order timing in~~ our ~~other franchise.~~
Joint Pain Management product family due to COVID-19.

Historically, we categorized our product offerings into four product families: Orthobiologics, Dermal, Surgical, and Other, which included our ophthalmic and veterinary products. As a result of our acquisitions of Parcus Medical and Arthrosurface during the period ended June 30, 2020, we now divide our product portfolio into three product families: Joint Pain Management, Orthopedic Joint Preservation and Restoration, and Other.
20
27

The following tables present product revenue by product ~~group:~~group (dollars in thousands):

Three Months Ended September 30,
2019 2018 $ Inc/(Dec) % Inc/(Dec)
(in thousands, except percentages)
Orthobiologics $ 26,765 $ 24,097 $ 2,668 11 %
Surgical 578 1,191 (613 ) (51 %)
Dermal 417 80 337 421 %
Other 1,855 1,413 442 31 %
Total $ 29,615 $ 26,781 $ 2,834 11 %

Three Months Ended June 30,

2020

2019

$ Inc/(Dec)

% Inc/(Dec)

Joint pain management
$ 22,247 $ 26,632 $ (4,385 ) (16%)
Orthopedic joint preservation and restoration
6,622 802 5,820 726%
Other
1,809 2,979 (1,170 ) (39%)
$ 30,678 $ 30,413 $ 265 1%

Nine Months Ended September 30,
2019 2018 $ Inc/(Dec) % Inc/(Dec)
(in thousands, except percentages)
Orthobiologics $ 74,975 $ 69,778 $ 5,197 7 %
Surgical 4,071 3,700 371 10 %
Dermal 990 163 827 507 %
Other 4,709 4,940 (231 ) (5 %)
Total $ 84,745 $ 78,581 $ 6,164 8 %

Six Months Ended June 30,

2020

2019

$ Inc/(Dec)

% Inc/(Dec)

Joint pain management
$ 47,730 $ 49,482 $ (1,752 ) (4%)
Orthopedic joint preservation and restoration
14,518 966 13,552 1,403%
Other
3,827 4,682 (855 ) (18%)
$ 66,075 $ 55,130 $ 10,945 20%
~~Orthobiologics~~Joint Pain Management

Our ~~orthobiologics franchise~~Joint Pain Management product family consists of ~~orthopedic~~injectable viscosupplement products that provide pain relief from osteoarthritis, or OA, conditions. These products include MONOVISC, ORTHOVISC, and CINGAL, all widely-used, HA-based viscosupplements utilized to treat OA pain in humans, as well as HYVISC, an HA-based treatment for equine osteoarthritis pain. Overall, revenue from joint pain management therapies decreased 16% and ~~regenerative therapies. Overall, sales increased 11% and 7%~~4% for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019,~~2020, respectively, as compared to the same periods in ~~2018.~~ 2019 due to the impact of COVID-19.
Orthopedic Joint Preservation and Restoration
Our Orthopedic Joint Preservation and Restoration product family consists of the following key products:
•
Arthrosurface’s catalogue of over 150 partial and total joint surface implants and preservation solutions for the knee, shoulder, hip, ankle, wrist and toe that are designed to treat upper and lower extremity orthopedic conditions caused by trauma, injury and arthritic disease. These products are designed to be less invasive and more bone preserving than conventional joint replacements. These products are available in the United States and over 25 international markets.
•
Parcus Medical’s line of surgical implant and instrumentation solutions are used by surgeons to repair and reconstruct damaged ligaments and tendons due to sports injuries, trauma and disease. These solutions include screws, sutures, anchors, and other surgical systems that facilitate surgical procedures on the shoulder, knee, hip, distal extremities, and soft tissue. They are typically utilized by surgeons in ambulatory surgical center, or ASC, and hospital environments. These products are commercialized in the United States and over 60 international markets.
•
HYALOFAST, a biodegradable, HYAFF-based support for human bone marrow mesenchymal stem cells used for cartilage regeneration and as an adjunct for microfracture surgery. This product is currently available in Europe, South America, Asia, and certain other international markets.
•
TACTOSET, an HA-enhanced bone repair therapy designed to treat insufficiency fractures. TACTOSET is available in the United States, and we expect to leverage the commercial infrastructure of our recent acquisitions to increase market access to sell TACTOSET.
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For the three-month period ended ~~September~~June 30, 2019, the increase was primarily driven by increased sales of MONOVISC domestically, supplemented by an increase in sales of our international viscosupplement products, led by CINGAL. The increase in revenue for the nine-month period ended September 30, 2019 was primarily driven by increased revenue from MONOVISC domestically2020, Orthopedic Joint Preservation and ~~internationally, as well as increased revenue from CINGAL in international markets. We expect orthobiologics~~Restoration product revenue ~~in 2019~~increased by $5.8 million to continue to increase as compared to 2018, primarily due to the growth in international CINGAL and global MONOVISC revenue and the U.S. commercial launch of TACTOSET via the previously-described hybrid commercial approach.
~~Surgical~~
Our surgical franchise consists of products used to prevent surgical adhesions and to treat ear, nose, and throat (“ENT”) disorders. For the three-month period ended September 30, 2019, surgical product sales decreased by $0.6$6.6 million as compared to the same period in ~~2018~~2019, resulting primarily from ~~order timing.~~the additions of the Arthrosurface and Parcus Medical product portfolios. For the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2019, sales~~2020, Orthopedic Joint Preservation and Restoration product revenue increased ~~$0.4~~by $13.6 million to $14.5 million as compared to the same period in 2018. The increase in surgical product revenue for the nine-month period was due to increased sales to our worldwide ENT commercial partner and higher sales of surgical anti-adhesion products to our international distributors. We expect surgical product revenue to remain flat in 2019, ~~as compared to 2018.~~
~~Dermal~~
~~Our dermal franchise~~ ~~consists of advanced wound care products, which are~~based on our HYAFF technology, and aesthetic dermal fillers. Our advanced wound care products treat complex skin wounds ranging from burns to diabetic ulcers, with HYALOMATRIX and HYALOFILL as the lead products. Sales of our dermal products increased $0.3 million and $0.8 million for the three- and nine-month periods ended September 30, 2019, to $0.4 million and $1.0 million, respectively, as compared to the same periods in 2018. For the three- and nine-month periods ended September 30, 2019, the increases were due to recoveryresulting primarily from the ~~previously-described voluntary recall~~additions of ~~certain production lots of our HYAFF-based products in 2018. We expect dermal sales to increase in 2019 as a result of resuming HYALOMATRIX shipments in late 2018 after~~ the Arthrosurface and Parcus Medical product ~~was impacted by the voluntary recall in 2018.~~portfolios.
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Other

Our Other product family consists of legacy HA-based products that do not fit into one of our other primary product categories. These products include:
•
Advanced wound care products based on our HYAFF technology which are used to treat skin wounds, ranging from burns to diabetic ulcers. The lead product is HYALOMATRIX, a bi-layered, sterile and flexible advanced wound care device ideally suited for a range of wounds that include pressure ulcers, diabetic foot ulcers and deep second-degree burns.
•
Products used in connection with the treatment of ENT (ears, nose and throat) disorders. The lead product is MEROGEL, a HYAFF-based woven fleece nasal packing. We have partnered with Medtronic XoMed, Inc., or Medtronic, for worldwide distribution of these ENT products.
•
Ophthalmic products, including injectable, high molecular weight HA products used as viscoelastic agents in ophthalmic surgical procedures such as cataract extraction and intraocular lens implantation.
Other product revenue ~~includes revenues from our ophthalmic and veterinary franchises. Other product revenue increased~~decreased for the three-month period ended ~~September~~June 30, ~~2019~~2020 by ~~$0.4~~$1.2 million or ~~31%~~39%, ~~and decreased by $0.2 million or 5%, for the nine-month period ended September 30, 2019, each~~ as compared to the corresponding period in ~~2018. We expect other~~2019. Other product revenue ~~to remain flat in 2019~~decreased for the six-month period ended June 30, 2020 by $0.9 million or 18%, as compared to ~~2018.~~the corresponding period in 2019.
Product Gross Profit and Margin

Product gross profit for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019 increased $5.2~~2020 decreased $9.8 million and ~~$10.3~~$6.0 million to ~~$23.7~~$13.7 million and ~~$64.7~~$34.9 million, respectively, representing ~~79.9%~~45% and ~~76.3%~~53% of product revenue. Product gross profit for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2018~~2019 was ~~$18.5~~$23.6 million and ~~$54.3~~$41.0 million, respectively, or ~~69.1%~~78% and 74% of product revenue for ~~each of~~ the ~~periods.~~periods, respectively. The ~~increase~~decrease in product gross margin for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019,~~2020, as compared to the same periods in ~~2018,~~2019, was ~~in part~~primarily due to ~~more favorable changes~~fair valuation of inventory purchased associated with the two newly acquired companies and acquisition related amortization expenses. The inventory fair-value markup and amortization of acquired intangible assets resulted in ~~revenue mix, including~~ an increase ~~in domestic royalty revenue from the viscosupplement business. In addition, the product gross margin~~of cost of goods sold by approximately $3.8 million and $6.8 million for the ~~nine-month~~three- and six-month period ended ~~September~~June 30, ~~2018 was also adversely impacted by~~2020, respectively. During the ~~previously-describedvoluntary~~three-month period ended June 30, 2020, we determined we will not pursue CE Mark renewals for certain of our products primarily in the wound care product ~~recall.~~family. This product rationalization activity resulted in an inventory impairment charge of $1.9 million.

Research and Development

Research and development expenses for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 were ~~$4.2~~$4.5 million and ~~$12.6~~$10.6 million, representing ~~14%~~an increase of $0.4 and ~~15% of total revenue for the respective periods, a decrease of $0.1 million and $1.5~~$2.2 million, respectively, as compared to the same periods in ~~2018.~~2019. The ~~decreases~~increase in research and development expense ~~were primarily due to lower clinical trial expenses related to CINGAL~~ for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019, as compared~~2020 was primarily due to preparation activities for the ~~same periods in 2018, partially offset by higher pre-clinical~~CINGAL Pilot study, certain European post-market clinical studies, and product development activities associated with the development of product candidates in our research and development pipeline ~~including our rotator cuff therapy. Research~~at the legacy Anika business as well as at the recently acquired Parcus Medical and development expenses may potentially increase in 2019 as compared to 2018 as we further develop new products and clinical trial activities, including preparation for the CINGAL pilot study, perform required post-market clinical follow-ups for our MONOVISC and ORTHOVISC-T products in the European Union related to the European Union Medical Device Regulation.Arthrosurface businesses.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 were ~~$7.5~~$14.6 and $29.0 million, ~~and $22.7 million, representing 25% and 27% of total revenue for the period,~~ an increase of ~~$1.8~~$7.0 million and ~~decrease of $5.5~~$13.8 million, respectively, as compared to the same periods in ~~2018.~~2019. The increase in SG&A expenses for the ~~three-month~~three- and six-month periods ended June 30, 2020 was primarily related to our newly acquired sales infrastructure and expenses related to the acquisitions of Parcus Medical and Arthrosurface, and asset impairments associated with product rationalization discussed above, partially offset by a decrease in stock compensation expense in the six-month period ended ~~September~~June 30, ~~2019~~2020 due to the forfeiture of unvested equity awards.
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Goodwill Impairment Charge
We assess goodwill for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. U.S. government policy responses to the COVID-19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of domestic elective surgical procedures. As a result of these events during the first quarter of 2020, we performed a quantitative assessment of goodwill impairment related to the Parcus and Arthrosurface reporting unit as of March 31, 2020. The results of these interim impairment tests indicated that the estimated fair value of this reporting unit was less than its carrying value. Consequently, a non-cash goodwill impairment charge of $18.1 million was recorded in the quarter ended March 31, 2020. The decline in fair value was primarily due to decreases in immediate term revenue and related cash flows as a result of the ~~establishment~~temporary suspension of domestic elective procedures which directly impact the Parcus and Arthrosurface reporting unit. For the quarter ended June 30, 2020, there have been no events or changes in circumstances that indicate that the carrying value of goodwill as determined on March 31, 2020 may not be recoverable. If the pandemic's economic impact is more severe, or if the economic recovery takes longer to materialize or does not materialize as strongly as anticipated, this could result in further goodwill impairment charges.
Contingent Consideration Fair Value Change
In the three- and six-month periods ended June 30, 2020, we recorded a $4.2 million expense and a $20.3 million net benefit, respectively, related to the change in fair value of our ~~U.S. hybrid commercial model~~contingent consideration liabilities incurred as a result of the acquisition of Parcus Medical and Arthrosurface in January and February of 2020. The liability for contingent consideration is remeasured at each reporting period until the ~~soft launch~~contingency is resolved. The $4.2 million increase in fair value of ~~TACTOSET, including increased personnel-related costs and external professional fees. The decrease~~the contingent consideration for ~~the nine-month period was primarily due to the one-time, non-cash, stock-based compensation expense of approximately $8.0 million in~~ the three-month period ended ~~March 31, 2018 related~~June 30, 2020 was due to an increase in revenue assumptions based on second quarter results and future projections, and other assumption changes as a result of events that occurred in the ~~retirement of our former Chief Executive Officer. We expect SG&A expenses for 2019 to~~quarter. The $20.3 million decrease in ~~comparison~~fair value of the contingent consideration for six-month period ended June 30, 2020 was due to ~~2018~~a decrease in the near term projections of revenue due to the above mentioned one-time charge. The decrease will be partially offset by investments in our global commercial capabilities and the implementation of improved business and financial technology platforms required to grow our business.
COVID-19 pandemic.

Income Taxes

The benefit from income taxes was $2.0 million and $0.4 million for the three- and six-month periods ended June 30, 2020, based on effective tax rates of 20.6% and 17.9%, respectively. The provision for income taxes was ~~$3.3~~$3.0 million and ~~$7.8~~$4.5 million for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, 2019, based on effective tax rates of ~~26.6%~~24.2% and ~~25.3%, respectively. The provision for income taxes was $1.5 million and $1.9 million for the three- and nine-month periods ended September 30, 2018, based on effective tax rates of 16.4% and 14.7%~~24.3%, respectively. The net ~~increase~~decrease in the effective tax rate for the three- and ~~nine- month~~six-month periods ended ~~September~~June 30, ~~2019,~~2020, as compared to the same periods in ~~2018,~~2019, was primarily due to the ~~windfall~~$1.9 million tax ~~benefit we realized in June 2018 related to exercises~~expense on the impairment of ~~employee equity awards~~non-tax deductible goodwill offset by the ~~limitation~~$1.7 million tax benefit on the ~~deductibility~~decrease in the fair value of ~~executive compensation for accelerated stock vesting upon~~ the ~~retirement of our former Chief Executive Officer on March 9, 2018.~~contingent consideration. In addition, we recorded a $0.3 million ~~and $0.4 million~~ tax ~~shortfall~~windfall for the ~~three- and nine-month periods~~six-month period ended ~~September~~June 30, ~~2019~~2020 related to exercises of employee equity awards. We recognized a net deferred tax liability of $11.2 million primarily due to intangible assets and inventory step up offset by net operating losses and research and development tax credits associated with the Arthrosurface acquisition discussed in Note 3.
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Non-GAAP Financial Measures
Adjusted EBITDA

We present information below with respect to adjusted EBITDA, which we define as our net income excluding interest and other income, net, income tax benefit (expense), depreciation and amortization, stock-based compensation, product rationalization and ~~stock-based compensation.~~acquisition related expenses. In light of the COVID-19 pandemic, we have also excluded the impacts of goodwill impairment charges and changes in the fair value of contingent consideration associated with our recent acquisition transactions. This financial measure is not based on any standardized methodology prescribed by accounting principles generally accepted in the United States (“GAAP”) and are not necessarily comparable to similarly titled measures presented by other companies.
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We have presented adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business. We believe this financial measure helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. In particular, we believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core operating performance. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making.

Adjusted EBITDA is not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest GAAP equivalent. Some of these limitations are:

adjusted EBITDA excludes depreciation and amortization and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future, the cash requirements for which are not reflected in adjusted EBITDA;
we exclude stock-based compensation expense from adjusted EBITDA although (a) it has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses would be higher, which would affect our cash position;
the expenses and other items that we exclude in our calculation of adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from adjusted EBITDA when they report their operating results;
~~adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs;~~
~~adjusted EBITDA does not reflect provision for (benefit from) income taxes or the cash requirements to pay taxes; and~~
•
adjusted EBITDA excludes depreciation and amortization, and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future, the cash requirements for which are not reflected in adjusted EBITDA;

��
•
we exclude stock-based compensation expense from adjusted EBITDA although (a) it has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses would be higher, which would affect our cash position;
•
we exclude acquisition related expenses, including impacts of purchase price accounting, such as the impact of inventory fair-value step up on cost of goods sold, amortization and depreciation of acquired assets, transactions costs, and other related expenses;
•
we exclude certain product rationalization charges related to non-core legacy assets as result of managing our financial position in light of our recent acquisitions, the impact of COVID-19 and changing regulatory requirements;
•
we exclude goodwill impairment charges and changes in the fair value of contingent consideration;
•
the expenses and other items that we exclude in our calculation of adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from adjusted EBITDA when they report their operating results;
•
adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs;
•
adjusted EBITDA does not reflect provision for (benefit from) income taxes or the cash requirements to pay taxes; and
•
adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments.

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31

The following is a reconciliation of net income to adjusted EBITDA for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, 2020 and 2019, ~~and 2018, respectively:~~respectively (dollars in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Net income $ 9,200 $ 7,599 $ 23,142 $ 11,004
Interest and other income, net (482 ) (522 ) (1,513 ) (907 )
Provision for income taxes 3,331 1,496 7,817 1,890
Depreciation and amortization 1,516 1,513 4,459 4,433
Stock-based compensation 1,311 1,177 4,140 10,064
Adjusted EBITDA $ 14,876 $ 11,263 $ 38,045 $ 26,484

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Net income (loss)
$ (7,708 ) $ 9,435 $ (1,915 ) $ 13,942
Interest and other income (expense), net
169 (533 ) (110 ) (1,031 )
Income taxes
(1,997 ) 3,013 (417 ) 4,486
Depreciation and amortization
1,739 1,466 3,412 2,943
Stock-based compensation
2,240 1,443 2,033 2,829
Product rationalization charges
2,892 - 2,892 -
Acquisition related expenses
4,028 - 11,354 -
Goodwill impairment
- - 18,144 -
Change in fair value of contingent consideration (benefit)
4,196 - (20,326 ) -
Adjusted EBITDA
$ 5,559 $ 14,824 $ 15,067 $ 23,169

Adjusted EBITDA in the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019, increased $3.6~~2020, decreased $9.3 million and ~~$11.6~~$8.1 million ~~respectively,~~ as compared with the comparable periods in ~~2018.~~2019. The ~~increase~~decrease in adjusted EBITDA for the periods was primarily due to an increase in ~~total~~cost of product revenue and selling and marketing expenses.
Adjusted Net Income and Adjusted EPS
We present information below with respect to adjusted net income and adjusted diluted earnings per share (“adjusted EPS”), which we define as our net income excluding acquisition related expenses and the impacts of goodwill impairment charges and changes in the fair value of contingent consideration, as well as non-cash product ~~gross profit~~rationalization charges associated with certain non-core legacy products, each on a tax effected basis. Acquisition related expenses are those that we would not have incurred except as a direct result of acquisition transactions. Acquisition related expenses consist of investment banking, legal, accounting, and ~~operating~~other professional and related expenses and the impact of purchase accounting, associated with acquisition transactions. In the context of adjusted net income, the impact of purchase accounting includes the amortization of inventory step up and the amortization of intangible assets recorded as part of purchase accounting for acquisition transactions. The amortized assets contribute to revenue generation, and the amortization of such assets will recur in future periods until such assets are fully amortized. These assets include the estimated fair value of certain identified assets acquired in acquisitions, including in-process research and development, developed technology, customer relationships and acquired trade name. We define adjusted EPS as GAAP diluted earnings per share excluding acquisition related costs on a tax-adjusted per share basis. As a result of COVID-19, we also exclude the impacts of acquisition related expenses and the impacts of goodwill impairment charges and changes in the fair value of contingent consideration as well as non-cash product rationalization charges associated with certain non-core legacy assets, each on a ~~more favorable revenue mix.~~tax effected basis. This financial measure is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similarly titled measures presented by other companies.
We have presented adjusted net income and adjusted EPS because they are key measures used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business. We believe these financial measures help identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. In ~~addition,~~particular, we believe that the ~~product gross margin~~exclusion of the expenses eliminated in calculating adjusted net income and adjusted EPS can provide useful measures for period-to-period comparisons of our core operating performance. Accordingly, we believe that adjusted net income and adjusted EPS provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making.
The following is a reconciliation of adjusted net income to net income for the ~~nine-month~~three- and six-month period ended ~~September~~June 30, ~~2018 was also adversely impacted by the previously-describedvoluntary product recall.~~2020 and 2019, respectively (dollars in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Net income (loss)
$ (7,708 ) $ 9,435 $ (1,915 ) $ 13,942
Product rationalization charges, tax effected
2,377 - 2,377 -
Acquisition related expenses, tax effected
3,085 - 8,678 -
Goodwill impairment, tax effected
- - 15,773 -
Change in fair value of contingent consideration, tax effected
3,474 - (17,208 ) -
Adjusted net income
$ 1,228 $ 9,435 $ 7,705 $ 13,942

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The following is a reconciliation of adjusted diluted EPS to diluted EPS for the three- and six-month periods ended June 30, 2020 and 2019:

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Diluted earnings (loss) per share
$ (0.54 ) $ 0.67 $ (0.13 ) $ 0.98
Product rationalization charges, tax effected
0.17 - 0.17 -
Acquisition related expenses per share, tax effected
0.22 - 0.61 -
Goodwill impairment, tax effected
- - 1.10 -
Change in fair of value contingent consideration, tax effected
0.24 - (1.19 ) -
Adjusted diluted EPS
$ 0.09 $ 0.67 $ 0.56 $ 0.98
Adjusted net income and adjusted diluted EPS for the three-month period ended June 30, 2020 decreased $8.2 million and $0.58, respectively, as compared with the comparable period in 2019. Adjusted net income and adjusted diluted EPS for the six-month period ended June 30, 2020 decreased $6.2 million and $0.42, respectively, as compared with the comparable period in 2019. The decrease for the three- and six-month periods was primarily due to an increase in cost of product revenue and related revenue mix, as well as selling and marketing expenses.
Liquidity and Capital Resources

We require cash to fund our operating expenses and to make capital expenditures. We expect that our requirements for cash to fund these uses will increase as our operations expand. Historically we have generated positive cash flow from operations, which, together with our available cash, investments, and debt, have met our cash requirements. Cash, cash equivalents, and investments aggregated ~~$173.2~~$144.4 million and ~~$159.0~~$184.9 million, and working capital totaled ~~$212.6~~$193.4 million and ~~$191.7~~$218.0 million as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. ~~In addition, as~~We are closely monitoring our liquidity and capital resources for any potential impact that the COVID-19 pandemic may have on our operations. As a precautionary measure, we executed a drawdown of ~~September 30, 2019, we have~~ $50.0 million ~~of available credit under~~from our ~~senior revolving~~existing credit facility with Bank of America ~~N.A. We believe~~on April 8, 2020. Our credit facility has an additional $50.0 million accordion feature that it could potentially access in the future. In addition, we are exploring other sources of funding aimed at further supporting our liquidity profile, as well as maintaining business and organizational continuity through the pandemic. In parallel, we have ~~adequate financial resources~~implemented a number of internal short-term expense controls and are prioritizing business initiatives to support our business for at least the twelve months from the issuance date of our financial statements. As of September 30, 2019, we were in compliance with the terms of our credit agreement with Bank of America, N.A.conserve cash flow.

Cash provided by operating activities was ~~$24.0~~$4.6 million for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2019,~~2020, as compared to cash provided by operating activities of ~~$24.9~~$13.9 million for the same period in ~~2018.~~2019. The decrease in cash provided by operating activities was primarily ~~related~~attributable to ~~a decrease in collections of our accounts receivable due to timing of receipts and a~~the decrease in accrued ~~expenses.~~expenses and the increase in inventory for the six-month period ended June 30, 2020.

Cash used in investing activities was ~~$1.3~~$94.8 million for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2019,~~2020, as compared to cash ~~provided by~~used in investing activities of ~~$47.7~~$3.4 million for the same period in ~~2018.~~2019. The change was primarily due to ~~increased purchases~~the consideration paid for the acquisitions of ~~investments, partially offset by lower capital expenditures as compared to~~Parcus Medical and Arthrosurface in the ~~same~~six-month period ~~in 2018.~~ended June 30, 2020.

Cash ~~used~~provided by financing activities was ~~$8.4~~$49.5 million for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2019,~~2020, as compared to cash used by financing activities of ~~$28.9~~$30.1 million for the same period in ~~2018. In each period,~~2019. Our credit facility has an additional $50.0 million accordion feature that we executed a $30.0 million accelerated share repurchase agreement. The decrease in cash used in financing activities for the nine-month period ended September 30, 2019, was primarily attributable to a $18.9 million increase in proceeds from the exercise of employee equity awards as compared to the corresponding periodcould potentially access in the ~~prior year.~~future.

Critical Accounting Policies and Estimates

There were no other significant changes in our critical accounting policies or estimates during the three months ended ~~September~~June 30, ~~2019~~2020 to augment the critical accounting estimates disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018,~~2019, other than those described below.
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Business Combinations and Contingent Consideration
Amounts paid for acquisitions are allocated to the intangible and tangible assets acquired and liabilities assumed, if any, based on their fair values at the dates of acquisition. This purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets and deferred revenue obligations. Critical estimates include, but are not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions determined by management. Any excess of purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of comprehensive income. The fair value of contingent consideration includes estimates and judgments made by management regarding the probability that future contingent payments will be made.
We use the income approach to determine the fair value of certain identifiable intangible assets including developed technology and IPR&D. This approach determines fair value by estimating after-tax cash flows attributable to these assets over their respective useful lives and then discounting these after-tax cash flows back to a present value. The estimated economic lives were determined using a variety of indicators including historical usage, evolutionary changes and other observable market data. We base our assumptions on estimates of future cash flows, expected growth rates and expected trends in technology. We base the discount rate used to arrive at the present value used in this method as of the date of acquisition on the time value of money and certain industry-specific risk factors. We use the relief from royalty method of the income approach to determine the fair value of trade names. This approach determines fair value by estimating the after-tax royalty savings attributable to owning the intangible asset and then discounting these after-tax royalty savings back to a present value. We base our assumptions on the estimated revenue attributable to the trade name and the estimated royalty rate attributable to the trade name. We use the avoided costs/lost profits method to determine the fair of customer relationships. This approach determines fair value by estimating the projected revenues related to the asset and estimated costs to recreate the intangible asset. We believe the estimated purchased customer relationships, developed technologies, trade name, and in process research and development amounts so determined represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the assets.
We use the comparative sales method to determine the fair value of work-in-process and finished goods inventory acquired and ultimately the inventory step-up required. The fair value of WIP inventory was estimated as the selling price less the sum of (a) costs to complete, (b) costs of disposal, and (c) a reasonable profit allowance for the selling effort of the acquiring entity based on profit for similar products. The fair value of finished goods inventory was estimated as the selling price less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity based on profit for similar products.
For contingent consideration, management updates these estimates and the related fair value of contingent consideration at each reporting period based on the estimated probability of achieving the earnout targets and applying a discount rate that captures the risk associated with the expected contingent payments. Under the Parcus Medical and Arthrosurface merger agreements, there are earn-out milestones totaling $100 million payable from 2020 to 2022. Parcus Medical and Arthrosurface each have net sales earn-out milestones annually from 2020 to 2022, while Arthrosurface has regulatory earn-out milestones in 2020 and 2021. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model or a Monte Carlo simulation approach. To the extent our estimates change in the ~~Notes~~future regarding the likelihood of achieving these targets we may need to record material adjustments to our accrued contingent consideration. Changes in the fair value of contingent consideration are recorded in our consolidated statements of comprehensive income.
34

Goodwill
We assess goodwill for impairment on November 30 of each year, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether further impairment testing is necessary, such as macroeconomic conditions, changes in our industry and the markets in which we operate, and our market capitalization, and our reporting units' historical and expected future financial performance. If we conclude that it is more likely than not that a reporting unit's fair value is less than it’s carrying value or we bypass the optional qualitative assessment, recoverability is assessed by comparing the fair value of the reporting unit with its carrying amount. If a reporting unit's carrying value exceeds its fair value, we will measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
For quantitative tests, we estimate the fair value of the reporting units using an income approach. Under the income approach, the fair value of the reporting unit is estimated based on the discounted present value of the projected future cash flows. Rates used to discount cash flows are dependent upon interest rates and the cost of capital based on our industry and capital structure, adjusted for equity and size risk premiums based on market capitalization, as well as other financial inputs from a selection of comparable publicly-traded companies with product offerings similar to those of the reporting unit. Estimates of future cash flows are dependent on our knowledge and experience about past and current events, and as well as significant judgments and assumptions about conditions we expect to exist, including revenue growth rates, margins, and the discount rate. Our estimates of cash flows are also based on historical and future operating performance, economic conditions and actions we expect to take. These assumptions are based on a number of factors, including future operating performance, economic conditions, actions we expect to take, and present value techniques. There are inherent uncertainties related to these factors and management’s judgment in applying them to the ~~condensed consolidated financial statements included~~analysis of goodwill impairment. It is possible that assumptions underlying the impairment analysis will change in ~~this report, including~~a manner that impairment in value may occur in the ~~adoption~~future.
U.S. government policy responses to the COVID-19 pandemic and the resulting changes in healthcare guidelines caused a temporary suspension of ~~the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification,~~ ~~Leases~~~~, (ASC 842) effective January 1, 2019.~~domestic elective surgical procedures. As a result of these events during the first quarter, we assessed goodwill for each of our ~~adoption~~reporting units. As of March 31, 2020, there was $7.5 million of goodwill on the new lease standard, we re-assessed the estimates, assumptions, and judgments that are most critical in our recognition of leases. For information regarding the impact of recently adopted accounting standards, refer to Notes 2 and 12balance sheet related to the ~~condensed~~legacy Anika reporting unit. We assessed that our legacy reporting unit’s fair value was greater than its carrying value using the qualitative assessment. Upon their acquisition, we recorded $44.4 million of goodwill on the balance sheet related to the combined Parcus Medical and Arthrosurface reporting unit. We performed a quantitative assessment of goodwill impairment related to the Parcus Medical and Arthrosurface reporting unit. The temporary suspension of domestic elective procedures directly impacted the Parcus and Arthrosurface reporting unit, resulting in an immediate term revenue decline. We further applied an increase in discount rate due to the increased overall uncertainty. These key changes, together with estimates on operating expenses, capital requirements, tax benefits, and other cash flow projections indicated that the estimated fair value of this reporting unit was less than its carrying value. Consequently, a goodwill impairment charge of $18.1 million was recorded in the quarter ended March 31, 2020. There were no events during the three months ended June 30, 2020 that indicated any further impairments to the Parcus Medical and Arthrosurface reporting unit.
In the event the financial ~~statements included~~performance of our reporting units do not meet our expectations in ~~this report.~~the future, we experience future prolonged market downturns, negative trends from the COVID-19 pandemic continue, or there are other negative revisions to key assumptions, we may be required to perform additional impairment analyses and could be required to recognize a goodwill impairment charge.
24
Recent Accounting Pronouncements

A discussion of Recent Accounting Pronouncements is included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018~~2019 and is updated in the Notes to the condensed consolidated financial statements included in this report.
35

Contractual Obligations and Other Commercial Commitments

Our contractual obligations and other commercial commitments are summarized in the section captioned “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations and Other Commercial Commitments” in our Annual Report on Form 10-K for the year ended December 31, ~~2018. We had~~2019. Material contractual obligations incurred in the quarter included those described in Note 16, “Revolving Credit Agreement.” There were otherwise no material changes ~~outside the ordinary course~~ to our contractual obligations reported in our ~~2018~~2019 Annual Report on Form 10-K or our Quarterly Report on Form 10-Q for the interim period ended March 31, 2020 during the ~~nine months~~six-month period ended ~~September~~June 30, ~~2019.~~2020. For additional discussion, see Note 1310, “Commitments and Contingencies,” to the condensed consolidated financial statements included in this report.

To the extent that funds generated from our operations, together with our existing capital resources, are insufficient to meet future requirements, we will be required to obtain additional funds through equity or debt financings, strategic alliances with corporate partners and others, or through other sources. No assurance can be given that any additional financing will be made available to us or will be available on acceptable terms should such a need arise.

Off-balance Sheet Arrangements

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

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risks and the ways we manage them are summarized in the section captioned “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. There have been no material changes in the first ~~nine~~six months of ~~2019~~2020 to our market risks or to our management of such risks.

ITEM 4.
CONTROLS AND PROCEDURES

(a)
Evaluation of disclosure controls and procedures.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. On an on-going basis, we review and document our disclosure controls and procedures, and our internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

25

(b)
Changes in internal controls over financial reporting.

As of the filing of this report, management is in the process of evaluating and integrating the internal controls of the acquired Parcus Medical and Arthrosurface businesses into our existing operations. During the three-month period ended June 30, 2020, we continued to implement controls over the accounting and disclosures related to purchase accounting and integration of the Parcus Medical and Arthrosurface businesses, as well as to enhance controls surrounding the goodwill impairment assessment. There were no other material changes in our internal control over financial reporting during the three-month period ended ~~September~~June 30, ~~2019~~2020, that have materially affected, or ~~that are~~were reasonably likely to materially affect, our internal control over financial reporting.
36

As a result of the COVID-19 pandemic, certain employees began working remotely in March 2020. Additionally, we have enhanced existing controls by implementing more frequent forecasting and increasing board oversight. Notwithstanding these changes, we have not identified any material changes in our internal control over financial reporting. We are continually monitoring and assessing the COVID-19 situation to determine any potential impact on the design and operating effectiveness of our internal controls over financial reporting.

PART II: OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

We are 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, we do not expect the resolution of these occasional legal proceedings to have a material adverse effect on our financial position, results of operations, or cash flow. There have been no material changes to the information provided in the section captioned “Part I, Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~
2019.

ITEM 1A.
RISK FACTORS

Except as set forth below, there have been no material changes to the risk factors described in the section captioned “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019, as updated by the section captioned “Part II, Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the interim period ended March 31, 2020. In addition to the other information set forth in this report, you should carefully consider the factors discussed in the section captioned “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019 and the section captioned “Part II, Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the interim period ended March 31, 2020, which could materially affect our business, financial condition, or future results. The risks described in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition, and/or operating results.

Risks Related to the COVID-19 Pandemic
The outbreak of COVID‑19, the novel strain of coronavirus, continues to grow in the United States and numerous other countries. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. Government and private sector actions responding to the pandemic have disrupted domestic business activities generally and have adversely affected our business operations. Numerous countries, including the United States and Italy, have imposed restrictions on travel, as well as general movement restrictions, business closures and other measures imposed to slow the spread of COVID‑19.
We have previously set forth key risks from the COVID‑19 pandemic as updated by the statements below. The current circumstances are dynamic, however. While the quarantine, social distancing, and other regulatory measures instituted or recommended in response to COVID‑19 are expected to be temporary, the full impact of COVID-19 on our business operations and financial condition, including the duration and severity of the impact on overall customer demand and on our clinical studies, cannot be reasonably estimated at this time. The COVID‑19 pandemic could adversely affect the economies and financial markets of many countries, resulting in an economic downturn and changes in global economic policy that could reduce demand for our products have a material adverse impact on our business, operating results and financial condition.
37

Our operations are located in areas impacted by the COVID-19 pandemic, and those operations have been, and may continue to be, adversely affected by the COVID-19 pandemic.
The coronavirus has impacted the social and economic framework in the United States and Italy. Our administrative, research and development, and manufacturing operations are principally performed at our U.S. facilities in Massachusetts and Florida. Though our Italian operations represent a relatively small percentage of our consolidated business, we conduct commercial activity, product development, sales and inventory management and other services in our office in Padova, Italy. Our business operations in the United States and Italy are subject to potential business interruptions arising from protective measures that may be taken by Italian, U.S., Massachusetts and Florida regulators and other agencies and governing bodies. Business disruptions elsewhere in the world could also negatively affect the sources and availability of components and materials that are essential to the operation of our business in both the United States and Italy. While we have seen improvement in certain areas in which we do business over the course of the second quarter of 2020 as it related to the pandemic, the situation in other jurisdictions, including Florida, has deteriorated over the same period. It is difficult to predict with certainty the timing for a return to pre-COVID-19 pandemic operations.
Stay-at-home orders, business closures, travel restrictions, supply chain disruptions, employee illness or quarantines, and other extended periods of interruption to our business could result in disruptions to our operations, which could adversely impact the growth of our business, could cause us to cease or delay operations, and could prevent our customers from receiving shipments or processing payments. To mitigate the spread of COVID-19, we transitioned a significant subset of our employee population to a remote work environment, which may exacerbate various cybersecurity risks to our business, including an increased demand for information technology resources, an increased risk of phishing and other cybersecurity attacks, and an increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information. Extended periods of interruption to our corporate, development or manufacturing facilities due to the COVID-19 pandemic could cause us to lose revenue and market share, which would depress our financial performance and could be difficult to recapture. Our business may also be harmed if travel within, to or from the United States and Italy continues to be restricted or inadvisable. In addition, employee disruptions and remote working environments related to the COVID-19 pandemic have impacted, and are continuing to impact, the efficiency and pace with which we work and develop our product candidates and our manufacturing capabilities.
The COVID-19 pandemic has resulted in a significant reduction in the number of elective surgeries being performed, which has decreased the usage of, and revenue from, certain of our products.
A significant portion of the demand for our products results from the usage of our products in elective surgeries. As COVID-19 reached a global pandemic level in March 2020, the volume of elective surgery procedures worldwide, including in the U.S. and Western Europe, declined precipitously, as healthcare systems diverted resources to meet the increasing demands of managing COVID-19 and as patients deferred elective surgeries to avoid the risk of exposure to the coronavirus. The American College of Surgeons, U.S. surgeon general, and other public health bodies recommended delaying elective surgeries during the COVID-19 pandemic, and surgeons and medical societies are evaluating the risks of minimally invasive surgeries in the presence of infectious diseases.
The decreased number of procedures performed has negatively impacted our revenue and operating results, and it is impossible to reasonably predict when the level of elective procedures will begin to return to pre-COVID-19 levels. While the easing of COVID-19 restrictions in certain regions resulted in elective surgical procedures resuming more quickly than we had anticipated in May and June of 2020, there is significant uncertainty in light of ongoing infection rates in many areas of the United States and in various international jurisdictions. Despite this modest recovery, procedure volumes did not return to pre-COVID-19 levels and there is no guarantee that the positive trends will continue. As a result, elective procedures may yet again decline substantially in future periods, especially in geographies with substantial COVID-19 infection rates. In the United States, COVID-19 policymaking is being handled largely on a state-by-state, and even city-by-city, basis. The international outlook is similar, as countries are taking varying approaches to combating the pandemic and returning to pre-COVID operations. The pace of recovery will continue to be phased and regionally determined based on local orders and the overall impact of COVID-19. A continuation of the decreased level of elective procedures due to COVID-19 will result in a loss of sales and profits and other material adverse effects on our business and operating results.
38

Risks Related to Our Business and Industry
~~We may not succeed in implementing~~Our business is dependent upon hiring and ~~executing~~retaining qualified management and technical personnel, including our ~~hybrid commercial model for TACTOSET and certain other products in the United States,~~recent hiring of a chief executive officer and our ~~failure~~need to ~~do so~~hire a chief financial officer.
We are highly dependent on the members of our management and technical staff, the loss of one or more of whom could ~~negatively impact~~have a material adverse effect on us. We have experienced a number of management changes in recent years, and there can be no assurances that any future management changes will not adversely affect our ~~business~~business. We believe that our future success will depend in large part upon our ability to attract and ~~financial results.~~
For near-term opportunities in the U.S. market, especially those with respect to orthopedic surgical products utilized in an operating room environment, we intend to utilize our hybrid commercial model through which we partner our own small internal sales team with a network of localretain technical and ~~regional distribution agents. This approach is a departure~~highly skilled executive, managerial, professional, and technical personnel. We face significant competition for such personnel from ~~our historical distribution model in the United States,~~competitive companies, research and ~~we cannot~~academic institutions, government entities, and other organizations. There can be ~~certain~~no assurance that we will be successful in ~~implementing and executing on this hybrid commercial approach~~hiring or ~~that, even if~~retaining the personnel we ~~are able to implement it, the approach will be successful.~~require. The commercialization of TACTOSET and any future products launched under this model is subject to many risks, including that we have not previously commercialized a product on our own and cannot guarantee that we will be able to do so successfully or profitably. We may not be able to attract or retain the sophisticated personnel required for such approach, to identify or negotiate favorable or acceptable terms with distribution agents, to achieve in-market pricing at the levels we have targeted, to timely execute on our strategies for market penetration generally, or to generate meaningful sales of TACTOSET or other future products as a result of other market dynamics. Among other factors, our competitors generally offer a broader range of products than we do, which could make their aggregate offerings more attractive to end-users, distributor agents, group purchasing organizations, hospitals, and surgeons. Our failure to ~~successfully implement~~hire and ~~execute on this commercial approach~~retain such personnel could have a material adverse effect on our business, financial condition, and results of operations.

26
~~We are facing~~On January 29, 2020, Joseph Darling, our former President and Chief Executive Officer, passed away unexpectedly. Dr. Cheryl Blanchard, a ~~delay in~~member of the ~~pathway to commercialize~~Board of Directors, was named Interim Chief Executive Officer initially and became our ~~CINGAL product in the United States~~permanent President and ~~may face other unforeseen difficulties and delays in achieving regulatory approval for CINGAL, which could affect our business and financial results.~~Chief Executive Officer on April 26, 2020.

~~In the second quarter~~On May 27, 2020, Sylvia Cheung notified us that she was resigning from her position of ~~2018,~~Chief Financial Officer, Treasurer and Assistant Secretary effective August 21, 2020 for personal reasons. On August 5, 2020, we ~~received~~announced that we had appointed Michael Levitz as our Executive Vice President, Chief Financial Officer and ~~analyzed the results of~~Treasurer, effective August 10, 2020 following a search process aided by an executive search firm. Even though we have appointed Mr. Levitz to succeed Ms. Cheung as our ~~second Phase III clinical trial for CINGAL~~Chief Financial Officer and found that, while substantial pain reduction associated with CINGAL was evident at each measurement point, the data did not meet the primary study endpoint of demonstrating a statistically significant difference in pain reduction between CINGAL and the approved steroid component of CINGAL at the six-month time point. The FDA has indicated that an additional Phase III clinical trial will be necessary to support U.S. marketing approval for CINGAL. We decided during the second quarter of 2019 to conduct a pilot study to enable us to evaluate our full-scale Phase III clinical trial design, including patient and site selection criteria, and increase the probability of success for the Phase III trial. We expect to begin enrolling patients in the pilot study in the first half of 2020, butTreasurer, we may ~~experience significant delays~~face challenges in ~~patient enrollment or~~building our business in accordance with our strategy as the ~~pilot study may otherwise not be successful. If the pilot study is successful, we expect~~result of having both a chief executive officer and chief financial officer that are relatively new to commence an additional Phase III trial, but we cannot guarantee the success of any additional Phase III trial. Because the results of the pilot study or any additional Phase III trial, or other unforeseen future developments, could have a substantial negative impact on the timeline for and the cost associated with a potential CINGAL regulatory approval, our ~~overall business condition, financial results, and competitive position could be affected.~~company.
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

Under our equity compensation plans, and subject to the specific approval of the Compensation Committee of our Board of Directors, grantees have the option of electing to satisfy tax withholding obligations at the time of vesting or exercise by allowing us to withhold shares of stock otherwise issuable to the grantee. During the three-month period ended ~~September~~June 30, ~~2019,~~2020, we withheld ~~2,147~~2,572 shares to satisfy grantee tax withholding obligations on restricted stock award and restricted stock unit vesting events.

Following is a summary of stock repurchases for the three-month period ended ~~September~~June 30, ~~2019~~2020 (in thousands, except share data):

Period

Total Number of
Shares Purchased as Part of Publicly Announced Plans or Programs (2)

Average
Price per Share

Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs(1)

April 1 to 30, 2020
1,794 $ 33.40 $ 20,000
May 1 to 31, 2020
778 $ 31.40 $ 20,000
June 1 to 30, 2020
- - $ 20,000
Total
2,572 $ 32.80
Period Total Number
of Shares
Purchased Average
Price Paid
per Share Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet be Purchased
Under the Plans or
Programs(1)
July 1 to 31, 2019 2,147 $ 55.85 - $ 32,000
August 1 to 31, 2019 - - - $ 32,000
September 1 to 30, 2019 - - - $ 32,000
Total 2,147 -

(1)
On May 2, 2019, we announced that our Board of Directors approved a $50.0 million share repurchase program with $30.0 million to be utilized for an accelerated share repurchase program and $20.0 million reserved for open market repurchases. On May 7, 2019, we entered into a previously-announced accelerated share repurchase agreement (the “ASR Agreement”) to repurchase an aggregate of $30.0 million of common stock. During the second quarter of 2019, 451,694
(2)
2,572 shares were ~~delivered~~withheld by us to ~~us, constituting the initial delivery of shares~~satisfy grantee tax withholding obligations on restricted stock award and ~~representing 60% of the then estimated total number of shares expected to be repurchased under the ASR Agreement. Through September 30, 2019, we have made no open market repurchases.~~restricted stock unit vesting events in April and May 2020.

27
39

ITEM 6.
EXHIBITS

Exhibit No.
Description
†10.1
Employment Agreement, dated April 23, 2020, by and between Anika Therapeutics, Inc. and Dr. Cheryl R. Blanchard
10.2
Second Amendment effective May 14, 2020, with respect to the Credit Agreement dated as of October 24, 2017 and the Security and Pledge Agreement dated as of October 24, 2017

~~(31)~~
10.3
~~Rule 13a-14(a)/15d-14(a) Certifications~~
Anika Therapeutics, Inc. 2017 Omnibus Incentive Plan (as amended effective June 16, 2020)
10.4 Offer letter dated as of July 29, 2020 between Anika Therapeutics, Inc. and Michael Levitz

(31)
Rule 13a-14(a)/15d-14(a) Certifications
*31.1
Certification of ~~Joseph G. Darling,~~Dr. Cheryl R. Blanchard, pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2
Certification of Sylvia Cheung, pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32)
Section 1350 Certifications
**32.1
Certification of ~~Joseph G. Darling,~~Dr. Cheryl R. Blanchard, and Sylvia Cheung, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(101)
XBRL
*101
The following materials from Anika Therapeutics, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2019~~2020 as filed with the ~~SEC~~Securities and Exchange Commission on ~~October 28, 2019,~~August 7, 2020, formatted in XBRL (eXtensible Business Reporting Language), as follows:
i.
i.
Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019 (unaudited)
ii.
Condensed Consolidated Statements of Operations and Comprehensive Income for the ~~Three~~three and ~~Nine Months Ended September~~six months ended June 30, 2020 and June 30, 2019 ~~and September 30, 2018~~ (unaudited)
iii.
Condensed Consolidated Statements of Stockholders’ Equity for the ~~Three~~six months ended June 30, 2020 and ~~Nine Months Ended September~~June 30, 2019 ~~and September 30, 2018~~ (unaudited)
iv.
Condensed Consolidated Statements of Cash Flows for the ~~Nine Months Ended September~~six months ended June 30, 2020 and June 30, 2019 ~~and September 30, 2018~~ (unaudited)
v.
Notes to Condensed Consolidated Financial Statements (unaudited)

* ~~Filed herewith.~~
*
Filed herewith.
**
Furnished herewith.
†
Management contract or compensatory plan or arrangement.

28
40

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ANIKA THERAPEUTICS, INC.
Date: ~~October 28, 2019~~August 7, 2020
By:
/s/ SYLVIA CHEUNG
Sylvia Cheung
Chief Financial Officer
(Authorized Officer and Principal Financial Officer)

29
41

Delaware	04-3145961
(State or Other Jurisdiction of	(I.R.S. Employer Identification No.)
Incorporation or Organization)

32 Wiggins Avenue, Bedford, Massachusetts	01730
(Address of Principal Executive Offices)	(Zip Code)

Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share	ANIK	NASDAQ Global Select Market

		Page
Part I	Financial Information
Item 1.	Financial Statements (unaudited):	3
	Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019	3
	Condensed Consolidated Statements of Operations and Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	4
	Condensed Consolidated Statements of Stockholders’ Equity for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	5
	Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1724
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2536
Item 4.	Controls and Procedures	2536
Part II	Other Information
Item 1.	Legal Proceedings	2637
Item 1A.	Risk Factors	2637
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2739
Item 6.	Exhibits	2840
Signatures		2941

Anika Therapeutics, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except per share data)
(unaudited)

	*June 30,*			*December 31,*
ASSETS	*2020*			*2019*
Current assets:
Cash and cash equivalents	$	116,746		$	157,463
Investments		27,624			27,480
Accounts receivable, net of reserves of $981 and $962 at June 30, 2020 and December 31, 2019, respectively		24,094			23,079
Inventories, net		46,479			21,995
Prepaid expenses and other current assets		6,340			4,289
Total current assets		221,283			234,306
Property and equipment, net		52,659			50,783
Right-of-use assets		23,196			22,864
Other long-term assets		13,451			7,478
Intangible assets, net		95,978			7,585
Goodwill		33,958			7,694
Total assets	$	440,525		$	330,710

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,162		$	3,832
Accrued expenses and other current liabilities		21,745			12,445
Total current liabilities		27,907			16,277
Other long-term liabilities		843			357
Contingent consideration		37,062			-
Long-term debt		50,000			-
Deferred tax liability		14,855			4,331
Lease liabilities		21,414			21,367
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.01 par value; 1,250 shares authorized, no shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		-			-
Common stock, $0.01 par value; 90,000 shares authorized, 14,204 and 14,308 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		142			143
Additional paid-in-capital		50,609			48,707
Accumulated other comprehensive loss		(5,818	)		(5,898	)
Retained earnings		243,511			245,426
Total stockholders’ equity		288,444			288,378
Total liabilities and stockholders’ equity	$	440,525		$	330,710

	September 30,			December 31,
ASSETS	2019			2018
Current assets:
Cash and cash equivalents	$	103,381		$	89,042
Investments		69,825			69,972
Accounts receivable, net of reserves of $981 and $1,525 at September 30, 2019 and December 31, 2018, respectively		23,889			20,775
Inventories, net		25,243			21,300
Prepaid expenses and other current assets		1,479			1,854
Total current assets		223,817			202,943
Property and equipment, net		51,750			54,111
Operating lease right-of-use assets		23,082			-
Other long-term assets		5,761			4,897
Intangible assets, net		7,680			9,191
Goodwill		7,489			7,851
Total assets	$	319,579		$	278,993

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,702		$	3,143
Accrued expenses and other current liabilities		8,493			8,146
Total current liabilities		11,195			11,289
Other long-term liabilities		372			550
Deferred tax liability		4,727			3,542
Operating lease liabilities		21,603			-
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.01 par value; 1,250 shares authorized, no shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		-			-
Common stock, $0.01 par value; 90,000 shares authorized, 14,269 and 14,210 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		143			142
Additional paid-in-capital		46,482			50,763
Accumulated other comprehensive loss		(6,318	)		(5,526	)
Retained earnings		241,375			218,233
Total stockholders’ equity		281,682			263,612
Total liabilities and stockholders’ equity	$	319,579		$	278,993

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2020			2019		2020			2019
Product revenue	$	30,678		$	30,413	$	66,075		$	55,130
Licensing, milestone and contract revenue		-			5		-			11
Total revenue		30,678			30,418		66,075			55,141

Operating expenses:
Cost of product revenue		16,936			6,836		31,136			14,147
Research & development		4,532			4,165		10,582			8,423
Selling, general & administrative		14,550			7,502		28,981			15,174
Goodwill impairment		-			-		18,144			-
Change in fair value of contingent consideration		4,196			-		(20,326	)		-
Total operating expenses		40,214			18,503		68,517			37,744
Income (loss) from operations		(9,536	)		11,915		(2,442	)		17,397
Interest and other income (expense), net		(169	)		533		110			1,031
Income (loss) before income taxes		(9,705	)		12,448		(2,332	)		18,428
Provision for (benefit from) income taxes		(1,997	)		3,013		(417	)		4,486
Net income (loss)	$	(7,708	)	$	9,435	$	(1,915	)	$	13,942
						��
Basic net income (loss) per share:
Net income (loss)	$	(0.54	)	$	0.68	$	(0.13	)	$	0.99
Basic weighted average common shares outstanding		14,199			13,916		14,201			14,054
Diluted net income (loss) per share:
Net income (loss)	$	(0.54	)	$	0.67	$	(0.13	)	$	0.98
Diluted weighted average common shares outstanding		14,199			14,088		14,201			14,203

Net income (loss)	$	(7,708	)	$	9,435	$	(1,915	)	$	13,942
Foreign currency translation adjustment		209			145		80			(170	)
Comprehensive income (loss)	$	(7,499	)	$	9,580	$	(1,835	)	$	13,772

	For the Six Months Ended June 30, 2020
													Accumulated
	Common Stock												Other			Total
	*Number of*			*$.01 Par*			*Additional Paid*			*Retained*			*Comprehensive*			*Stockholders'*
	*Shares*			*Value*			*in Capital*			*Earnings*			*Loss*			*Equity*
Balance, January 1, 2020		14,308		$	143		$	48,707		$	245,426		$	(5,898	)	$	288,378
Vesting of restricted stock units		42			-			-			-			-			-
Forfeiture of restricted stock awards		(9	)		-			-			-			-			-
Stock-based compensation expense		-			-			(207	)		-			-			(207	)
Retirement of common stock for minimum tax withholdings		(4	)		-			(141	)		-			-			(141	)
Repurchase of common stock		(139	)		(1	)		1			-			-			-
Net income		-			-			-			5,793			-			5,793
Other comprehensive loss		-			-			-			-			(129	)		(129	)
Balance, March 31, 2020		14,198		$	142		$	48,360		$	251,219		$	(6,027	)	$	293,694
Issuance of common stock for equity awards		2			-			68			-			-			68
Vesting of restricted stock units		7			-			-			-			-			-
Stock-based compensation expense		-			-			2,240			-			-			2,240
Retirement of common stock for minimum tax withholdings		(3	)		-			(59	)		-			-			(59	)
Net loss		-			-			-			(7,708	)		-			(7,708	)
Other comprehensive income		-			-			-			-			209			209
Balance, June 30, 2020		14,204		$	142		$	50,609		$	243,511		$	(5,818	)	$	288,444

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Product revenue	$	29,615		$	26,781		$	84,745		$	78,581
Licensing, milestone and contract revenue		82			6			93			18
Total revenue		29,697			26,787			84,838			78,599

Operating expenses:
Cost of product revenue		5,951			8,282			20,098			24,279
Research & development		4,158			4,232			12,581			14,126
Selling, general & administrative		7,539			5,700			22,713			28,207
Total operating expenses		17,648			18,214			55,392			66,612
Income from operations		12,049			8,573			29,446			11,987
Interest and other income, net		482			522			1,513			907
Income before income taxes		12,531			9,095			30,959			12,894
Provision for income taxes		3,331			1,496			7,817			1,890
Net income	$	9,200		$	7,599		$	23,142		$	11,004

Basic net income per share:
Net income	$	0.65		$	0.53		$	1.65		$	0.76
Basic weighted average common shares outstanding		14,070			14,237			14,065			14,524
Diluted net income per share:
Net income	$	0.64		$	0.53		$	1.62		$	0.74
Diluted weighted average common shares outstanding		14,387			14,377			14,266			14,820

Net income	$	9,200		$	7,599		$	23,142		$	11,004
Foreign currency translation adjustment		(622	)		(113	)		(792	)		(444	)
Comprehensive income	$	8,578		$	7,486		$	22,350		$	10,560

	For the Six Months Ended June 30, 2019
												Accumulated
	Common Stock											Other			Total
	*Number of*			*$.01 Par*			*Additional Paid*			*Retained*		*Comprehensive*			*Stockholders'*
	*Shares*			*Value*			*in Capital*			*Earnings*		*Loss*			*Equity*
Balance, January 1, 2019		14,210		$	142		$	50,763		$	218,233	$	(5,526	)	$	263,612
Issuance of common stock for equity awards		7			-			5			-		-			5
Retirement of common stock for minimum tax withholdings		(3	)		-			(124	)		-		-			(124	)
Stock-based compensation expense		-			-			1,386			-		-			1,386
Net income		-			-			-			4,507		-			4,507
Other comprehensive loss		-			-			-			-		(315	)		(315	)
Balance, March 31, 2019		14,214		$	142		$	52,030		$	222,740	$	(5,841	)	$	269,071
Issuance of common stock for equity awards		30			1			851			-		-			852
Forfeiture of restricted stock		(7	)		-			-			-		-			-
Stock-based compensation expense		-			-			1,443			-		-			1,443
Repurchase of common stock		(452	)		(5	)		(29,995	)		-		-			(30,000	)
Net income		-			-			-			9,435		-			9,435
Other comprehensive income		-			-			-			-		145			145
Balance, June 30, 2019		13,785		$	138		$	24,329		$	232,175	$	(5,696	)	$	250,946

	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities:
Net income (loss)	$	(1,915	)	$	13,942
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,459			2,943
Non-cash operating lease cost		725			591
Goodwill impairment		18,144			-
Change in fair value of contingent consideration		(20,326	)		-
Loss on disposal of fixed assets		265			721
Loss on impairment of intangible asset		1,025			281
Stock-based compensation expense		2,033			2,829
Deferred income taxes		(907	)		120
Provision (recovery) for doubtful accounts		(36	)		-
Provision for inventory		3,259			601
Amortization of acquisition related inventory step-up		4,123			-
Accretion of amortized cost of investments		-			(757	)
Changes in operating assets and liabilities:
Accounts receivable		6,208			(2,293	)
Inventories		(5,410	)		(3,033	)
Prepaid expenses, other current and long-term assets		(373	)		356
Accounts payable		(2,462	)		(906	)
Operating lease liabilities		(675	)		(534	)
Accrued expenses, other current and long-term liabilities		(5,135	)		(1,300	)
Income taxes		(389	)		371
Net cash provided by operating activities		4,613			13,932

Cash flows from investing activities:
Acquisition of Parcus Medical and Arthrosurface, net of cash acquired		(93,859	)		-
Proceeds from maturities of investments		20,000			72,594
Purchases of investments		(20,035	)		(73,896	)
Purchases of property and equipment		(908	)		(2,131	)
Net cash used in investing activities		(94,802	)		(3,433	)

Cash flows from financing activities:
Repurchases of common stock		-			(30,000	)
Repayments of long term debt		(351	)		-
Proceeds from long term debt		50,000			-
Cash paid for tax withheld on vested restricted stock awards		(200	)		(125	)
Proceeds from exercises of equity awards		68			6
Net cash provided by (used in) financing activities		49,517			(30,119	)

Exchange rate impact on cash		(45	)		(15	)

Decrease in cash and cash equivalents		(40,717	)		(19,635	)
Cash and cash equivalents at beginning of period		157,463			89,042
Cash and cash equivalents at end of period	$	116,746		$	69,407
Supplemental disclosure of cash flow information:
Right-of-use assets obtained in exchange for operating lease liabilities as of January 1, 2019	$	-		$	24,110
Non-cash Investing Activities:
Purchases of property and equipment included in accounts payable and accrued expenses	$	61		$	211
Consideration for acquisitions included in accounts payable and accrued expenses	$	1,209		$	-
Acquisition related contingent consideration	$	69,076		$	-

	For the nine months ended September 30, 2019
												Accumulated
	Common Stock											Other			Total
	Number of			$0.01 Par			Additional Paid			Retained		Comprehensive			Stockholders'
	Shares			Value			in Capital			Earnings		Loss			Equity
Balance, January 1, 2019		14,210		$	142		$	50,763		$	218,233	$	(5,526	)	$	263,612
Issuance of common stock for equity awards		7			-			5			-		-			5
Retirement of common stock for minimum tax withholdings		(3	)		-			(124	)		-		-			(124	)
Stock-based compensation expense		-			-			1,386			-		-			1,386
Net income		-			-			-			4,507		-			4,507
Other comprehensive loss		-			-			-			-		(315	)		(315	)
Balance, March 31, 2019		14,214		$	142		$	52,030		$	222,740	$	(5,841	)	$	269,071
Issuance of common stock for equity awards		30			1			851			-		-			852
Forfeiture of restricted stock		(7	)		-			-			-		-			-
Stock-based compensation expense		-			-			1,443			-		-			1,443
Repurchase of common stock		(452	)		(5	)		(29,995	)		-		-			(30,000	)
Net income		-			-			-			9,435		-			9,435
Other comprehensive income		-			-			-			-		145			145
Balance, June 30, 2019		13,785		$	138		$	24,329		$	232,175	$	(5,696	)	$	250,946
Issuance of common stock for equity awards		488			5			20,962			-		-			20,967
Forfeiture of restricted stock		(2	)		-			-			-		-			-
Stock-based compensation expense		-			-			1,311			-		-			1,311
Retirement of common stock for minimum tax withholdings		(2	)		-			(120	)		-		-			(120	)
Net income		-			-			-			9,200		-			9,200
Other comprehensive loss		-			-			-			-		(622	)		(622	)
Balance, September 30, 2019		14,269		$	143		$	46,482		$	241,375	$	(6,318	)	$	281,682

Cash consideration	$	32,794
Deferred consideration		1,642
Estimated fair value of contingent consideration		40,700
Estimated total purchase consideration	$	75,136

Recognized identifiable assets acquired and liabilities assumed:
Cash and cash equivalents	$	196
Accounts receivable		2,029
Inventories		9,088
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		53,628
Goodwill		21,508
Estimated total purchase consideration	$	75,136

Intangible assets acquired consist of:
Developed technology	$	41,100
Trade name		1,800
Customer relationships		1,100
Total intangible assets	$	44,000

Cash consideration	$	61,909
Estimated fair value of contingent consideration		28,376
Estimated total purchase consideration	$	90,285

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 intangible assets	$	48,900

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets		Significant Other		Significant
			for Identical Assets		Observable Inputs		Unobservable Inputs
	June 30, 2020		(Level 1)		(Level 2)		(Level 3)		Amortized Cost
Cash equivalents:
Money market funds	$	49,357	$	49,357	$	-	$	-	$	49,357

Investments:
Bank certificates of deposit	$	7,514	$	-	$	7,514	$	-	$	7,524
U.S. treasury bills		20,110		20,110		-		-		20,178
Total investments	$	27,624	$	20,110	$	7,514	$	-	$	27,702

Other current and long-term liabilities:
Contingent consideration- short term	$	11,688	$	-	$	-	$	11,688	$	-
Contingent consideration- long term		37,062		-		-		37,062		-
Total other current and long-term liabilities	$	48,750	$	-	$	-	$	48,750	$	-

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in										Fair Value Measurements at Reporting Date Using
			Active Markets		Significant Other		Significant						Quoted Prices in Active Markets		Significant Other		Significant
			for Identical Assets		Observable Inputs		Unobservable Inputs						for Identical Assets		Observable Inputs		Unobservable Inputs
	September 30, 2019		(Level 1)		(Level 2)		(Level 3)		Amortized Cost		December 31, 2019		(Level 1)		(Level 2)		(Level 3)		Amortized Cost
Cash equivalents:			��
Money market funds	$	6,406	$	6,406	$	-	$	-	$	6,406
Money Market Funds											$	48,971	$	48,971	$	-	$	-	$	48,971

Investments:
U.S. treasury bills	$	69,825	$	69,825	$	-	$	-	$	69,821
U.S. Treasury Bills											$	27,480	$	27,480	$	-	$	-	$	27,479

	Six Months Ended
	June 30, 2020
Balance, beginning January 1, 2020	$	-
Additions		69,076
Payments		-
Change in fair value		(20,326	)
Balance, ending June 30, 2020	$	48,750

	June 30,		December 31,
	2020		2019
Raw materials	$	13,851	$	12,058
Work-in-process		11,914		8,330
Finished goods		33,680		8,777
Total	$	59,445	$	29,165

Inventories	$	46,479	$	21,995
Other long-term assets		12,966		7,170

			Six Months Ended June 30, 2020
	Gross Value		Less: Accumulated Currency Translation Adjustment			Less: Current Period Impairment Charge			Less: Accumulated Amortization			Net Book Value		Weighted Average Useful Life
Developed technology	$	93,953	$	(2,904	)	$	(1,025	)	$	(11,460	)	$	78,564		15
In-process research & development		5,006		(1,242	)		-			-			3,764	Indefinite
Customer relationships		9,000		-			-			(377	)		8,623		10
Distributor relationships		4,700		(415	)		-			(4,285	)		-		5
Patents		1,000		(177	)		-			(555	)		268		16
Tradenames		5,200		-			-			(441	)		4,759		5
Total	$	118,859	$	(4,738	)	$	(1,025	)	$	(17,118	)	$	95,978		13

			September 30, 2019											December 31, 2018
	Gross Value		Accumulated Currency Translation Adjustment			Impairment			Accumulated Amortization			Net Book Value		Accumulated Currency Translation Adjustment			Accumulated Amortization			Net Book Value		Useful Life
Developed technology	$	17,100	$	(3,056	)	$	(303	)	$	(9,448	)	$	4,293	$	(2,824	)	$	(8,672	)	$	5,604		15
In-process research & development		4,406		(1,316	)		-			-			3,090		(1,168	)		-			3,238		Indefinite
Distributor relationships		4,700		(415	)		-			(4,285	)		-		(415	)		(4,285	)		-		5
Patents		1,000		(184	)		-			(519	)		297		(169	)		(482	)		349		16
Elevess trade name		1,000		-			-			(1,000	)		-		-			(1,000	)		-		9
Total	$	28,206	$	(4,971	)	$	(303	)	$	(15,252	)	$	7,680	$	(4,576	)	$	(14,439	)	$	9,191

			Year ended December 31, 2019
	Gross Value		Less: Accumulated Currency Translation Adjustment			Less: Current Period Impairment Charge			Less: Accumulated Amortization			Net Book Value		Weighted Average Useful Life
Developed technology	$	17,100	$	(2,934	)	$	(389	)	$	(9,657	)	$	4,120		15
In-process research & development		4,406		(1,234	)		-			-			3,172	Indefinite
Distributor relationships		4,700		(415	)		-			(4,285	)		-		5
Patents		1,000		(176	)		-			(531	)		293		16
Elevess Tradename		1,000		-			-			(1,000	)		-		9
Total	$	28,206	$	(4,759	)	$	(389	)	$	(15,473	)	$	7,585		11

	Six Months Ended June 30, 2020			Year Ended December 31, 2019
Balance, beginning	$	7,694		$	7,851
Effect of foreign currency adjustments		8			(157	)
Acquisitions		44,400			-
Impairment		(18,144	)		-
Balance, ending	$	33,958		$	7,694

	September 30,
	2019
Balance at January 1, 2019	$	7,851
Effect of foreign currency adjustments		(362	)
Balance at September 30, 2019	$	7,489

	For the Three Months Ended				For the Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Amortization of ROU Assets		49		-		86		-
Interest on finance lease liabilities		8		-		15		-
Finance lease expense	$	57	$	-	$	101	$	-
Operating lease expense		595		521		1,169		1,043
Short-term lease expense		-		4		-		6
Variable lease expense		74		60		137		112
Total lease expense	$	726	$	585	$	1,407	$	1,161

	For the three months ended September 30, 2019		For the nine months ended September 30, 2019
Lease cost
Operating lease cost	$	525	$	1,568
Short-term lease cost		-		6
Variable lease cost		43		155
Total lease cost	$	568	$	1,729

Other information
Operating cash flows from operating leases	$	488	$	1,482

	Operating Lease Obligation As Of
Years ended December 31,	September 30, 2019
2019 (remaining 3 months)	$	497
2020		2,025
2021		2,024
2022		1,981
2023		1,965
Thereafter		23,530
Present value adjustment		(9,310	)
Present value of lease payments		22,712
Less current portion included in Accrued expenses and other current liabilities		(1,109	)
Operating lease liabilities	$	21,603

Years ended December 31,	Operating Leases			Financing Leases			Total
2020 (Remaining 6 months)	$	1,195		$	128		$	1,323
2021		2,304			174			2,478
2022		2,240			166			2,406
2023		2,123			160			2,283
2024		2,059			44			2,103
Thereafter		21,374			-			21,374
Present value adjustment		(8,405	)		(57	)		(8,462	)
Present value of lease payments		22,890			615			23,505
Less current portion included in accrued expenses and other current liabilities		(1,476	)		(186	)		(1,662	)
Total lease liabilities	$	21,414		$	429		$	21,843

	June 30, 2020		December 31, 2019
Compensation and related expenses	$	3,212	$	5,830
Professional fees		3,052		3,850
Operating lease liability - current		1,476		1,141
Clinical trial costs		1,113		788
Current portion of acquisition related contingent consideration (Note 4)		11,688		-
Finance lease liability - current		186		-
Other		1,018		836
Total	$	21,745	$	12,445

Years ended December 31,
2019	$	1,879
2020		1,917
2021		1,924
2022		1,672
2023		414
2024 and thereafter		897
Total	$	8,703

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019

Joint pain management	$	22,247	$	26,632	$	47,730	$	49,482
Orthopedic joint preservation and restoration		6,622		802		14,518		966
Other		1,809		2,979		3,827		4,682
	$	30,678	$	30,413	$	66,075	$	55,130

	Six months ended June 30,
	2020				2019
Risk free interest rate		0.31%	-	1.59%		2.18%	-	2.54%
Expected volatility		46.48%	-	51.87%		44.05%	-	44.72%
Expected life (years)		4.0	-	6.3			3.5
Expected dividend yield			0.00%				0.00%

	•	we exclude certain product rationalization charges related to non-core legacy assets as result of managing our financial position in light of our recent acquisitions, the impact of COVID-19 and changing regulatory requirements;

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